<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1996
REGISTRATION NO. 333-09767
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MEDPARTNERS/MULLIKIN, INC.
(Exact Name of Registrant as Specified in its Charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 8099 63-1151076
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
3000 GALLERIA TOWER, SUITE 1000, BIRMINGHAM, ALABAMA 35244-2331
(205) 733-8996
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
LARRY R. HOUSE
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
MEDPARTNERS/MULLIKIN, INC.
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244-2331
(205) 733-8996
(Name, Address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
COPIES TO:
<TABLE>
<S> <C> <C>
EDWARD D. HERLIHY, ESQ. J. BROOKE JOHNSTON, JR., ESQ. ROBERT E. LEE GARNER, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ SENIOR VICE PRESIDENT AND GENERAL COUNSEL F. HAMPTON MCFADDEN, JR., ESQ.
51 WEST 52ND STREET MEDPARTNERS/MULLIKIN, INC. HASKELL SLAUGHTER & YOUNG,
NEW YORK, NEW YORK 10019 3000 GALLERIA TOWER, SUITE 1000 L.L.C.
(212) 403-1000 BIRMINGHAM, ALABAMA 35244-2331 1200 AMSOUTH/HARBERT PLAZA
(205) 733-8996 1901 SIXTH AVENUE NORTH
BIRMINGHAM, ALABAMA 35203
(205) 251-1000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At the
Effective Time of the Merger of a wholly-owned subsidiary of the Registrant, PPM
Merger Corporation (the "Subsidiary"), with Caremark International Inc.
("Caremark").
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT(1) OFFERING PRICE FEES
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<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share (including the Common Stock
Purchase Rights)................. 100,404,647 shares Inapplicable $1,954,986,338(2) $674,133.22(3)
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</TABLE>
(1) The number of shares of Common Stock, par value $.001 per share (the
"MedPartners/Mullikin Common Stock"), of MedPartners/Mullikin to be
registered has been determined based upon 82,979,047 shares of Common
Stock, par value $1.00 per share (the "Caremark Common Stock"), of Caremark
and an exchange ratio of 1.21 shares of MedPartners/Mullikin Common Stock
per share of Caremark Common Stock as provided for in the Plan and
Agreement of Merger, dated as of May 13, 1996 by and among MedPartners/
Mullikin, PPM Merger Corporation and Caremark (the "Plan of Merger").
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) of the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to Rule 457(f)(1), the maximum aggregate
offering price is the product of (a) $23.56 representing the average of the
high and low sales prices of Caremark Common Stock as reported on the New
York Stock Exchange Composite Transactions Tape on August 6, 1996, and (b)
82,979,047, the number of shares of Caremark Common Stock to be acquired by
MedPartners/ Mullikin in connection with the acquisition of Caremark
pursuant to the Plan of Merger.
(3) The registration fee for the securities registered hereby, is $674,133.22,
calculated pursuant to Section 6(b) of the Securities Act and Rule 457(f)
promulgated thereunder. Such registration fee has previously been paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
[CAREMARK LETTERHEAD]
August 16, 1996
Dear Caremark International Inc. Stockholder:
On behalf of our Board of Directors, I would like to invite you to attend a
Special Meeting of Stockholders (the "Special Meeting") of Caremark
International Inc. ("Caremark") to be held at Caremark's headquarters at 2211
Sanders Road, Northbrook, Illinois 60062, on September 5, 1996, at 9:30 a.m.,
local time.
At the Special Meeting you will be asked to vote on a proposal to approve
and adopt a Plan and Agreement of Merger, dated as of May 13, 1996 (the "Plan of
Merger"), providing for the merger (the "Merger") of a wholly-owned subsidiary
of MedPartners/Mullikin, Inc. ("MedPartners/Mullikin") with and into Caremark.
Upon consummation of the Merger, Caremark will become a wholly-owned subsidiary
of MedPartners/Mullikin, and Caremark stockholders will be entitled to receive
1.21 shares of MedPartners/ Mullikin common stock for each share of Caremark
common stock held by them, as set forth in the Plan of Merger. Approval of the
Plan of Merger and the Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Caremark common stock.
The Board of Directors of Caremark has carefully considered the terms and
conditions of the proposed Merger. In addition, in connection with its approval
of the transaction with MedPartners/Mullikin, the Board of Directors of Caremark
has received a written opinion from its financial advisor in connection with the
Merger, CS First Boston Corporation, to the effect that the consideration to be
received by the holders of Caremark common stock pursuant to the Plan of Merger
is fair to such holders from a financial point of view.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE TERMS OF THE
PLAN OF MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE
BEST INTERESTS OF, CAREMARK AND THE CAREMARK STOCKHOLDERS. ACCORDINGLY, THE
BOARD RECOMMENDS THAT CAREMARK STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION
OF THE PLAN OF MERGER.
In view of the importance of the action to be taken at this Special Meeting
of Caremark stockholders, we urge you to review carefully the accompanying
Notice of Special Meeting of Stockholders and the Prospectus-Joint Proxy
Statement, including the Annexes thereto, which also include information on
MedPartners/ Mullikin and Caremark. For a discussion of the risk factors
relating to the Merger, stockholders should review carefully the "Risk Factors"
section of the enclosed Prospectus-Joint Proxy Statement. The Caremark Board
considered these risks in voting to approve and recommend the Merger. Whether or
not you expect to attend the Special Meeting, please complete, sign and date the
enclosed proxy and return it as promptly as possible.
Sincerely,
/s/ C.A. LANCE PICCOLO
- -------------------------------
C.A. Lance Piccolo
Chairman of the Board
and Chief Executive Officer
<PAGE> 3
CAREMARK INTERNATIONAL INC.
2211 SANDERS ROAD
NORTHBROOK, ILLINOIS 60062
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 5, 1996
---------------------
To the Stockholders of
Caremark International Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Caremark
International Inc., a Delaware corporation ("Caremark"), will be held on
September 5, 1996, at 9:30 a.m., Central Time, at Caremark's headquarters at
2211 Sanders Road, Northbrook, Illinois, for the following purposes (the
"Special Meeting"):
1. To consider and vote on a proposal (the "Merger") to approve and
adopt the Plan and Agreement of Merger, dated as of May 13, 1996 (the "Plan
of Merger"), by and among Caremark, MedPartners/Mullikin, Inc., a Delaware
corporation ("MedPartners/Mullikin"), and PPM Merger Corporation, a
Delaware corporation and a wholly-owned subsidiary of MedPartners/Mullikin
(the "Subsidiary"), pursuant to which, among other things, (i) the
Subsidiary will be merged with and into Caremark with the result that
Caremark will become a wholly-owned subsidiary of MedPartners/ Mullikin
(the "Merger"), and (ii) each outstanding share (other than shares held in
the treasury of Caremark or MedPartners/Mullikin, or their subsidiaries, if
any, which will be cancelled) of Caremark common stock, par value $1.00 per
share ("Caremark Common Stock") will be converted into the right to receive
1.21 shares of MedPartners Common Stock, par value $.001 per share, subject
to adjustment, as set forth in the Plan of Merger. A copy of the Plan of
Merger is attached as Annex A to the accompanying Prospectus-Joint Proxy
Statement.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The Board of Directors of Caremark has fixed the close of business on July
29, 1996, as the record date for the determination of the holders of Caremark
Common Stock entitled to notice of, and to vote at, the Special Meeting and
adjournments or postponements thereof. Approval of the Plan of Merger requires
the affirmative vote of the holders of a majority of the outstanding shares of
Caremark Common Stock entitled to vote at the Special Meeting. Caremark
stockholders will not be entitled to dissenters' appraisal rights under Delaware
law or any other statute in connection with the Merger.
Information regarding the Merger and related matters is contained in the
accompanying Prospectus-Joint Proxy Statement and the Annexes thereto, which are
incorporated by reference herein and form a part of this Notice.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IT IS
IMPORTANT THAT YOUR INTERESTS BE REPRESENTED AT THE MEETING.
THE BOARD OF DIRECTORS OF CAREMARK HAS UNANIMOUSLY DETERMINED THAT THE
TERMS OF THE PLAN OF MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR
TO, AND IN THE BEST INTERESTS OF, CAREMARK AND THE CAREMARK STOCKHOLDERS.
ACCORDINGLY, THE CAREMARK BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE
APPROVAL AND ADOPTION OF THE PLAN OF MERGER.
By Order of the Board of Directors
/s/ Nancy K. Bellis
--------------------------------------
Nancy K. Bellis
Assistant Secretary
Northbrook, Illinois
August 16, 1996
PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS TIME.
<PAGE> 4
MEDPARTNERS/MULLIKIN, INC.
3000 GALLERIA TOWER
SUITE 1000
BIRMINGHAM, ALABAMA 35244-2331
August 16, 1996
Dear Stockholder:
I am pleased to enclose information relating to a Special Meeting of
Stockholders of MedPartners/ Mullikin, Inc. to be held at the Wynfrey Hotel,
1000 Riverchase Galleria, Birmingham, Alabama, at 10:00 a.m., Central Time, on
September 5, 1996.
The purpose of the Special Meeting of Stockholders is to approve and adopt
a Plan and Agreement of Merger, dated as of May 13, 1996 (the "Plan of Merger"),
among MedPartners/Mullikin, Inc. ("MedPartners/Mullikin"), PPM Merger
Corporation (the "Subsidiary") and Caremark International Inc. ("Caremark"),
pursuant to which Caremark will be combined with MedPartners/Mullikin through
the merger of the Subsidiary into Caremark, with Caremark as the surviving
corporation, whereby stockholders of Caremark will be entitled to receive 1.21
shares of MedPartners/Mullikin Common Stock, subject to certain adjustments
described in the Plan of Merger, for each issued and outstanding share of
Caremark Common Stock owned by them, all as described in the accompanying
Prospectus-Joint Proxy Statement. Approval of the Plan of Merger will also
constitute approval of a change of name of the corporation from "MedPartners/
Mullikin, Inc." to "MedPartners, Inc."
WE URGE YOU TO CONSIDER CAREFULLY THESE IMPORTANT MATTERS, WHICH ARE
DESCRIBED IN THE ATTACHED PROSPECTUS-JOINT PROXY STATEMENT. The Prospectus-Joint
Proxy Statement describes in greater detail the advantages and disadvantages of
the transaction, the manner in which it will occur and other matters relating
thereto.
YOUR VOTE IS IMPORTANT. In order to ensure that your vote is represented at
the Special Meeting, please indicate your vote on the Proxy form, date and sign
it, and return it in the enclosed postage pre-paid envelope. A prompt response
will be appreciated. If you are able to attend the Special Meeting, you may
revoke your Proxy and vote in person if you wish.
THE BOARD OF DIRECTORS OF MEDPARTNERS/MULLIKIN RECOMMENDS THAT YOU VOTE FOR
THE PROPOSAL DESCRIBED ABOVE.
I look forward to seeing you at the Special Meeting.
Sincerely yours,
LARRY R. HOUSE
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 5
MEDPARTNERS/MULLIKIN, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
August 16, 1996
A Special Meeting of Stockholders of MedPartners/Mullikin, Inc.
("MedPartners/Mullikin") will be held at the Wynfrey Hotel, 1000 Riverchase
Galleria, Birmingham, Alabama on September 5, 1996, at 10:00 a.m., Central Time,
for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Plan
and Agreement of Merger, dated as of May 13, 1996 (the "Plan of Merger"),
among MedPartners/Mullikin, Inc. ("MedPartners/ Mullikin"), PPM Merger
Corporation (the "Subsidiary") and Caremark International Inc.
("Caremark"), pursuant to which Caremark will be combined with
MedPartners/Mullikin, through the merger of the Subsidiary into Caremark,
with Caremark as the surviving corporation, whereby holders of Caremark
Common Stock will be entitled to receive 1.21 shares of
MedPartners/Mullikin Common Stock, subject to certain adjustments described
in the Plan of Merger, for each issued and outstanding share of Caremark
Common Stock owned by them, all as described in the accompanying
Prospectus-Joint Proxy Statement. Approval of the Plan of Merger will also
constitute approval of a change of name of the corporation from
MedPartners/Mullikin, Inc. to MedPartners, Inc.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Stockholders of record at the close of business on July 22, 1996, are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof.
PLEASE COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY TO MEDPARTNERS/ MULLIKIN. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY
REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU DESIRE TO DO SO, BUT ATTENDANCE AT
THE SPECIAL MEETING DOES NOT ITSELF SERVE TO REVOKE YOUR PROXY.
TRACY P. THRASHER
Secretary
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PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY
PROMPTLY, WHETHER YOU PLAN TO ATTEND THE
SPECIAL MEETING OR NOT.
A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
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<PAGE> 6
JOINT PROXY STATEMENT
OF
<TABLE>
<S> <C>
MEDPARTNERS/MULLIKIN, INC. CAREMARK INTERNATIONAL INC.
FOR THE SPECIAL MEETING OF STOCKHOLDERS FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 5, 1996 TO BE HELD ON SEPTEMBER 5, 1996
</TABLE>
---------------------
PROSPECTUS
OF
MEDPARTNERS/MULLIKIN, INC.
---------------------
THIS PROSPECTUS-JOINT PROXY STATEMENT RELATES TO UP TO 100,404,647 SHARES
OF THE COMMON STOCK, PAR VALUE $.001 PER SHARE (TOGETHER WITH THE ASSOCIATED
COMMON STOCK PURCHASE RIGHTS, THE "MEDPARTNERS/ MULLIKIN COMMON STOCK"), OF
MEDPARTNERS/MULLIKIN, INC. (TOGETHER WITH ITS SUBSIDIARIES AND OTHER CONTROLLED
ENTITIES, "MEDPARTNERS/MULLIKIN") ISSUABLE TO THE STOCKHOLDERS OF CAREMARK
INTERNATIONAL INC., A DELAWARE CORPORATION ("CAREMARK"), UPON CONSUMMATION OF
THE MERGER (AS DEFINED HEREIN). SUCH NUMBER OF SHARES REPRESENTS THE MAXIMUM
NUMBER OF SHARES THAT WILL BE ISSUED IN THE MERGER.
---------------------
This Prospectus-Joint Proxy Statement describes the terms of a proposed
business combination between MedPartners/Mullikin and Caremark, pursuant to
which MedPartners/Mullikin will acquire Caremark by means of the merger (the
"Merger") of PPM Merger Corporation, a Delaware corporation and a wholly-owned
subsidiary of MedPartners/Mullikin (the "Subsidiary"), with and into Caremark,
with Caremark being the surviving corporation. After the Merger, the combined
operations of MedPartners/Mullikin and Caremark are expected to be conducted
with Caremark as a subsidiary of MedPartners/Mullikin. Upon consummation of the
Merger, each issued and outstanding share of Common Stock, par value $1.00 per
share, of Caremark (together with the associated Preferred Share Purchase
Rights, the "Caremark Common Stock" and, sometimes, collectively, referred to
herein as the "Caremark Shares") will automatically be converted into the right
to receive 1.21 (the "Exchange Ratio") shares of MedPartners/Mullikin Common
Stock. On August 15, 1996, the closing price of MedPartners/Mullikin Common
Stock was $20.63. At such price, the equivalent value of a share of Caremark
Common Stock would be $24.96, calculated based on the Exchange Ratio (the
"Equivalent Value"), and the aggregate Merger Consideration (as defined herein)
would be approximately $2,054,364,210. The actual market price of the
MedPartners/Mullikin Common Stock may vary, which will cause a corresponding
change in the Equivalent Value and the aggregate Merger Consideration.
Additionally, the Equivalent Value may differ from the actual market price of
Caremark Common Stock. Each stockholder is urged to obtain updated market
information. Caremark stockholders will receive cash (without interest) in lieu
of fractional shares of MedPartners/Mullikin Common Stock. For a more complete
description of the terms of the Merger, see "The Merger".
This Prospectus-Joint Proxy Statement is being furnished in connection with
the Special Meetings of Stockholders of MedPartners/Mullikin and Caremark (the
"Special Meetings"). All information contained herein with respect to
MedPartners/Mullikin and the Subsidiary has been furnished by MedPartners/
Mullikin, and all information with respect to Caremark has been furnished by
Caremark. This Prospectus-Joint Proxy Statement also constitutes the Prospectus
of MedPartners/Mullikin filed as a part of the Registration Statement (as
defined herein). See "Available Information".
The Merger will be effected pursuant to the terms and subject to the
conditions of the Plan and Agreement of Merger, dated as of May 13, 1996, among
MedPartners/Mullikin, the Subsidiary and Caremark (the "Plan of Merger"). The
Plan of Merger is attached to this Prospectus-Joint Proxy Statement as Annex A
and is incorporated herein by reference.
THE SECURITIES TO BE ISSUED HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS-JOINT PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus-Joint Proxy Statement and the forms of Proxy are first
being mailed to MedPartners/ Mullikin and Caremark stockholders on or about
August 16, 1996.
SEE "RISK FACTORS" AT PAGE 14 FOR A DISCUSSION OF CERTAIN RISK FACTORS
RELATED TO THE MERGER, MEDPARTNERS/MULLIKIN AND CAREMARK.
THE DATE OF THIS PROSPECTUS-JOINT PROXY STATEMENT IS AUGUST 16, 1996.
<PAGE> 7
AVAILABLE INFORMATION
MedPartners/Mullikin has filed a Registration Statement (the "Registration
Statement") on Form S-4 under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission (the "SEC")
covering the shares of MedPartners/Mullikin Common Stock to be issued in
connection with the Merger. This Prospectus-Joint Proxy Statement does not
contain all of the information set forth in the Registration Statement covering
the securities offered hereby which MedPartners/Mullikin has filed with the SEC,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC, and to which portions reference is hereby made for
further information with respect to MedPartners/ Mullikin, Caremark, and the
securities offered hereby. Statements contained herein concerning certain
documents are not necessarily complete and, in each instance, reference is made
to the copies of such documents filed as exhibits to the Registration Statement.
Each such statement is qualified in its entirety by such reference.
Each of MedPartners/Mullikin and Caremark is subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (SEC File Nos. 0-27276 and 1-11328, respectively), and in accordance
therewith files periodic reports, proxy statements and other information with
the SEC relating to its business, financial statements and other matters. The
Registration Statement, as well as such reports, proxy statements and other
information, may be inspected and copied at prescribed rates at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. and should be available for inspection and
copying at the regional offices of the SEC located at Seven World Trade Center,
Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Chicago, Illinois. Copies of such material can be obtained at prescribed
rates by writing to the SEC, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Common Stock of each of MedPartners/Mullikin and
Caremark is listed on the New York Stock Exchange ("NYSE"). The reports, proxy
statements and certain other information can be inspected at the office of the
NYSE, 20 Broad Street, New York, New York.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. When used
in this Prospectus-Joint Proxy Statement, the words "estimate," "project,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements. For a discussion of such risks,
see "Risk Factors". Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Neither
MedPartners/Mullikin nor Caremark undertakes any obligation to publicly release
any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
---------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS-JOINT PROXY
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THE INFORMATION CONTAINED HEREIN WITH
RESPECT TO MEDPARTNERS/MULLIKIN AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY
MEDPARTNERS/MULLIKIN AND THE INFORMATION CONTAINED HEREIN WITH RESPECT TO
CAREMARK HAS BEEN SUPPLIED BY CAREMARK. THIS PROSPECTUS-JOINT PROXY STATEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE,
THE SECURITIES OFFERED BY THIS PROSPECTUS-JOINT PROXY STATEMENT, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION, TO OR FROM ANY PERSON TO WHOM OR
FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN SUCH JURISDICTION.
i
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
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PAGE
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AVAILABLE INFORMATION................................................................. i
SUMMARY OF PROSPECTUS-JOINT PROXY STATEMENT........................................... 1
The Companies....................................................................... 1
The Merger.......................................................................... 4
Risk Factors........................................................................ 10
The Special Meetings................................................................ 10
Votes Required...................................................................... 10
Market and Market Prices............................................................ 11
No Rights of Appraisal.............................................................. 12
Comparative Per Share Information................................................... 12
RISK FACTORS.......................................................................... 14
Risks Relating to the Merger; Acquisitions.......................................... 14
Risks Relating to MedPartners/Mullikin's Growth Strategy............................ 14
Risks Relating to Capital Requirements.............................................. 15
Risks Relating to Capitated Nature of Revenues; Control of Health Care Costs........ 15
Potential Reductions in Third-Party Reimbursement................................... 16
Risks Relating to Dependence on Affiliated Physicians............................... 16
Risks Relating to Certain Caremark Legal Matters.................................... 17
Risks Relating to Exposure to Professional Liability; Liability Insurance........... 19
Risks Relating to Concentration of Customers........................................ 19
Competition......................................................................... 19
Government Regulation............................................................... 20
Risks Relating to Pharmacy Licensing and Operation.................................. 21
Risks Relating to Regulatory Requirements of Knox-Keene Act......................... 21
Risks Relating to Health Care Reform................................................ 22
Anti-Takeover Considerations........................................................ 22
Possible Volatility of Stock Price.................................................. 22
Dilution of Voting Power of MedPartners/Mullikin Stockholders....................... 22
Risks Relating to Federal Income Taxes.............................................. 23
SELECTED FINANCIAL INFORMATION -- MEDPARTNERS/MULLIKIN................................ 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--MEDPARTNERS/MULLIKIN.................................................... 25
THE SPECIAL MEETINGS.................................................................. 31
General............................................................................. 31
Date, Places and Times.............................................................. 31
Record Dates; Quorums............................................................... 31
Votes Required...................................................................... 31
Voting and Revocation of Proxies.................................................... 32
Solicitation of Proxies............................................................. 32
THE MERGER............................................................................ 34
Terms of the Merger................................................................. 34
Background of the Merger............................................................ 35
Recommendations of the Boards of Directors.......................................... 36
Opinions of Financial Advisors...................................................... 40
Effective Time of the Merger........................................................ 50
Exchange of Certificates............................................................ 50
Conditions to the Merger............................................................ 51
Representations and Covenants....................................................... 52
</TABLE>
ii
<PAGE> 9
<TABLE>
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PAGE
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Regulatory Approvals................................................................ 52
Business Pending the Merger......................................................... 53
Waiver and Amendment................................................................ 54
Termination......................................................................... 54
NYSE Listing........................................................................ 54
Resale of MedPartners/Mullikin Common Stock by Affiliates........................... 54
Additional Interests of Certain Persons in the Merger............................... 55
Accounting Treatment................................................................ 58
Federal Income Tax Consequences..................................................... 58
No Solicitation of Transactions..................................................... 59
Expenses; Breakup Fees.............................................................. 60
Indemnification..................................................................... 60
OPERATIONS AND MANAGEMENT OF MEDPARTNERS/MULLIKIN AFTER THE MERGER.................... 61
Operations.......................................................................... 61
Management.......................................................................... 61
Option Exercises and Fiscal Year-End Option Values.................................. 65
Pension Plan Table.................................................................. 65
Summary of Caremark Director's Compensation......................................... 66
BUSINESS OF MEDPARTNERS/MULLIKIN...................................................... 67
General............................................................................. 67
Recent Developments................................................................. 67
Industry............................................................................ 69
Strategy............................................................................ 70
Recent Major Acquisitions........................................................... 71
Development and Operations.......................................................... 71
Information Systems................................................................. 74
Competition......................................................................... 75
Government Regulation............................................................... 75
Legal Proceedings................................................................... 77
Employees........................................................................... 77
Corporate Liability and Insurance................................................... 77
Properties.......................................................................... 77
MEDPARTNERS/MULLIKIN'S MANAGEMENT..................................................... 78
Directors and Executive Officers.................................................... 78
Classified Board of Directors....................................................... 80
Committees of the Board of Directors................................................ 81
Executive Officer Compensation...................................................... 81
Director Compensation............................................................... 83
Compensation Committee Interlocks and Insider Participation......................... 83
Non-Competition and Severance Agreements............................................ 84
Stock Option Plans.................................................................. 84
401(k) Plans........................................................................ 85
CERTAIN TRANSACTIONS--MEDPARTNERS/MULLIKIN............................................ 86
MME Acquisition Agreements.......................................................... 86
Financings.......................................................................... 87
PRINCIPAL STOCKHOLDERS OF MEDPARTNERS/MULLIKIN........................................ 88
SELECTED FINANCIAL DATA -- CAREMARK................................................... 90
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION -- CAREMARK............................................................... 91
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BUSINESS OF CAREMARK.................................................................. 100
PRINCIPAL STOCKHOLDERS OF CAREMARK.................................................... 109
PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)................................. 111
DESCRIPTION OF CAPITAL STOCK OF MEDPARTNERS/MULLIKIN.................................. 121
Authorized Capital Stock............................................................ 121
MedPartners/Mullikin Common Stock................................................... 121
MedPartners/Mullikin Preferred Stock................................................ 121
Certain Provisions of the MedPartners/Mullikin Certificate and the DGCL............. 121
MedPartners/Mullikin Stockholders' Rights Plan...................................... 123
Limitations on Liability of Officers and Directors.................................. 124
Registration Rights................................................................. 125
Transfer Agent and Registrar........................................................ 125
COMPARISON OF RIGHTS OF CAREMARK AND MEDPARTNERS/MULLIKIN STOCKHOLDERS................ 126
Classes and Series of Capital Stock................................................. 126
Size and Election of the Board of Directors......................................... 126
Amendment or Repeal of the Certificate of Incorporation and By-Laws................. 127
Special Meetings of Stockholders.................................................... 128
Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations of
Directors........................................................................ 128
Indemnification of Directors and Officers........................................... 130
EXPERTS............................................................................... 131
LEGAL MATTERS......................................................................... 131
ADDITIONAL INFORMATION................................................................ 131
Stockholder Proposals............................................................... 131
Other Business...................................................................... 131
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
ANNEXES:
A. Plan and Agreement of Merger, dated as of May 13, 1996............................ A-1
B. Opinion of Smith Barney Inc....................................................... B-1
C. Opinion of CS First Boston Corporation............................................ C-1
</TABLE>
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<PAGE> 11
SUMMARY OF PROSPECTUS-JOINT PROXY STATEMENT
The following is a summary of certain information contained elsewhere in
this Prospectus-Joint Proxy Statement. Certain capitalized terms used in this
Summary are defined elsewhere in this Prospectus-Joint Proxy Statement.
Reference is made to, and this Summary is qualified in its entirety by, the more
detailed information contained in this Prospectus-Joint Proxy Statement and in
the Annexes hereto.
THE COMPANIES
MedPartners/Mullikin. MedPartners/Mullikin, Inc. is a leading physician
practice management ("PPM") company that develops, consolidates and manages
integrated health care delivery systems. Through its network of affiliated group
and independent practice association ("IPA") physicians, MedPartners/ Mullikin
provides primary and specialty health care services to prepaid managed care
enrollees and fee-for-service patients. MedPartners/Mullikin enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
At June 30, 1996, MedPartners/Mullikin operated in 23 states and was affiliated
with 5,777 physicians, including 1,461 in group practices, 3,580 through IPA
relationships and 736 hospital-based physicians. At June 30, 1996,
MedPartners/Mullikin physicians provided prepaid health care to over 798,000
enrollees through 45 HMO (as defined herein) relationships.
MedPartners/Mullikin offers medical group practices and independent
physicians a range of affiliation models. These affiliations are carried out by
the acquisition of physician practice management entities or practice assets,
either for cash or through an equity exchange, or by affiliation on a
contractual basis. In all instances, MedPartners/Mullikin enters into long-term
practice management agreements with the affiliated physicians that provide for
the management of the practices by MedPartners/Mullikin while at the same time
allowing the physicians to maintain their clinical independence.
MedPartners/Mullikin's 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 MedPartners/Mullikin and its affiliated physicians on a prepaid basis
(collectively, "HMOs"). In the prepaid arrangements, MedPartners/Mullikin,
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 health coverage to the HMOs. In return,
MedPartners/Mullikin, through its affiliated physicians, is responsible for
substantially all of the medical services required by enrollees. In many
instances, MedPartners/Mullikin and its affiliated physicians accept financial
responsibility for hospital and ancillary health care 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/ Mullikin, through its affiliated physicians, provides
the majority of covered health care services to enrollees and contracts with
hospitals and other health care providers for the balance of the covered
services.
MedPartners/Mullikin's strategy is to develop locally prominent, integrated
health care delivery networks that provide high quality, cost-effective health
care in selected geographic markets. MedPartners/Mullikin implements this
strategy through growth in its existing markets, expansion into new markets
through acquisitions and affiliations, creation of strategic alliances with
hospital partners, HMOs and other third-party payors in its market areas, use of
sophisticated information systems and increasing the operational efficiency of,
and reducing costs associated with, operating MedPartners/Mullikin's network.
At June 30, 1996, MedPartners/Mullikin had consolidated assets of
approximately $618 million and consolidated stockholders' equity of
approximately $415 million, and employed 9,433 persons.
MedPartners/Mullikin was incorporated under the laws of Delaware in August
1995 to be the surviving corporation in the combination of the businesses of
MedPartners, Inc., incorporated under the laws of Delaware in 1993
("MedPartners"), and Mullikin Medical Enterprises, L.P. ("MME"), a California
limited partnership which, directly or through its predecessor entities, had
operated since 1957. See "Business of MedPartners/Mullikin -- Recent Major
Acquisitions". As used herein, the term "MedPartners/Mullikin" refers to
MedPartners/Mullikin, Inc. and its predecessors, MedPartners and MME, and their
respective subsidiaries and affiliates, unless the context otherwise requires.
The executive offices of MedPartners/ Mullikin are located at 3000 Galleria
Tower, Suite 1000, Birmingham, Alabama 35244, and its telephone number is (205)
733-8996. See "Business of MedPartners/Mullikin".
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<PAGE> 12
Recent Developments. On March 19, 1996, MedPartners/Mullikin completed a
public offering of a total of 8,250,000 shares of MedPartners/Mullikin Common
Stock, 6,632,800 of which were sold for the account of MedPartners/Mullikin and
1,617,200 of which were sold for the account of certain selling stockholders of
MedPartners/Mullikin. The public offering resulted in net proceeds to
MedPartners/Mullikin of approximately $194 million. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations -- MedPartners/Mullikin -- Liquidity and Capital Resources" and
"Business of MedPartners/Mullikin -- Recent Developments".
On March 11, 1996, MedPartners/Mullikin entered into a Plan and Agreement
of Merger to acquire CHS Management, Inc. ("CHS"), Los Angeles, California, in
exchange for shares of MedPartners/Mullikin Common Stock. The transaction is to
be a tax-free reorganization accounted for as a pooling of interests. CHS
primarily engages in the organization and management of physician practices
which contract with HMOs to provide physician and related healthcare services to
enrollees. CHS currently provides management services to primary care medical
groups and an IPA. Concurrent with, and as a condition to, the consummation of
the CHS merger, MedPartners/Mullikin or their subsidiaries will acquire the
assets of New Management, a California general partnership ("New Management")
owned by the beneficial owners of 50% of CHS. CHS provides certain financial
services to New Management, which is engaged in the business of providing
certain management and administrative services to West Hills Hospital.
MedPartners/Mullikin has filed a Registration Statement on Form S-4 with the SEC
with respect to the shares of MedPartners/Mullikin Common Stock to be issued to
the stockholders of CHS and the partners of New Management in connection with
such acquisition. Consummation of this acquisition is subject to a number of
conditions, usual in a transaction of this type, including: that the
stockholders of CHS and the partners of New Management approve the transaction;
that the transaction qualify for pooling of interests accounting treatment; and
that the transaction qualify as a tax free reorganization. There is no guarantee
that such conditions will be met. If such conditions are not met, the
acquisition of CHS and New Management may not be consummated. See "Business of
MedPartners/Mullikin -- Recent Developments", "Pro Forma Condensed Financial
Information" and the Financial Statements beginning at page F-1.
On June 28, 1996, MedPartners/Mullikin entered into a Plan and Agreement of
Merger to acquire Summit Medical Group, P.A. ("Summit"), Summit, New Jersey, in
exchange for shares of MedPartners/ Mullikin Common Stock. The transaction is to
be a tax free reorganization accounted for as a pooling of interests. Summit is
a multi-specialty group of approximately 70 physicians which serves the northern
area in New Jersey. Concurrently with, and as a condition to, the consummation
of the acquisition of Summit, MedPartners/Mullikin or its subsidiaries will
acquire the assets of Medical Realty Associates, a New Jersey general
partnership ("MRA"), which owns certain real estate used in the operations of
Summit. MRA is owned by 54 of the 59 shareholders of Summit.
MedPartners/Mullikin intends to file a Registration Statement with the SEC with
respect to the shares of MedPartners/Mullikin Common Stock to be issued to the
shareholders of Summit and the partners of MRA in connection with such
acquisition. Consummation of this acquisition is subject to a number of
conditions, including that the shareholders of Summit and the partners of MRA
approve the transaction, that the transaction qualify as a tax free
reorganization and other conditions usual in transactions of this type. In
addition, the closing of the transaction is conditioned upon the receipt by the
parties of a letter from Ernst & Young LLP, MedPartners/Mullikin's independent
auditors, that the transaction will qualify for pooling of interests accounting
treatment. See "Notes to Pro Forma Condensed Financial Information". There is no
guarantee that such conditions will be met. If such conditions are not met, the
acquisition of Summit and MRA may not be consummated. See "Business of
MedPartners/Mullikin -- Recent Developments".
On July 3, 1996, MedPartners/Mullikin entered into a Plan and Agreement of
Merger to acquire Cardinal Healthcare, P.A., ("Cardinal") Raleigh, North
Carolina in exchange for shares of MedPartners/ Mullikin Common Stock. The
transaction is to be a tax-free reorganization accounted for as a pooling of
interests. Cardinal is a multi-specialty group of 75 physicians which serves the
Triangle area in Raleigh-Durham and includes Research Triangle Park. In addition
to the main campus, Cardinal provides services at 16 clinical facilities and 15
satellite locations. Cardinal is also affiliated with almost 500 physicians
through three IPAs, including Cardinal IPA, Piedmont Physicians Alliance, Inc.
and Eastern Carolina Primary Care Alliance, Inc. The three IPAs, which are in
the early stages of development, already have contracts with five managed care
companies providing service to almost 6,000 enrollees. MedPartners/Mullikin
intends to file a Registration Statement with the SEC with respect to the shares
of MedPartners/Mullikin Common Stock to
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<PAGE> 13
be issued to the shareholders of Cardinal in connection with such acquisition.
Consummation of this acquisition is subject to a number of conditions, including
that the shareholders of Cardinal approve the transaction, that the transaction
qualify as a tax free reorganization and other conditions usual in transactions
of this type. In addition, the closing of the transaction is conditioned upon
the receipt by the parties of a letter from Ernst & Young LLP,
MedPartners/Mullikin's independent auditors, that the transaction will qualify
for pooling of interests accounting treatment. See "Notes to Pro Forma Condensed
Financial Information". There is no guarantee that such conditions will be met.
If such conditions are not met, the acquisition of Cardinal may not be
consummated. See "Business of MedPartners/Mullikin -- Recent Developments".
On July 24, 1996, MedPartners/Mullikin announced that it had entered into a
Plan and Agreement of Merger to acquire Emergency Professional Services, Inc.
("Emergency Professional Services"), Cleveland, Ohio, in exchange for shares of
MedPartners/Mullikin Common Stock. The transaction is to be a tax free
reorganization accounted for as a pooling of interests. Emergency Professional
Services provides emergency department contract management, in-house physician
staff services and staffing to 16 hospitals and six urgent care centers in
northern Ohio and western Pennsylvania. The professional staff of Emergency
Professional Services includes 115 physicians, all of whom are individual
independent contractors. MedPartners/Mullikin intends to file a Registration
Statement with the SEC with respect to the shares of MedPartners/Mullikin Common
Stock to be issued to the shareholders of Emergency Professional Services in
connection with such acquisition. Consummation of this acquisition is subject to
a number of conditions, usual in a transaction of this type, including: that the
shareholders of Emergency Professional Services approve the transaction; that
the transaction qualify for pooling of interests accounting treatment; and that
the transaction qualify as a tax free reorganization. There is no guarantee that
such conditions will be met. If such conditions are not met, the acquisition of
Emergency Professional Services may not be consummated. See "Business of
MedPartners/ Mullikin -- Recent Developments", "Pro Forma Condensed Financial
Information" and the Financial Statements beginning at page F-1.
Caremark. Caremark is a leading provider of health care services through
its PPM, pharmaceutical services, disease management and international
businesses. In its PPM business, Caremark provides PPM services to approximately
1,000 affiliated physicians delivering comprehensive care to over one million
people. Caremark also operates one of the largest independent prescription drug
benefit management ("PBM") businesses in the United States with four mail
service pharmacies dispensing 42,000 prescriptions daily and a network of
approximately 53,000 retail pharmacies serving patients' immediate prescription
needs. Caremark's disease management business provides services and therapies to
patients with certain chronic conditions, primarily hemophilia and growth
disorders. Caremark's international business provides health care services in a
number of locations outside the United States which have different regulatory
environments and payor systems.
Initiated in 1992, Caremark's PPM business provides comprehensive
management services to large multi-specialty physician practices in major
metropolitan areas. Caremark is a leader in providing capitated health care
arrangements to payors. As of June 30, 1996, Caremark provided management
services to approximately 1,000 affiliated physicians and 210 other licensed
health care professionals who deliver comprehensive health care services to over
one million people. As of June 30, 1996, Caremark had affiliated with large,
established multi-specialty physician practices in six major metropolitan
markets, including Friendly Hills HealthCare Network (that includes CIGNA
HealthCare of California, Inc.'s Los Angeles area staff model delivery system
("CIGNA Medical Group")) in Southern California, Kelsey-Seybold Clinic in
Houston, North Suburban and Glen Ellyn Clinics in Chicago, Diagnostic Clinic in
Tampa/St. Petersburg, Oklahoma City Clinic and Atlanta Medical Clinic.
Caremark's pharmaceutical services business manages outpatient prescription
drug benefit programs for more than 1,200 clients, including corporations,
insurance companies, unions, government employee groups and managed care
organizations throughout the United States. Caremark's prescription benefit
management business is one of the largest independent PBMs, dispensing 42,000
prescriptions daily from four mail services pharmacies. Caremark also manages
patients' immediate prescription needs through a network of approximately 53,000
pharmacies.
Caremark's disease management business designs and directs comprehensive
programs, including drug therapies, to meet the health care needs of individuals
with chronic diseases or conditions. Caremark currently provides therapies and
services for individuals suffering from hemophilia, growth disorders, immune
deficien-
3
<PAGE> 14
cies, genetic emphysema, cystic fibrosis and multiple sclerosis. Caremark
continually develops additional programs to address other chronic diseases and
conditions.
Caremark's international business is developing and implementing new
approaches to health care delivery to provide services in different regulatory
environments and payor systems in six countries.
Caremark was formed as a wholly-owned subsidiary of Baxter International
Inc. ("Baxter") in August 1992, and, on November 30, 1992, Baxter distributed to
the holders of Baxter common stock all of the outstanding shares of Caremark
Common Stock. As used herein, the term "Caremark" refers to Caremark and its
predecessors, and their respective subsidiaries and affiliates, unless the
context otherwise requires. The principal executive offices of Caremark are
located at 2215 Sanders Road, Northbrook, Illinois 60062, and its telephone
number is (847) 559-4700.
At June 30, 1996, Caremark had consolidated assets of approximately $1.40
billion and stockholders' equity of approximately $388.0 million, and employed
approximately 11,600 persons.
PPM Merger Corporation. The Subsidiary, which was incorporated under the
laws of Delaware on May 13, 1996, is a direct, wholly-owned subsidiary of
MedPartners/Mullikin and has not engaged in any business activity unrelated to
the Merger. The principal executive offices of the Subsidiary are located at
3000 Galleria Tower, Suite 1000, Birmingham, Alabama 35244 and its telephone
number is (205) 733-8996.
THE MERGER
Terms of the Merger. Upon consummation of the Merger, each share of Caremark
Common Stock other than shares held by Caremark or MedPartners/Mullikin or their
subsidiaries (which will be cancelled) will be converted into the right to
receive 1.21 shares of MedPartners/Mullikin Common Stock with cash paid in lieu
of fractional shares. For example, if a Caremark stockholder owned 100 shares of
Common Stock at the time the Merger is consummated (the "Effective Time"), that
stockholder would receive 121 shares of MedPartners/Mullikin Common Stock in the
Merger. In addition, the outstanding and unexercised options to acquire Caremark
Common Stock will be adjusted at the Effective Time to permit them to remain
outstanding and become exercisable to acquire MedPartners/Mullikin Common Stock
as more fully described in the Plan of Merger. Each outstanding share of
MedPartners/Mullikin Common Stock will remain outstanding and unchanged
following the Merger. See "The Merger -- Terms of the Merger".
On August 15, 1996, the closing price of MedPartners/Mullikin Common Stock
was $20.63. At such price, the Equivalent Value of a share of Caremark Common
Stock would be $24.96 and the aggregate Merger Consideration would be
approximately $2,054,364,210. The actual market price of the MedPartners/
Mullikin Common Stock may vary, which will cause a corresponding change in the
Equivalent Value and the aggregate Merger Consideration. Additionally, the
Equivalent Value may differ from the actual market price of Caremark Common
Stock. Each stockholder is urged to obtain updated market information. During
the period between the date of this Prospectus-Joint Proxy Statement and the
time of the Special Meetings, MedPartners/Mullikin and Caremark stockholders may
obtain updated information regarding the market prices for the
MedPartners/Mullikin Common Stock and the Caremark Common Stock by calling toll
free at 1-800-563-7126.
Consummation of the Merger is conditioned upon stockholder approval. There
is no guarantee that such stockholder approval will be obtained at the Special
Meetings. If such stockholder approval is not obtained, the Merger will not be
consummated. See "-- Votes Required" and "The Special Meetings".
After consummation of the Merger, MedPartners/Mullikin will operate under
the name "MedPartners, Inc.", and Caremark will operate under the name "Caremark
International Inc." as a wholly-owned subsidiary of MedPartners, Inc. No
material disposition of assets of either MedPartners/Mullikin or Caremark or any
material part thereof is contemplated as a result of the Merger. See "Operations
and Management of MedPartners/Mullikin After the Merger".
Recommendations of the Boards of Directors.
MedPartners/Mullikin. The Board of Directors of MedPartners/Mullikin (the
"MedPartners/Mullikin Board of Directors") has unanimously approved the Plan of
Merger and recommends a vote FOR approval and adoption of the Plan of Merger.
The MedPartners/Mullikin Board of Directors believes the Plan of Merger is fair
to and in the best interests of the MedPartners/Mullikin stockholders.
4
<PAGE> 15
In considering the advantages of the Merger, the MedPartners/Mullikin Board
of Directors addressed the material considerations below. The reasons the
MedPartners/Mullikin Board of Directors believes that the Merger is desirable to
MedPartners/Mullikin include: the Merger is expected to be treated as a pooling
of interests under generally accepted accounting principles ("GAAP") and as a
tax-free reorganization under the Internal Revenue Code of 1986, as amended (the
"Code"); the Merger will enhance MedPartners/ Mullikin's leadership role in the
provision of physician-directed and patient-centered health care services
nationwide; the depth and breadth of the management of both companies; the
benefits to be derived by the combination of Caremark's pharmacy and disease
management businesses with MedPartners/Mullikin's physician network so as to
offer payors with complete health care solutions; the financial and operational
synergies expected as a result of the Merger; the opinion of the management of
MedPartners/Mullikin that the issuance of MedPartners/Mullikin Common Stock in
the Merger is not believed to be dilutive to earnings; and the opinion of Smith
Barney Inc. ("Smith Barney") as to the fairness of the Exchange Ratio, from a
financial point of view, to MedPartners/Mullikin. In considering the
disadvantages of the Merger, the MedPartners/Mullikin Board of Directors
addressed the following material factors: the risk that MedPartners/Mullikin
would not be able to successfully integrate the businesses of Caremark with that
of MedPartners/Mullikin and thus not realize the expected synergies, including
the fact that an unsuccessful integration would interrupt its normal business
processes; the potential of an adverse outcome to the outstanding litigation to
which Caremark is a party and the possible adverse effect on the combined
company; the significant cash resources needed to satisfy the remaining payments
related to the OIG (as defined herein) and private payor settlements and their
effect on the cash resources of the combined company. The MedPartners/Mullikin
Board of Directors considered that after the Merger, the current stockholders of
MedPartners/Mullikin will own approximately 35% and the current stockholders of
Caremark will own approximately 65% of the combined company resulting from the
Merger. The MedPartners/Mullikin Board of Directors also considered the size of
and circumstances under which the termination provisions and the significant
break up fee contained in the Plan of Merger would be payable and the effect
these provisions might have in reducing the likelihood of engaging in a business
combination with a party other than Caremark. See "The Merger -- Recommendations
of the Boards of Directors -- MedPartners/Mullikin".
Caremark. The Board of Directors of Caremark (the "Caremark Board") has
unanimously approved the Plan of Merger and recommends a vote FOR approval and
adoption of the Plan of Merger. The Caremark Board believes the Plan of Merger
is fair to and in the best interests of the stockholders of Caremark. In
considering the Merger, the Caremark Board addressed the following material
considerations: the Caremark Board's review of the financial condition, results
of operations, cash flows and business of MedPartners/ Mullikin; the Caremark
Board's view of changes in its operating environment and the importance of
economies of scale in being able to capitalize on developing opportunities in
the health care industry; the synergies expected to be realized by the combined
company; the Caremark Board's review, based in part on the analysis of CS First
Boston, of Caremark's potential strategic alternatives; the Caremark Board's
review of terms of the Plan of Merger, including without limitation the fixed
Exchange Ratio and restrictive covenants of the Plan of Merger; the financial
presentation of CS First Boston that, as of the date of its opinion, the
consideration to be received by the holders of Caremark Common Stock in
connection with the proposed Merger is fair to such stockholders from a
financial point of view; the attractiveness of allowing the Caremark
stockholders to become stockholders of a larger more geographically diverse
company; the potential long- and short-term benefits of the Merger; the Caremark
Board's belief that certain valuable employees of Caremark might choose to
terminate their employment with Caremark pending closing of the Merger and
provisions in the Plan of Merger intended to mitigate this concern; the
expectation that the Merger will generally be tax-free to Caremark and its
stockholders; and the expectation that the Merger will be accounted for as a
pooling of interests. In considering potential disadvantages of the Merger, the
Caremark Board addressed the material consideration set forth below under "Risk
Factors". The Caremark Board considered that, after the Merger, the current
stockholders of MedPartners/Mullikin will own approximately 35% and the current
stockholders of Caremark will own approximately 65% of the combined company
resulting from the Merger. The Caremark Board also considered the circumstances
under which the termination provisions and the significant break up fee
contained in the Plan of Merger would be payable, as well as restrictions on
Caremark's ability to solicit other potential acquirors, and the effect these
provisions might have in reducing the likelihood of engaging in a business
combination with a party other than MedPartners/Mullikin. See "The
Merger -- Recommendations of the Boards of Directors -- Caremark" and "Risk
Factors".
5
<PAGE> 16
Opinions of Financial Advisors.
MedPartners/Mullikin. Smith Barney has acted as financial advisor to
MedPartners/Mullikin in connection with the Merger and delivered an oral opinion
to the Board of Directors of MedPartners/Mullikin on May 13, 1996 (subsequently
confirmed by delivery of a written opinion dated such date) to the effect that,
as of the date of such opinion and based upon and subject to certain matters
stated therein, the Exchange Ratio was fair, from a financial point of view, to
MedPartners/Mullikin. The full text of the written opinion of Smith Barney dated
May 13, 1996, which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached as Annex B to this
Prospectus-Joint Proxy Statement and should be read carefully in its entirety.
Smith Barney's opinion is directed only to the fairness of the Exchange Ratio
from a financial point of view, to MedPartners/Mullikin, does not address any
other aspect of the Merger or related transactions and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
Special Meeting of MedPartners/Mullikin stockholders (the "MedPartners/Mullikin
Special Meeting"). See "The Merger -- Opinions of Financial
Advisors -- MedPartners/Mullikin".
In the ordinary course of business, Smith Barney and its affiliates may
actively trade or hold the securities of MedPartners/Mullikin and Caremark for
their own account or for the account of customers and, accordingly, may at any
time hold a long or short position in such securities. Smith Barney in the past
has provided certain investment banking services to MedPartners/Mullikin
unrelated to the proposed Merger, including acting as lead manager for
underwritten public offerings of MedPartners Common Stock in February 1995 and
MedPartners/Mullikin Common Stock in March 1996, and as financial advisor to
MedPartners/Mullikin in connection with its acquisition of Pacific Physician
Services, Inc. ("PPSI") in February 1996.
Caremark. CS First Boston has acted as financial advisor to Caremark in
connection with the Merger. CS First Boston assisted the Caremark Board in its
negotiation of the terms of the Plan of Merger and its examination of the
fairness to the stockholders of Caremark from a financial point of view of the
consideration the stockholders are to receive in connection with the Merger. At
the May 13, 1996 meeting of the Caremark Board, prior to the execution of the
Plan of Merger, CS First Boston rendered its oral opinion (subsequently
confirmed by delivery of a written opinion) stating that, as of the date
thereof, the consideration to be received by holders of Caremark Common Stock in
connection with the Merger was fair to such holders, from a financial point of
view. CS First Boston's fairness opinion is attached hereto as Annex C and
should be read carefully and in its entirety.
In the ordinary course of business, CS First Boston and its affiliates may
actively trade the securities of MedPartners/Mullikin and Caremark for its own
account or for the accounts of their customers, and, accordingly, may at any
time hold a long or short position in such securities. See "The
Merger -- Opinions of Financial Advisors -- Caremark".
Effective Time of the Merger. The Merger will become effective upon the filing
of the Certificate of Merger by Caremark under the ("DGCL"), or at such later
time as may be specified in such Certificate of Merger. The Plan of Merger
requires that this filing be made, subject to satisfaction of the separate
conditions to the obligations of each party to consummate the Merger, as soon as
practicable on or after the date of the Effective Time, or at such other time as
may be agreed by MedPartners/Mullikin and Caremark. It is presently anticipated
that such filing will be made as soon as practicable after the Special Meetings
on August 30, 1996, and that the Effective Time will occur upon such filing,
although there can be no assurance as to whether or when the Merger will occur.
See "The Merger -- Effective Time of the Merger".
Exchange of Certificates. As soon as reasonably practicable on or after the
Effective Time, transmittal materials will be provided to each holder of record
of shares of Caremark Common Stock by ChaseMellon Shareholder Services, L.L.C.
or such other person as MedPartners/Mullikin and Caremark shall mutually agree
(the "Exchange Agent") for use in exchanging such holder's stock certificates
for certificates evidencing shares of MedPartners/Mullikin Common Stock and for
receiving cash in lieu of fractional shares and any dividends or other
distributions to which such holder is entitled as a result of the Merger.
CAREMARK STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. See "The
Merger -- Exchange of Certificates".
Conditions to the Merger. The obligation of each of MedPartners/Mullikin, the
Subsidiary and Caremark to consummate the Merger is subject to certain
conditions typical in transactions of this type. See "The Merger -- Conditions
to the Merger".
6
<PAGE> 17
Representations and Covenants. Under the Plan of Merger, MedPartners/Mullikin,
the Subsidiary and Caremark have each made a number of representations regarding
the organization and capital structures of the respective companies and their
affiliates, their operations, financial condition and other matters, including
their authority to enter into the Plan of Merger and to consummate the Merger.
Under the Plan of Merger, MedPartners/Mullikin and Caremark have each agreed not
to encourage, solicit, participate in or initiate discussions or negotiations
with or provide any information to any third party concerning any merger, sale
of assets, sale of or tender offer for its shares or similar transactions,
except that each of the companies may furnish information to and negotiate with
an unsolicited third party consistent with the good faith exercise by the Board
of Directors of its fiduciary obligations. See "-- Termination" and "The
Merger -- Representations and Covenants".
Regulatory Approvals. The Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act") provides that certain business mergers (including the
Merger) may not be consummated until certain information has been furnished to
the United States Department of Justice (the "DOJ") and the United States
Federal Trade Commission (the "FTC"), and certain waiting period requirements
(including any extensions thereof) have been satisfied. MedPartners/Mullikin and
Caremark each made their respective filings with the DOJ and the FTC with
respect to the Plan of Merger, which filings became complete on June 14, 1996.
Under the HSR Act, the completion of the filings commenced a 30-day waiting
period during which the Merger may not be consummated, unless such waiting
period is extended by a request for additional information. Such a request was
made on July 12, 1996 and MedPartners/Mullikin and Caremark are fully
cooperating with the FTC's review. It is anticipated that the waiting period
will be terminated by the time of the Special Meetings, although there can be no
assurance of this. Notwithstanding the termination of the waiting period of the
HSR Act, the FTC, the DOJ or others could take action under the antitrust laws,
including, seeking to enjoin the consummation of the Merger or, after the
Effective Time, seeking the divestiture by MedPartners/Mullikin of all or any
part of the assets of Caremark acquired in the Merger. There can be no assurance
that a challenge to the Merger on antitrust grounds will not be made or, if such
a challenge were made, that it would not be successful. See "The
Merger -- Regulatory Approvals".
Business Pending the Merger. The Plan of Merger provides that, until the
Effective Time, except as otherwise provided in the Plan of Merger, each of
MedPartners/Mullikin and Caremark will conduct its business in the ordinary
course and will use its reasonable best efforts to preserve intact its present
business organization and preserve its goodwill with customers, suppliers and
others having business dealings with MedPartners/Mullikin and Caremark,
respectively. Caremark has also agreed to abide by certain restrictions and
limitations, as set forth in the Plan of Merger, with respect to its business,
prior to the Effective Time and to cooperate on certain matters relating to the
Merger. See "The Merger -- Business Pending the Merger".
Waiver and Amendment. The Plan of Merger provides that, at any time prior to
the Effective Time, the parties may, under certain circumstances, waive
compliance with covenants or conditions or amend or otherwise change the Plan of
Merger, except that, after approval by the stockholders of Caremark, no
amendment may be made that, under the DGCL, would require further stockholder
approval, without such further approval. See "The Merger -- Waiver and
Amendment".
Termination. The Plan of Merger may be terminated at any time prior to the
Effective Time, whether before or after the requisite approval of the Plan of
Merger by the stockholders of MedPartners/Mullikin and Caremark under certain
circumstances which are set forth under "The Merger -- Termination". If the Plan
of Merger is terminated by either MedPartners/Mullikin or Caremark and within
one year after the effective date of such termination such terminating party is
the subject of a Third Party Acquisition Event (as defined herein) with any
Person (as defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) (other
than a party hereto), then at the time of consummation of such a Third Party
Acquisition Event, such terminating party shall pay to the non-terminating party
a break-up fee of $100 million. Additionally, under the Plan of Merger,
MedPartners/Mullikin and Caremark will not, except as specifically allowed by
the Plan of Merger, directly or indirectly participate in or initiate
discussions or negotiations with any third party concerning any merger, sale of
assets, or similar transaction. See "The Merger -- Termination".
Additional Interests of Certain Persons in the Merger.
MedPartners/Mullikin. In considering the recommendations of the
MedPartners/Mullikin Board of Directors with respect to the Plan of Merger and
the transactions contemplated thereby, MedPartners/ Mullikin stockholders should
be aware that certain members of the MedPartners/Mullikin Board of Directors
7
<PAGE> 18
and management of MedPartners/Mullikin have certain interests in the Merger that
are in addition to interests of MedPartners/Mullikin stockholders generally. As
of the MedPartners/Mullikin Record Date (as defined herein), directors and
executive officers of MedPartners/Mullikin and their affiliates beneficially
owned an aggregate of 7,799,254 shares of MedPartners/Mullikin Common Stock
(excluding shares issuable upon exercise of options) or approximately 14.9% of
the shares of MedPartners/Mullikin Common Stock outstanding on such date. The
directors and executive officers of MedPartners/Mullikin and their affiliates
have unanimously indicated their intentions to vote the shares of
MedPartners/Mullikin Common Stock beneficially owned by them FOR the Plan of
Merger. See "The Merger -- Additional Interests of Certain Persons in the
Merger".
Caremark. In considering the recommendations of the Caremark Board with
respect to the Plan of Merger and the transactions contemplated thereby,
Caremark stockholders should be aware that certain members of the Caremark Board
and management of Caremark have certain interests in the Merger that are in
addition to the interests of Caremark stockholders generally. Certain of these
persons may have participated in the negotiation and consideration of the Plan
of Merger as well as certain of the arrangements described below. The Caremark
Board was aware that such arrangements may give these individuals interests in
the Merger that are in addition to the interests of stockholders generally and
concluded that such additional interests did not affect the negotiation of the
terms of the Merger in a manner that conflicted with or was adverse to the
interests of stockholders generally. The Caremark Board's belief was based on
its assessment of the terms of the Plan of Merger (See "The
Merger -- Recommendations of the Boards of Directors -- Caremark") as well as
the knowledge that the finance committee of the Caremark Board, a majority of
whose members are independent outside directors, was involved in the negotiation
of the terms of the Merger. As of the Caremark Record Date (as defined herein),
directors and executive officers of Caremark and their affiliates beneficially
owned an aggregate of 406,452 shares of Caremark Common Stock (excluding shares
issuable upon exercise of options) or less than 1% of the shares of Caremark
Common Stock outstanding on such date. See "The Merger -- Additional Interests
of Certain Persons in the Merger". The directors and executive officers of
Caremark and certain of their affiliates have unanimously indicated their
intentions to vote the shares of Caremark Common Stock beneficially owned by
them FOR the Plan of Merger.
Certain of the executive officers of Caremark will be entitled to severance
payments pursuant to severance compensation agreements. In addition, C.A. Lance
Piccolo, Thomas W. Hodson and Diane L. Munson have each entered into consulting
agreements with Caremark and MedPartners/Mullikin pursuant to which they will
each receive $5,373,920, $318,856, $280,000, respectively, over the ten-year,
one-year, and one-year terms of their respective consulting agreements. Certain
of the executive officers will continue in their present positions with Caremark
and have agreed to terminate their severance compensation agreements in return
for lump sum payments to be made within 30 days of the Effective Time as
follows: James G. Connelly III, President of Caremark -- $1,786,710; Kristen E.
Gibney, Vice President, Pharmaceutical Services -- $1,306,824; Michele J.
Hooper, Vice President, International Business -- $1,171,824, John M.
Pellettiere, Jr., Vice President and Controller of Caremark $783,030, and K. J.
Michael McDonald, Vice President, Disease Management -- $1,171,824. The Plan of
Merger also provides that: (i) Caremark employees who become employees of the
surviving corporation will receive a competitive employee benefit plan and all
accrued or vested benefits under specified Caremark employee benefit plans; (ii)
the benefits of any Caremark employee terminated within 12 months after the
Effective Time will be vested under certain employee benefit plans; and (iii)
that the surviving corporation will honor Caremark's Severance Pay and Benefits
Plan for six months after the Effective Time. Pursuant to the terms of
Caremark's stock-based option and incentive plans, at the Effective Time, each
Caremark stock option will become immediately exercisable and all restrictions
with respect to restricted stock will automatically lapse. The Plan of Merger
provides that MedPartners/Mullikin will cause the surviving corporation to
maintain in effect following the Merger the rights to indemnification of
Caremark officers and directors currently provided for in the Caremark
Certificate of Incorporation (the "Caremark Certificate") and the Caremark
By-laws (as defined herein). The Plan of Merger also provides that
MedPartners/Mullikin will cause the surviving corporation to maintain for not
less than three years following the Effective Time the same coverage with
respect directors' and officers' liability insurance maintained by Caremark with
respect to matters occurring prior to the Effective Time. See "The
Merger -- Indemnification".
The foregoing interests of members of management of Caremark in the Merger
may mean that such persons have personal interests in the Merger which may not
be identical to the interests of nonaffiliated
8
<PAGE> 19
stockholders. The Caremark Board was aware of the interests of Caremark
management in the Merger when it voted to approve and recommend the Plan of
Merger. See "The Merger -- Additional Interests of Certain Persons in the
Merger".
Accounting Treatment. It is intended that the Merger will be accounted for as a
pooling of interests under GAAP. It is a condition to the consummation of the
Merger that MedPartners/Mullikin and Caremark each receive a letter at closing
from Ernst & Young LLP, MedPartners/Mullikin's independent auditors, to the
effect that they concur with the conclusion of management of
MedPartners/Mullikin and Caremark that the Merger shall qualify for
pooling-of-interests accounting treatment under Accounting Principles Board
("APB") Opinion No. 16 if closed in accordance with the Plan of Merger. See "The
Merger -- Accounting Treatment" and "Pro Forma Condensed Financial Information".
Federal Income Tax Consequences. MedPartners/Mullikin has received an opinion
from Haskell Slaughter & Young, L.L.C., its counsel, and Caremark has received
an opinion from Wachtell, Lipton, Rosen & Katz, its special counsel, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, which opinions are based upon reasonable
representations of fact provided by officers of MedPartners/Mullikin, Caremark
and the Subsidiary. The Haskell Slaughter & Young, L.L.C. opinion further
provides that (i) no gain or loss will be recognized by any Caremark stockholder
(except in connection with the receipt of cash for a fractional share interest
of MedPartners/Mullikin Common Stock) upon the exchange of Caremark Common Stock
for MedPartners/Mullikin Common Stock in the Merger, (ii) the basis of the
MedPartners/Mullikin Common Stock received by a Caremark stockholder who
exchanges Caremark Common Stock for MedPartners/Mullikin Common Stock will be
the same as the basis of the Caremark Common Stock surrendered in exchange
therefor (subject to any adjustments required as the result of the receipt of
cash in lieu of a fractional share interest of MedPartners/Mullikin Common
Stock), (iii) the holding period of the MedPartners/Mullikin Common Stock
received by a Caremark stockholder receiving MedPartners/Mullikin Common Stock
will include the holding period of the Caremark Common Stock surrendered in
exchange therefor (provided that the Caremark Common Stock of such Caremark
stockholder was held as a capital asset as of the Effective Time), and (iv) cash
received by a Caremark stockholder in lieu of a fractional share interest of
MedPartners/Mullikin Common Stock will be treated as having been received as a
distribution in full payment in exchange for the fractional share interest of
MedPartners/Mullikin Common Stock redeemed, which such Caremark stockholder
would otherwise be entitled to receive, and will generally qualify as capital
gain or loss (assuming the Caremark Common Stock was a capital asset in such
Caremark stockholder's hands at the Effective Time). The Wachtell, Lipton, Rosen
& Katz opinion further provides that (i) no gain or loss will be recognized by
Caremark stockholders who exchange their Caremark Common Stock solely for
MedPartners Common Stock in the Merger (except with respect to cash received in
lieu of a fractional share interest in MedPartners Common Stock, if any); (ii)
the tax basis of the MedPartners Common Stock received by Caremark stockholders
will equal the tax basis of the Caremark Common Stock surrendered in exchange
therefore; (iii) the holding period of MedPartners Common Stock received by
Caremark stockholders in the Merger will include the period during which the
shares of Caremark Common Stock surrendered in exchange therefor were held;
provided that such Caremark Common Stock was held as a capital asset by the
holder thereof at the Effective Time; (iv) the receipt of cash in lieu of a
fractional share of MedPartners/Mullikin Common Stock will be treated as if the
fractional shares were distributed as part of the exchange and then were
redeemed by MedPartners/Mullikin. These payments will be treated as having been
received as distributions in full payment in exchange for the stock redeemed as
provided in Section 302(a) of the Code. EACH HOLDER OF CAREMARK COMMON STOCK IS
URGED TO CONSULT HIS OR HER OWN PERSONAL TAX AND FINANCIAL ADVISORS CONCERNING
THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, AS WELL AS ANY APPLICABLE
STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES, BASED UPON SUCH HOLDER'S OWN
PARTICULAR FACTS AND CIRCUMSTANCES. See "The Merger -- Federal Income Tax
Consequences".
Resale Restrictions. All shares of MedPartners/Mullikin Common Stock received
by Caremark stockholders in the Merger will be freely transferable, except that
shares of MedPartners/Mullikin Common Stock received by persons who are deemed
to be "affiliates" (as such term is used in Rule 145 under the Securities Act)
of Caremark or MedPartners/Mullikin at the time of the Special Meetings may be
resold by them only in certain permitted circumstances under the Securities Act,
other applicable securities laws and rules, and in accordance with restrictions
related to pooling of interests accounting treatment. See "The Merger -- Resale
of MedPartners/Mullikin Common Stock by Affiliates".
9
<PAGE> 20
NYSE Listing. It is a condition to the obligation of MedPartners/Mullikin and
Caremark to consummate the Merger that the shares of MedPartners/Mullikin Common
Stock to be received by Caremark stockholders pursuant to the Merger be approved
for listing on the NYSE, upon official notice of issuance, at the Effective
Time. A Subsequent Listing Application will be filed with the NYSE to list the
shares of MedPartners/Mullikin to be issued to the Caremark stockholders.
Although no assurance can be given that the NYSE will accept such shares of
MedPartners/Mullikin Common Stock for listing, MedPartners/ Mullikin anticipates
that these shares will qualify for listing. See "The Merger -- NYSE Listing".
RISK FACTORS
Certain factors to be considered in connection with an investment in
MedPartners/Mullikin Common Stock and approval of the Merger are set forth under
"Risk Factors". These risk factors include risks associated with this Merger and
MedPartners/Mullikin's growth strategy in general, and risks associated with the
businesses of MedPartners/Mullikin and Caremark, including: capital
requirements; the capitated nature of revenues; control of health care costs,
reduction in third-party reimbursement; dependence on affiliated physicians;
certain Caremark legal matters; professional liability concerns; concentration
of customers; competition; government regulation; pharmacy licensing and
operations; health care reform; possible volatility of MedPartners/Mullikin's
stock price; and federal income taxes and dilution. For a complete discussion of
the risk factors see "Risk Factors".
THE SPECIAL MEETINGS
MedPartners/Mullikin. The MedPartners/Mullikin Special Meeting to consider
and vote on the Plan of Merger will be held on September 5, 1996 at 10:00 a.m.,
Central Time, at the Wynfrey Hotel, 1000 Riverchase Galleria, Birmingham,
Alabama. Only holders of record of MedPartners/Mullikin Common Stock at the
close of business on July 22, 1996 (the "MedPartners/Mullikin Record Date") will
be entitled to notice of and to vote at the MedPartners/Mullikin Special
Meeting. As of such date, there were outstanding and entitled to vote 52,504,180
shares of MedPartners/Mullikin Common Stock. Each issued and outstanding share
of MedPartners/Mullikin Common Stock is entitled to one vote on each matter to
be presented at the MedPartners/Mullikin Special Meeting. The presence, in
person or by proxy, of the holders of MedPartners/ Mullikin Common Stock
entitled to cast a majority of the votes entitled to be cast at the MedPartners/
Mullikin Special Meeting will constitute a quorum at the MedPartners/Mullikin
Special Meeting. Abstentions and broker non-votes will be included in
determining whether a quorum is present.
Caremark. The Caremark Special Meeting to consider and vote on the Plan of
Merger will be held on September 5, 1996, at 9:30 a.m., Central Time, at the
Caremark headquarters at 2211 Sanders Road, Northbrook, Illinois. Only holders
of record of Caremark Common Stock at the close of business on July 29, 1996
(the "Caremark Record Date") will be entitled to notice of and to vote at the
Caremark Special Meeting. As of the Caremark Record Date, there were outstanding
and entitled to vote 82,318,626 shares of Caremark Common Stock. Each issued and
outstanding share of Caremark Common Stock is entitled to one vote on each
matter to be presented at the Caremark Special Meeting. The presence, in person
or by proxy, of the holders of Caremark Common Stock entitled to cast a majority
of the votes entitled to be cast at the Caremark Special Meeting will constitute
a quorum at the Caremark Special Meeting. Abstentions and broker non-votes will
be included in determining whether a quorum is present.
For additional information relating to the MedPartners/Mullikin Special
Meeting and the Caremark Special Meeting, see "-- Votes Required", and "The
Special Meetings".
VOTES REQUIRED
MedPartners/Mullikin Approval. As of the MedPartners/Mullikin Record Date
there were outstanding and entitled to vote 52,504,180 shares of
MedPartners/Mullikin Common Stock. Under the DGCL, approval and adoption of the
Plan of Merger by the stockholders of MedPartners/Mullikin requires the
affirmative vote of the holders of a majority of the issued and outstanding
shares of MedPartners/Mullikin Common Stock. As a result, failures to vote,
abstentions and broker non-votes will be the equivalents of votes against the a
Plan of Merger. Approval of the Plan of Merger will constitute approval of an
amendment to the MedPartners/ Mullikin Second Amended and Restated Certificate
of Incorporation (the "MedPartners/Mullikin Certificate") to change the name of
the corporation to "MedPartners, Inc."
10
<PAGE> 21
As of the MedPartners/Mullikin Record Date, directors and executive
officers of MedPartners/Mullikin and their affiliates beneficially owned an
aggregate of 7,799,254 shares of MedPartners/Mullikin Common Stock (excluding
shares issuable upon exercise of options) or approximately 14.9% of the shares
of MedPartners/Mullikin Common Stock outstanding on such date. The directors and
executive officers of MedPartners/Mullikin and their affiliates have unanimously
indicated their intentions to vote the shares of MedPartners/Mullikin Common
Stock beneficially owned by them FOR the Plan of Merger.
Caremark Approval. As of the Caremark Record Date there were outstanding
and entitled to vote 82,318,626 shares of Caremark Common Stock. Under the DGCL,
approval and adoption of the Plan of Merger by the stockholders of Caremark
requires the affirmative vote of the holders of a majority of the issued and
outstanding shares of Caremark Common Stock. As a result, failures to vote,
abstentions and broker non-votes will be the equivalents of votes against the
Plan of Merger.
As of the Caremark Record Date, directors and executive officers of
Caremark and their affiliates beneficially owned an aggregate of 406,452 shares
of Caremark Common Stock (excluding shares issuable upon exercise of options) or
less than 1% of Caremark Common Stock outstanding on such date. The directors
and executive officers of Caremark and their affiliates have unanimously
indicated their intentions to vote the shares of Caremark Common Stock
beneficially owned by them FOR the Plan of Merger.
See "The Special Meetings -- Votes Required", "The Merger -- Conditions to
the Merger" and "The Merger -- Additional Interests of Certain Persons in the
Merger".
MARKET AND MARKET PRICES
Prior to February 21, 1995, the effective date of the initial public
offering of MedPartners, there was no public market for MedPartners' common
stock. MedPartners and then MedPartners/Mullikin's Common Stock was traded on
the Nasdaq National Market under the symbol "MPTR" from February 21, 1995 until
February 21, 1996. On February 22, 1996, the MedPartners/Mullikin Common Stock
was listed on the NYSE under the symbol "MDM".
The following table sets forth for the quarterly periods indicated the high
and low reported bid prices for the MedPartners/Mullikin Common Stock through
February 21, 1996, as reported on the Nasdaq National Market. After February 21,
1996, the table sets forth the high and low last sale price as reported on the
NYSE Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter (from February 21)............................................. $24.00 $14.75
Second Quarter............................................................... 24.50 17.75
Third Quarter................................................................ 30.00 18.00
Fourth Quarter............................................................... 33.00 26.00
</TABLE>
<TABLE>
<S> <C> <C>
1996
First Quarter................................................................ $34.75 $28.50
Second Quarter............................................................... 30.25 20.13
Third Quarter (through August 15)............................................ 21.50 16.63
</TABLE>
There were approximately 743 holders of record of the MedPartners/Mullikin
Common Stock as of July 22, 1996.
Caremark Common Stock is listed on the NYSE under the symbol "CK". The
following table sets forth for the quarterly periods indicated the high and low
last sale price of Caremark Common Stock as reported on the NYSE Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
First Quarter................................................................ $22.88 $17.50
Second Quarter............................................................... 20.25 15.75
Third Quarter................................................................ 26.75 16.75
Fourth Quarter............................................................... 25.00 16.63
1995
First Quarter................................................................ $19.88 $16.25
Second Quarter............................................................... 21.88 16.88
Third Quarter................................................................ 22.75 19.00
Fourth Quarter............................................................... 21.13 17.88
</TABLE>
11
<PAGE> 22
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
First Quarter................................................................ $28.63 $18.13
Second Quarter............................................................... 29.50 23.88
Third Quarter (through August 15)............................................ 25.63 20.00
</TABLE>
On August 15, 1996, the closing price of the Caremark Common Stock on the
NYSE was $24.63 per share. A dividend of $0.04 per share was declared on each of
October 25, 1994 and November 1, 1995 payable on December 15, 1994 and December
15, 1995, respectively, to holders of Caremark Common Stock of record on
November 30, 1994 and November 30, 1995, respectively. There were approximately
46,009 holders of record of the Caremark Common Stock as of July 29, 1996.
The following table sets forth the closing price per share of Caremark
Common Stock, the closing price per share of MedPartners/Mullikin Common Stock
and the "equivalent per share price" (as defined herein) of Caremark Common
Stock as of May 13, 1996, the last trading day before Caremark and MedPartners/
Mullikin announced execution of the Plan of Merger. The "equivalent per share
price" of Caremark Common Stock as of such date equals the closing price per
share of MedPartners/Mullikin Common Stock on such date multiplied by 1.21,
which is the number of shares of MedPartners/Mullikin Common Stock to be issued
in exchange for each share of Caremark Common Stock pursuant to the Plan of
Merger, subject to certain adjustments.
<TABLE>
<CAPTION>
CAREMARK MEDPARTNERS EQUIVALENT
DATE COMMON STOCK COMMON STOCK PER SHARE
- --------------------------------------------------------- ------------ ------------ ----------
<S> <C> <C> <C>
May 13, 1996............................................. $28.63 $26.13 $31.61
August 15, 1996.......................................... $24.63 $20.63 $24.96
</TABLE>
STOCKHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE
MEDPARTNERS/MULLIKIN COMMON STOCK AND CAREMARK COMMON STOCK. No assurance can
be given as to the market price of MedPartners/ Mullikin Common Stock or the
Caremark Common Stock at the Effective Time or at any other time.
Because the Exchange Ratio of MedPartners/Mullikin Common Stock for
Caremark Common Stock is fixed at 1.21 and will not increase or decrease due to
fluctuations in the market price of either stock, it will not compensate
Caremark stockholders for certain decreases in the market price of
MedPartners/Mullikin Common Stock which could occur before the Effective Time.
As a result, in the event the market price of MedPartners/Mullikin Common Stock
decreases, the value of the MedPartners/Mullikin Common Stock to be received in
the Merger in exchange for Caremark Common Stock would decrease. In the event
the market price of MedPartners/Mullikin Common Stock instead increases, the
value of the MedPartners/Mullikin Common Stock to be received in the Merger in
exchange for Caremark Common Stock would increase. See "The Merger -- Terms of
the Merger".
Following the Merger, Caremark Common Stock will no longer be listed on the
NYSE.
NO RIGHTS OF APPRAISAL
Under the DGCL, no holders of MedPartners/Mullikin Common Stock or Caremark
Common Stock will be entitled to appraisal rights in connection with the Merger.
COMPARATIVE PER SHARE INFORMATION
The following summary presents selected comparative per share information
for (i) MedPartners/ Mullikin on a historical basis in comparison with pro forma
information giving effect to the Merger on a pooling of interests basis, (ii)
Caremark on a historical basis in comparison with pro forma equivalent
information after giving effect to the merger, assuming that 1.21 shares of
MedPartners/Mullikin Common Stock is issued in exchange for each share of
Caremark Common Stock in the Merger. The historical and pro forma financial
information should be read in conjunction with the historical consolidated
financial statements of MedPartners/Mullikin and the related notes thereto and
with the unaudited pro forma financial information and the related notes
thereto, appearing elsewhere in this Prospectus-Joint Proxy Statement. See
"Consolidated Financial Statements of MedPartners/Mullikin", "Pro Forma
Condensed Financial Information" and "Selected Financial and Operating
Data -- Caremark".
MedPartners/Mullikin has not paid cash dividends since inception. It is
anticipated that MedPartners/ Mullikin will retain all earnings for use in the
expansion of the business and therefore does not anticipate paying any cash
dividends in the foreseeable future. The payment of future dividends will be at
the discretion
12
<PAGE> 23
of the Board of Directors of MedPartners/Mullikin and will depend, among other
things, upon MedPartners/ Mullikin's earnings, capital requirements, financial
condition and debt covenants.
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined stockholders' equity.
<TABLE>
<CAPTION>
PER COMMON AND COMMON EQUIVALENT SHARE
--------------------------------------------------------------------
INCOME (LOSS) STOCKHOLDERS'
------------------------------------------ EQUITY
SIX MONTHS (BOOK VALUE)
YEAR ENDED DECEMBER 31, ENDED JUNE 30, -----------------------
------------------------ --------------- DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996 1995 1996
------ ------ ------ ------ ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income (Loss):
MedPartners/Mullikin
Historical(1).................... $(0.06) $(0.08) $ 0.01 $ 0.26 $(0.11) $ 4.75 $ 8.29
Pro forma combined............... 0.64 0.61 (0.83) (0.72) (0.20) 4.19 4.78
Caremark
Historical....................... 1.04 1.08 (1.55) (1.47) (0.33) 5.24 5.01
Pro forma equivalent(2).......... 0.77 0.74 (1.00) (0.87) (0.24) 5.07 5.78
Income (loss) from continuing
operations(4):
MedPartners/Mullikin
Historical....................... (0.06) (0.08) 0.01 0.26 (0.11)
Pro forma combined............... 0.39 0.41 0.13 0.31 0.24
Caremark
Historical(3).................... 0.63 0.73 0.27 0.41 0.54
Pro forma equivalent(2).......... 0.47 0.50 0.16 0.38 0.29
</TABLE>
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(1) MedPartners/Mullikin's historical pro forma net income (loss) per common
share is computed, after adjusting historical net income (loss) for the
estimated tax provision (benefit) applicable to the pooled companies, by
dividing net income (loss) by the number of common equivalent shares
outstanding during the period in accordance with the applicable rules of
the SEC. All stock options and warrants issued have been considered as
outstanding common share equivalents, even if anti-dilutive, under the
treasury stock method. Shares of MedPartners Common Stock issued in
February 1995, upon conversion of the then outstanding Convertible
Preferred Stock, are assumed to be common share equivalents.
(2) Caremark pro forma equivalent per common share data is calculated by
multiplying the pro forma MedPartners/Mullikin amounts by the fixed
Exchange Ratio of 1.21.
(3) Income (loss) from continuing operations for Caremark excludes results from
its Clozaril(R) Patient Management System, Home Infusion business, Oncology
Management Service business, Caremark Orthopedic Services Inc. subsidiary
and Nephrology Services division, all of which have been reflected as
discontinued operations in accordance with APB Opinion No. 30.
(4) Income (loss) from continuing operations per share data is computed, after
adjusting historical net income (loss) to eliminate the effects of
discontinued operations, by dividing adjusted net income (loss) by the
number of common equivalent shares outstanding during the period in
accordance with the applicable rules of the SEC. All stock options and
warrants issued have been considered as outstanding common share
equivalents, even if anti-dilutive, under the treasury stock method. Shares
of MedPartners Common Stock issued in February 1995, upon conversion of the
then outstanding Convertible Preferred Stock, are assumed to be common
share equivalents.
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<PAGE> 24
RISK FACTORS
In addition to the other information contained in this Prospectus-Joint
Proxy Statement, MedPartners/ Mullikin and Caremark stockholders should consider
carefully the factors listed below in evaluating the Merger.
RISKS RELATING TO THE MERGER; ACQUISITIONS
MedPartners/Mullikin believes that the Merger represents another step in
MedPartners/Mullikin's consolidation initiative in the PPM business to develop
integrated health care delivery systems through affiliation with individual
physicians, physician practices, hospitals and third-party payors. In addition,
MedPartners/Mullikin has recently completed major acquisitions and is still in
the process of integrating those acquired businesses. While the business plans
of these acquired companies are similar, their histories, geographical location,
business models and cultures are different in many respects. The
MedPartners/Mullikin Board of Directors and senior management of
MedPartners/Mullikin face a significant challenge in their efforts to integrate
the acquired businesses, including Caremark, so that the different cultures and
the varying emphasis on managed care and fee-for-service can be effectively
managed to continue to grow these businesses. The dedication of management
resources to such integration may detract attention from the day-to-day business
of MedPartners/Mullikin. There can be no assurance that there will not be
substantial costs associated with such activities or that there will not be
other material adverse effects of these integration efforts. While management of
MedPartners/Mullikin and Caremark believe that the diverse experience of each of
the combined companies will serve to strengthen MedPartners/Mullikin, there can
be no assurance that management's efforts to integrate the operations of
MedPartners/Mullikin will be successful or that the anticipated benefits of the
Merger will be fully realized.
The profitability of MedPartners/Mullikin is largely dependent on its
ability to develop and integrate networks of physicians from the affiliated
practices, to manage and control costs and to realize economies of scale.
MedPartners/Mullikin's operating results could be adversely affected in the
event it incurs costs associated with developing networks without generating
sufficient revenues from such networks.
RISKS RELATING TO MEDPARTNERS/MULLIKIN'S GROWTH STRATEGY
MedPartners/Mullikin's growth strategy involves growth through acquisitions
and internal development. MedPartners/Mullikin is subject to various risks
associated with its growth strategy. Because the major acquisitions carried out
by MedPartners/Mullikin in 1995 and the six months of 1996 have been structured
as poolings of interests, the operating income of MedPartners/Mullikin has been
reduced by the merger expenses incurred in connection therewith, resulting in a
net loss for the six months ended June 30, 1996. The expenses of the Merger are
expected to result in a net loss for the year ended December 31, 1996. In
addition, MedPartners/Mullikin and the combined company is subject to the risk
that it will be unable to identify and recruit suitable acquisition candidates
in the future or to integrate and manage the affiliated physicians.
MedPartners/Mullikin is also largely dependent on the continued increase in
the number of HMO enrollees who use its physician networks. This growth may come
from the development or acquisition of other PPM entities, additional affiliated
physicians, increased enrollment in HMOs currently contracting with
MedPartners/Mullikin through its affiliated physicians, or from agreements with
new HMOs. There can be no assurance that MedPartners/Mullikin will be successful
in identifying, acquiring and integrating additional medical groups or other PPM
companies or in increasing the number of enrollees. A decline in enrollees in
HMOs could also have a material adverse effect on MedPartners/Mullikin's
profitability.
MedPartners/Mullikin's current and anticipated future expansion has placed,
and will continue to place, significant demands on the management, operational
and financial resources of MedPartners/Mullikin. MedPartners/Mullikin will need
to continue to augment its management and operational systems to support growth
both within existing and into new geographic markets. There can be no assurance
that MedPartners/ Mullikin will be able to manage its expanded operations
effectively.
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<PAGE> 25
RISKS RELATING TO CAPITAL REQUIREMENTS
MedPartners/Mullikin's growth strategy requires substantial capital for the
acquisition of assets of physician practices, and for the effective integration,
operation and expansion of the affiliated practices. Affiliated physician
practices may also require capital for renovation, expansion and additional
medical equipment and technology. MedPartners/Mullikin believes that, without
taking into consideration the Merger, its existing cash resources, the use of
MedPartners/Mullikin's Common Stock for selected practice and other
acquisitions, and available borrowings under the Bank Credit Facility, dated as
of November 21, 1995, among MedPartners/Mullikin and NationsBank of Georgia,
N.A. (the "Bank Credit Facility") or any successor credit facility, will be
sufficient to meet MedPartners/Mullikin's anticipated acquisition, expansion and
working capital needs for the foreseeable future. It is expected that an
increased bank credit facility will be put into effect in connection with the
consummation of the Merger in order to refinance the indebtedness under the Bank
Credit Facility and the current indebtedness under the Caremark bank facility so
that the combined company will not have a working capital deficit. See
"Managements' Discussion and Analysis of Results of Operations and Financial
Condition--Caremark". MedPartners/Mullikin 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 as
management deems appropriate and the market allows. Any of such financings could
result in dilution of existing equity positions, increased interest and
amortization expense, or decreased income to fund future expansion. There can be
no assurance that acceptable financing for future acquisitions or for the
integration and expansion of existing networks can be obtained.
RISKS RELATING TO CAPITATED NATURE OF REVENUES; CONTROL OF HEALTH CARE COSTS
A substantial portion of the revenue of MedPartners/Mullikin's and of
Caremark's PPM business is derived from agreements with HMOs that provide for
the receipt of capitated fees. Under these agreements, each of
MedPartners/Mullikin and Caremark, 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. MedPartners/Mullikin and Caremark
are statutorily and contractually prohibited from controlling any medical
decisions made by any health care provider. To the extent that enrollees require
more care than is anticipated or require supplemental medical care which 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, MedPartners/Mullikin's and Caremark's operating
results could be adversely affected. As a result, the success of
MedPartners/Mullikin and of Caremark's PPM business will depend in large part on
the effective management of health care costs through various methods, including
utilization management, competitive pricing for purchased services and favorable
agreements with payors. Recently, many providers, including MedPartners/Mullikin
and Caremark, 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 health care
services. At the same time, employer groups are demanding higher accountability
from payors and providers of health care 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 decrease. There can be no assurance that these
pricing pressures will not have a material adverse effect on the operating
results of MedPartners/Mullikin or Caremark. Changes in health care practices,
inflation, new technologies, major epidemics, natural disasters and numerous
other factors affecting the delivery and cost of health care are beyond the
control of MedPartners/Mullikin, and may adversely affect its operating results.
Under its HMO agreements, MedPartners/Mullikin is frequently responsible
for the provision of all covered hospital benefits regardless of whether it is
responsible for provision of the hospital services associated with the covered
benefits. Similarly, under its HMO agreements, Caremark, through its affiliated
physicians, provides the majority of covered health care services to enrollees
and enters into sub-capitation agreements with hospitals and other health care
providers for the balance of the covered services. MedPartners/Mullikin and
Caremark have contracted with a number of hospitals to provide covered services
to HMO enrollees who have been assigned to the physician practices affiliated
with MedPartners/Mullikin and Caremark, respec-
15
<PAGE> 26
tively. MedPartners/Mullikin expects to seek additional hospital providers to
provide covered services to HMO enrollees assigned to its affiliated physicians.
To the extent that 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. If such revenue is insufficient, MedPartners/Mullikin's
and Caremark's operating results could be adversely affected.
In addition, MedPartners/Mullikin'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, operating results of MedPartners/Mullikin could be
materially adversely affected.
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.
MedPartners/Mullikin'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, which may cause fluctuations from amounts previously
accrued.
In connection with the HMO agreements, MedPartners/Mullikin negotiates
stop-loss catastrophic reinsurance with third-party insurers. Coverage under
this reinsurance commences at the threshold at which the risk of further
financial exposure for critically ill or injured HMO enrollees is contractually
shifted to the HMOs or another third party. There can be no assurance that
MedPartners/Mullikin will be able to negotiate favorable catastrophic
reinsurance in connection with future HMO agreements.
POTENTIAL REDUCTIONS IN THIRD-PARTY REIMBURSEMENT
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 health care services provided to their patients. A
significant portion of the revenue of MedPartners/Mullikin is derived from
payments made by these third-party payors. These third-party payors are
increasingly negotiating the prices charged for medical services, with the goal
of lowering reimbursement and utilization rates. The success of
MedPartners/Mullikin therefore depends in large part on the effective management
of health care costs, including controlling utilization of specialty care
physicians and other ancillary providers and purchasing services from
third-party providers at competitive prices. 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, was experimental or
for other reasons. Any loss of revenues by the affiliated physicians caused by
this trend in the health care industry toward cost containment and oversight
could have a material adverse effect on MedPartners/Mullikin's operating
results.
RISKS RELATING TO DEPENDENCE ON AFFILIATED PHYSICIANS
MedPartners/Mullikin's revenue and revenue of Caremark's PPM business
depend on revenues generated by the physicians with whom each of
MedPartners/Mullikin and Caremark has practice management agreements. These
agreements define the responsibilities of the physicians and
MedPartners/Mullikin and Caremark, respectively, and govern all terms and
conditions of their relationship. MedPartners/Mullikin practice management
agreements have terms generally of 20 to 44 years, subject to termination for
cause, which includes bankruptcy or a material breach. Practice management
agreements with certain of MedPartners/Mullikin affiliated practices contain
provisions giving the physician practice the option to terminate the agreement
without cause, subject to significant limitations. Because MedPartners/Mullikin
and Caremark cannot control the provision of medical services by its affiliated
physicians contractually or
16
<PAGE> 27
otherwise under the laws of California and most other states in which each of
MedPartners/Mullikin and Caremark operates, affiliated physicians may decline to
enter into HMO agreements that are negotiated for them by MedPartners/Mullikin
or Caremark or may enter into contracts for the provision of medical services or
make other financial commitments which are not intended to benefit
MedPartners/Mullikin or Caremark and which could have a material adverse effect
on MedPartners/Mullikin's or Caremark's operating results. See "Business of
MedPartners/Mullikin -- Development and Operations -- Affiliated Physicians".
RISKS RELATING TO CERTAIN CAREMARK LEGAL MATTERS
OIG Settlement and Related Claims. Caremark agreed in June 1995 to settle a
nearly four year long investigation of Caremark with the Office of the Inspector
General (the "OIG") of the United States Department of Health and Human Services
(the "DHHS"), DOJ, the Veteran's Administration, the Federal Employee 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 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 Civilian Health and Medical Payments for the Uniformed Services
("CHAMPUS") and Federal Employees Health Benefit Plan ("FEHBP"), federally
funded health care benefit programs, concerning financial relationships between
Caremark and a physician in each of Minnesota and Ohio. See "Business of
Caremark -- 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. Although MedPartners/Mullikin is not subject to the reporting
requirements under Caremark's compliance-related oversight procedures, any
material liabilities incurred by Caremark post-merger will be required to be
reflected in the consolidated financial statements of the combined company after
the Merger and could have an adverse result on the results of operations and
financial condition of the combined 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 health care services from Caremark and such
patients' insurers. See the discussion contained in Note 14 to "Caremark's
Consolidated Financial Statements". 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 California's unfair business practices statute. The
complaint seeks unspecified treble damages, and attorneys' fees and expenses.
Caremark intends to defend this case vigorously. Caremark is unable at this time
to estimate the impact, if any, of the ultimate resolution of this matter.
Private Payor Settlements. In March 1996, Caremark agreed to settle all
disputes with a number of private payors. The settlements resulted in an
after-tax charge of approximately $42.3 million. These disputes relate to
businesses that were covered by the OIG Settlement. In addition, Caremark 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. Caremark may pay the
settlement amounts in 1996 and 1997 or, under certain circumstances, in
semi-annual installments, including interest, through 1999. Caremark's lenders
have waived the impact of these settlements on the financial covenants under the
credit facility. These waivers expire on September 15, 1996. As further
discussed in
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<PAGE> 28
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Caremark", it is anticipated that MedPartners/Mullikin will
refinance Caremark's existing credit facility in connection with the Merger. In
the event the Merger is not consummated, Caremark expects to enter into a
revised credit facility, although there can be no assurances as to the certainty
or terms of any such agreement. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Caremark" and Note 14 to the
"Caremark's Consolidated Financial Statements".
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 million. This reserve represented
Caremark's management's estimate of the ultimate costs relating to the
disposition of these matters. Caremark's management cannot determine at this
time whether there will be additional costs relating to any future disposition
of non-governmental claims or litigation. Therefore there can be no assurance
that the ultimate costs of these matters will not exceed the reserve or that
additional costs, claims and damages will not occur. Such additional costs, if
incurred, could have a material negative impact on Caremark's future results.
See Note 14 to "Caremark's Consolidated Financial Statements".
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 million in cash
and $100 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 motions in October
1995 in the Superior Court of California seeking (i) to strike certain causes of
action due to the speculative nature of the claims and damages asserted and (ii)
dismissal of Coram's lawsuit on grounds of lack of jurisdiction over
Illinois-based Caremark. The Superior Court of California subsequently dismissed
the case against Caremark (but not against Caremark Inc.) on the basis of lack
of jurisdiction. Caremark 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. This case, which has been dismissed, is on appeal
and Caremark has filed counterclaims to the lawsuit pending in San Francisco
against Caremark Inc. Coram's lawsuit is currently in the discovery phase.
Although Caremark management believes, based on information currently
available, that the ultimate resolution of this matter is not likely to have a
material adverse effect on Caremark's results of operations, cash flows or
financial position, there can be no assurance, that the ultimate resolution of
this matter, if adversely determined, would not have a material adverse effect
on Caremark's results of operations, cash flows or financial position.
Recently Filed Litigation. In May 1996, two stockholders, each purporting
to represent a class, filed (but have not yet served) 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 proposed merger with MedPartners/Mullikin. The complaints seek
unspecified damages, injunctive relief, and attorneys' fees and expenses.
Caremark intends, if served, to defend these cases vigorously. Caremark believes
these complaints will not have a material adverse effect on its financial
condition or results of operations. CAREMARK STOCKHOLDERS SHOULD NOTE THE
FOLLOWING: In the course of the litigation, the defendants may raise as a
defense to any claims asserted in these complaints the circumstance that the
Merger was approved and ratified, upon full disclosure, by the requisite vote of
the Caremark stockholders, if such is the case. Further, the defendants may
contend that those Caremark stockholders who vote in favor of the Merger are
barred from receiving any proceeds from any potential award against the
defendants in the litigation, unless such award is based on a finding that the
defendants failed to make full disclosure in connection with the vote of
Caremark stockholders.
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<PAGE> 29
RISKS RELATING TO EXPOSURE TO PROFESSIONAL LIABILITY; LIABILITY INSURANCE
In recent years, physicians, hospitals and other participants in the health
care 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 neither
MedPartners/Mullikin nor Caremark engage in the practice of medicine or provide
medical services, or control the practice of medicine by their respective
affiliated physicians or the compliance with regulatory requirements directly
applicable to the affiliated physicians and physician groups, there can be no
assurance that either MedPartners/Mullikin or Caremark will not become involved
in such litigation in the future. Through MedPartners/Mullikin's ownership and
operation of Pioneer Hospital ("Pioneer Hospital") and U.S. Family Care Medical
Center ("USFMC"), acute care hospitals located in Artesia and Montclair,
California, respectively, MedPartners/ Mullikin 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 an acute care hospital. In addition, through its
management of clinic locations and provision of non-physician health care
personnel, MedPartners/Mullikin or Caremark could be named in actions involving
care rendered to patients by physicians employed by or contracting with
affiliated medical organizations and physician groups.
Each of MedPartners/Mullikin and Caremark 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, MedPartners/ Mullikin's and Caremark's practice management agreements
require the affiliated physicians to maintain professional liability insurance
coverage on the practice and on each employee and agent of the practice, and
MedPartners/Mullikin and Caremark generally are indemnified under each of the
practice management agreements by the affiliated physicians for liabilities
resulting from the performance of medical services. However, 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 of MedPartners/Mullikin -- Corporate Liability and
Insurance".
RISKS RELATING TO CONCENTRATION OF CUSTOMERS
Three HMOs, PacifiCare, Health Net and CaliforniaCare, accounted for
approximately 29% of net revenue of MedPartners/Mullikin for the quarter ended
June 30, 1996. MedPartners/Mullikin's HMO agreements are generally for one-year
terms, and are, thus subject to annual negotiation of rates, covered benefits,
and other terms and conditions. HMO agreements are often negotiated and executed
in arrears. There can be no assurance that such agreements will be renewed, or,
if renewed, that they will contain terms favorable to MedPartners/Mullikin and
its affiliated physicians. The loss of any of the above HMO customers could have
a material adverse effect on MedPartners/Mullikin's operating results.
COMPETITION
The PPM industry is highly competitive. The industry is also subject to
continuing changes in the provision of services and the selection and
compensation of providers. In addition, certain companies, including hospitals
and insurers, are expanding their presence in the physician management market.
The provision of physician contract management services for hospitals and other
health care providers is also highly competitive, and MedPartners/Mullikin's
hospital-based operations compete with national, regional and local companies in
providing its services. Certain of MedPartners/Mullikin's competitors are larger
and better capitalized, provide a wider variety of services, may have greater
experience in providing health care management services and may have longer
established relationships with buyers of such services.
The demand for physician and health care professional personnel presently
exceeds the supply of qualified personnel. As a result, MedPartners/Mullikin
experiences competitive pressures for the recruitment and retention of qualified
physicians and other health care professionals to deliver their services.
MedPartners/ Mullikin's future success depends on its ability to continue to
recruit and retain qualified physicians and other health care professionals to
serve as employees or independent contractors of MedPartners/Mullikin and its
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<PAGE> 30
affiliates. There can be no assurance that MedPartners/Mullikin will be able to
recruit or retain a sufficient number of competent physicians and other health
care professionals to continue to expand its operations.
GOVERNMENT REGULATION
Federal and state laws regulate the relationships among providers of health
care 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 money penalties and exclusion from participation in the
Medicare and Medicaid programs. Such exclusion and penalties, if applied to
MedPartners/Mullikin's or Caremark's affiliated physicians, could result in
significant loss of reimbursement.
Moreover, the laws of many states, including California, from which a
significant portion of MedPartners/Mullikin's and Caremark'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 the Notes to its
Consolidated Financial Statements, MedPartners/Mullikin 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
each of MedPartners/Mullikin and Caremark believes its operations as currently
conducted are in material compliance with existing applicable laws, there can be
no assurance that the existing organization of each of MedPartners/Mullikin and
Caremark 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 respective businesses of MedPartners/Mullikin and Caremark and
their respective affiliates by courts or regulatory authorities will not result
in a determination that could adversely affect their operations or that the
health care regulatory environment will not change so as to restrict existing
operations or expansion of MedPartners/Mullikin and Caremark and their
respective affiliates. In the event of action by any regulatory authority
limiting or prohibiting MedPartners/Mullikin or Caremark or their respective
affiliates from carrying on its business or from expanding the operations of
MedPartners/Mullikin or Caremark to certain jurisdictions, structural and
organizational modifications of such organization or arrangements of
MedPartners/Mullikin or Caremark may be required, which could have an adverse
effect on MedPartners/Mullikin or Caremark.
In addition to the regulations referred to above, significant aspects of
Caremark's businesses are subject to state and federal statutes and regulations
governing the operation of pharmacies, repackaging of drug products, dispensing
of controlled substances, medical waste disposal and workplace health and
safety. Caremark's businesses 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 an adverse effect on the businesses of Caremark. See "-- Risks
Relating to Pharmacy Licensing and Operation".
Approximately 10% of the revenues of MedPartners/Mullikin's affiliated
physician groups is derived from payments made by government-sponsored health
care 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
MedPartners/Mullikin. There are also state and federal civil and criminal
statutes imposing substantial penalties, including civil and criminal fines and
imprisonment, on health
20
<PAGE> 31
care providers that fraudulently or wrongfully bill governmental or other
third-party payors for health care services. MedPartners/Mullikin believes it is
in material compliance with such laws, but there can be no assurance that
MedPartners/Mullikin's activities will not be challenged or scrutinized by
governmental authorities.
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
MedPartners/Mullikin or any of its subsidiaries or affiliated physicians, such
exclusion could result in a significant loss of reimbursement for
MedPartners/Mullikin, up to a maximum of the approximately 15% of revenues
derived from such programs. Although MedPartners/Mullikin 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
United States Congress in the 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 MedPartners/Mullikin believes it is in compliance with such
legislation, future regulations could require MedPartners/Mullikin to modify the
form of its relationships with physician groups. Some states have also enacted
similar self-referral laws and MedPartners/Mullikin believes it is likely that
more states will follow. MedPartners/Mullikin believes that its practices fit
within exemptions contained in such statutes. Nevertheless, expansion of the
operations of MedPartners/Mullikin to certain jurisdictions may require
structural and organizational modifications of MedPartners/Mullikin's
relationships with physician groups to comply with new or revised state
statutes.
RISKS RELATING TO PHARMACY LICENSING AND OPERATION
Caremark is subject to federal and state laws and regulations governing
pharmacies. Federal controlled substance laws require Caremark 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.
RISKS RELATING TO REGULATORY REQUIREMENTS OF KNOX-KEENE ACT
On March 5, 1996 the California Department of Corporations ("DOC") issued
to Pioneer Provider Network, Inc. ("PPN"), a wholly-owned subsidiary of
MedPartners/Mullikin, a license (the "Restricted License") in accordance with
the requirements of the Knox-Keene Health Care Service Plan Act of 1975 (the
"Knox- Keene Act"). The Restricted License authorizes PPN to operate as a health
care service plan in the State of California. MedPartners/Mullikin, through PPN,
intends to utilize the Restricted License for purposes of contracting with HMOs
for a broad range of health care services, including both institutional and
professional medical services, through a consolidated contract with the HMO.
21
<PAGE> 32
The Knox-Keene Act and the regulations promulgated thereunder subject
entities which are licensed as health care service plans in California to
substantial regulation by 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 which fail to comply with such
requirements. PPN is a newly-created organization without an operating history
and there is no assurance that the DOC will view its operations to be fully in
compliance with applicable laws and regulations. If this were to occur, it could
have an adverse effect on MedPartners/ Mullikin.
RISKS RELATING TO HEALTH CARE REFORM
As a result of the continued escalation of health care costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the United States Congress and state
legislatures relating to health care reform. There can be no assurance as to the
ultimate content, timing or effect of any health care reform legislation, nor is
it possible at this time to estimate the impact of potential legislation, which
may be material, on MedPartners/Mullikin.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the MedPartners/Mullikin Certificate,
MedPartners/Mullikin's Amended and Restated By-laws (the "MedPartners/Mullikin
By-laws") and the DGCL could, together or separately, discourage potential
acquisition proposals, delay or prevent a change in control of
MedPartners/Mullikin. These provisions include a classified Board of Directors
and the issuance, without further stockholder approval, of preferred stock with
rights and privileges which could be senior to MedPartners/Mullikin's Common
Stock. MedPartners/Mullikin 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 stockholder. In addition, MedPartners/Mullikin's Rights Plan (as
defined herein), which provides for discount purchase rights to certain
stockholders of MedPartners/Mullikin upon certain acquisitions of 10% or more of
the outstanding shares of MedPartners/Mullikin's Common Stock, may also inhibit
a change in control of MedPartners/Mullikin. See "MedPartners/Mullikin
Management -- Classified Board of Directors", "Description of Capital Stock of
MedPartners/Mullikin -- Certain Provisions of the MedPartners/Mullikin
Certificate and the DGCL" and "-- MedPartners/Mullikin Stockholders' Rights
Plan".
POSSIBLE VOLATILITY OF STOCK PRICE
There may be significant volatility in the market price for
MedPartners/Mullikin's Common Stock. Quarterly operating results of
MedPartners/Mullikin, changes in general conditions in the economy, the
financial markets or the health care industry, or other developments effecting
MedPartners/Mullikin or its competitors, could cause the market price of
MedPartners/Mullikin'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.
DILUTION OF VOTING POWER OF MEDPARTNERS/MULLIKIN STOCKHOLDERS
Consummation of the Merger will result in an approximate 190% increase in
the number of shares of MedPartners/Mullikin Common Stock outstanding.
Stockholders of MedPartners/Mullikin will, therefore, experience a dilution of
their voting power. In exchange for 100% of the outstanding Caremark Common
Stock, stockholders of Caremark will receive approximately 65% of the
outstanding voting stock of MedPartners/Mullikin which will be outstanding after
the Merger. Accordingly, stockholders of MedPartners/Mullikin will experience a
dilution of approximately 65% of their relative voting authority after the
Merger.
22
<PAGE> 33
RISKS RELATING TO FEDERAL INCOME TAXES
If the Merger were not to constitute a tax-free reorganization under
Section 368(a) of the Code, each holder of Caremark Common Stock would recognize
gain or loss equal to the difference between the fair market value of the
MedPartners/Mullikin Common Stock received and cash received in lieu of
fractional shares and such holder's basis in the shares of Caremark Common Stock
exchanged therefor. See "The Merger -- Federal Income Tax Consequences".
23
<PAGE> 34
SELECTED FINANCIAL INFORMATION --
MEDPARTNERS/MULLIKIN
SELECTED FINANCIAL DATA
The following tables set forth selected financial data for
MedPartners/Mullikin derived from its Consolidated Financial Statements. The
selected financial data should be read in conjunction with the Consolidated
Financial Statements of MedPartners/Mullikin and the related notes thereto
included elsewhere in this Prospectus-Joint Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue........................................ $266,447 $394,878 $549,695 $815,041 $1,153,557 $547,450 $703,683
Operating Expenses:
Cost of affiliated physician services............ 97,364 167,488 224,770 349,036 506,811 240,225 301,280
Clinic salaries, wages and benefits.............. 66,596 89,439 112,489 159,010 216,119 105,133 116,600
Outside hospitalization expense.................. 17,411 27,842 59,861 86,974 109,934 50,364 83,516
Clinic rent and lease expense.................... 9,467 11,970 18,832 27,515 41,825 19,744 23,814
Clinic supplies.................................. 15,552 17,996 24,529 34,453 47,744 22,519 30,953
Other clinic costs............................... 19,227 22,648 41,248 67,645 88,991 43,776 59,154
General corporate expenses....................... 18,060 38,099 42,196 56,653 64,713 32,167 39,540
Depreciation and amortization.................... 6,404 9,575 14,057 21,892 29,088 13,962 16,482
Net interest expense............................. 2,098 2,396 3,338 5,958 8,443 3,367 2,811
Merger expenses.................................. -- -- -- -- 66,564 1,051 34,448
Loss (gain) from disposal of assets.............. (3) -- 122 1,627 -- -- --
------- -------- -------- -------- ---------- ---------- ----------
Income (loss) from continuing operations before
pro forma income taxes and cumulative effect of
change in method of accounting................. 14,271 7,425 8,253 4,278 (26,675) 15,142 (4,915)
Pro forma income tax expense (benefit)(1)........ 2,190 7,703 9,723 7,350 (27,233) 4,411 360
------- -------- -------- -------- ---------- ---------- ----------
Pro forma income (loss) from continuing
operations before cumulative effect of change
in method of accounting........................ 12,081 (278) (1,470) (3,072) 558 10,731 (5,275)
Cumulative effect of change in method of
accounting for income taxes.................... (120) -- 298 -- -- -- --
------- -------- -------- -------- ---------- ---------- ----------
Pro forma income (loss) from continuing
operations..................................... 12,201 (278) (1,768) (3,072) 558 $ 10,731 (5,275)
Loss from discontinued operation of clinics...... (279) (702) -- -- -- -- --
------- -------- -------- -------- ---------- ---------- ----------
Pro forma net income (loss)(1)................... $ 11,922 $ (980) $ (1,768) $ (3,072) $ 558 $ 10,731 $ (5,275)
======= ======== ======== ======== ========== ========== ==========
Pro forma net income (loss) per share(2)........... $ 0.97 $ (0.06) $ (0.06) $ (0.08) $ 0.01 $ 0.26 $ (0.11)
Number of shares used in pro forma net income
(loss) per
share............................................ 12,249 15,308 28,403 36,553 42,720 41,867 50,034
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------------------------- ---------
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 23,677 $ 22,312 $ 43,367 $ 66,623 $ 55,328 $ 56,221
Working capital (deficit)...................................... 11,425 (3,358) 13,023 75,605 91,892 101,038
Total assets................................................... 111,478 181,032 243,758 417,974 576,733 618,184
Long-term debt, less current portion........................... 29,369 46,678 48,340 146,498 200,814 35,080
Total stockholders' equity..................................... 30,708 49,281 71,577 109,232 202,717 414,611
</TABLE>
- ---------------
(1) Includes pro forma income tax provision giving effect to pooling with
non-taxable entities. See Note 1 to Consolidated Financial Statements of
MedPartners/Mullikin.
(2) Pro forma net income (loss) per share is computed, after giving effect to
the pro forma tax provision described above, by dividing net income (loss)
by the number of common equivalent shares outstanding during the periods
presented in accordance with the applicable rules of the SEC. All stock
options issued have been considered as outstanding common equivalent shares
for all periods presented, even if anti-dilutive, under the treasury stock
method. Shares of the common stock of MedPartners issued in February 1995
upon conversion of the then outstanding Convertible Preferred Stock are
assumed to be common equivalent shares for all periods presented.
24
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- MEDPARTNERS/MULLIKIN
The following discussion of the results of operations and financial
condition of MedPartners/Mullikin should be read in conjunction with the
Consolidated Financial Statements of MedPartners/Mullikin, Inc. and notes
thereto included elsewhere in this Prospectus-Joint Proxy Statement.
GENERAL
MedPartners was incorporated in January 1993, and affiliated with its
initial physician practice in November 1993. MME was formed by the merger of
several physician partnerships in 1994, and the original business was organized
in 1957.
MedPartners/Mullikin is the result of the business combination between
MedPartners and MME, which was consummated on November 29, 1995. As described in
Note 1 to MedPartners/Mullikin's Consolidated Financial Statements, the
financial information referred to in this discussion reflects the combined
operations of several entities. During 1995, MedPartners/Mullikin combined with
MEDCTR, Inc., Vanguard Healthcare Group, Inc., Texas Back Institute, Inc., MME,
Cerritos Investment Group, Cerritos Investment Group II, and 5000 Airport Plaza,
L.P. in business combinations that were accounted for as poolings of interests
(collectively, the "1995 Mergers"). In February of 1996, MedPartners/Mullikin
combined with PPSI in a business combination that was accounted for as a pooling
of interests. During 1995 PPSI combined with Team Health, Inc. ("Team Health")
in a business combination accounted for as a pooling of interests.
Because of MedPartners' limited operating history and the business
combinations described above, MedPartners/Mullikin does not believe that the
period-to-period comparisons, percentage relationships within periods and
apparent trends set forth below are meaningful.
MedPartners/Mullikin acquires existing medical practices and enters into
long-term contractual relationships pursuant to practice management agreements,
for periods ranging from 20 to 44 years, to provide management and
administrative services. MedPartners/Mullikin believes that the practice
management agreements convey to MedPartners/Mullikin perpetual, unilateral
control over the assets and operations of the various affiliated professional
corporations. Notwithstanding the lack of technical majority ownership of the
stock of such entities, consolidation of the professional corporations is
necessary to present fairly the financial position and results of operations of
MedPartners/Mullikin because there exists a parent-subsidiary relationship by
means other than record ownership of a majority of voting stock. Control by
MedPartners/Mullikin is perpetual rather than temporary because of (i) the
length of the original term of the agreements, (ii) the continuing investment of
capital by MedPartners/Mullikin, (iii) the employment of the majority of the
non-physician personnel, and (iv) the nature of the services provided to the
professional corporations by MedPartners/Mullikin. MedPartners/Mullikin's
financial relationship with each practice offers the physicians access to
capital, management expertise, sophisticated information systems, and managed
care contracts. MedPartners/Mullikin's revenue is derived from medical services
provided by physicians under the practice management agreements, which revenue
has been assigned to MedPartners/Mullikin. Approximately 50.0% of this revenue
is derived through contracts for prepaid health care with HMOs.
MedPartners/Mullikin contracts directly with the HMOs to provide medical
services to HMO enrollees who have chosen MedPartners/Mullikin's affiliated
physicians, or, in some cases, physicians who are members of Mullikin
Independent Physicians Association ("MIPA"). Through its wholly-owned
subsidiaries, MedPartners/ Mullikin also contracts with hospitals to provide
medical staff for various hospital departments. MedPartners/ Mullikin's
profitability depends on enhancing operating efficiency, expanding health care
services provided, increasing market share and assisting affiliated physicians
in managing the delivery of medical care.
The nature of the affiliated practices affects the cost of affiliated
physician services, clinic salaries, wages and benefits, clinic supplies and
depreciation and amortization. These expenses as a percentage of net revenue
will vary based on the mix of primary care and office-based (i.e., non-surgery)
practices to specialty care practices and the mix of capitated business. Primary
care includes family practice, internal medicine, pediatrics and
obstetrics/gynecology. Generally, primary care and office-based practices are
less capital intensive but require a higher number of employees per physician to
operate and maintain than specialty care practices. Typically,
MedPartners/Mullikin endeavors to achieve an equal number of primary care
physicians and specialists in each network. Institutional capitation increases
revenues without a material impact on many of the clinic expenses.
25
<PAGE> 36
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net revenue represented by the following items:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue(1)............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of affiliated physician
services(2)........................... 40.9 42.8 43.9 43.9 42.8
Clinic salaries, wages and benefits...... 20.5 19.5 18.7 19.2 16.6
Outside hospitalization expense.......... 10.9 10.7 9.5 9.2 11.9
Clinic rent and lease expense............ 3.4 3.4 3.6 3.6 3.4
Clinic supplies.......................... 4.5 4.2 4.1 4.1 4.4
Other clinic costs....................... 7.5 8.3 7.7 8.0 8.4
General corporate expenses............... 7.7 7.0 5.6 5.9 5.6
Depreciation and amortization............ 2.6 2.7 2.6 2.6 2.3
Net interest expense..................... 0.5 0.7 0.7 0.6 0.4
Merger expenses.......................... 0.0 0.0 5.9 0.2 4.9
Loss on disposal of assets............... 0.0 0.2 0.0 0.0 0.0
Pro forma income tax expense (benefit)... 1.8 0.9 (2.3) 0.8 0.1
----- ----- ----- ----- -----
Pro forma net (loss) income...... (0.3)% (0.4)% 0.0% 1.9% (0.8)%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) "Net revenue" means gross clinic charges less allowances for contractual
adjustments.
(2) "Cost of affiliated physician services" consists solely of the total
payments made to each of the affiliated practices for medical services
rendered under its respective practice management agreement.
The following table sets forth the breakdown of net revenue for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Prepaid health care........................ 66.7% 62.5% 53.8% 53.4% 48.5%
Fee-for-service............................ 31.4 36.1 44.7 45.3 50.5
Other...................................... 1.9 1.4 1.5 1.3 1.0
----- ----- ----- ----- -----
Net revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Enrollment
MedPartners/Mullikin's prepaid health care revenue is reflective of the
number of HMO enrollees for whom it receives monthly capitation payments.
Enrollment is categorized as either "commercial enrollment" (enrollees 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). MedPartners/Mullikin receives professional capitation to
provide physician services and institutional capitation to provide hospital care
and other non-professional services. The table below sets forth the changes in
enrollment for professional and institutional capitation. Most of the enrollment
growth is related to acquisitions and increased enrollment in the northern
California operations.
<TABLE>
<CAPTION>
COMMERCIAL SENIOR TOTAL
ENROLLEES ENROLLEES OTHER ENROLLEES
---------- --------- ------ ---------
<S> <C> <C> <C> <C>
PROFESSIONAL CAPITATION:
December 31, 1995.................................. 607,772 60,345 14,427 682,544
December 31, 1994.................................. 550,672 50,330 3,374 604,376
December 31, 1993.................................. 500,229 44,563 1,239 546,031
INSTITUTIONAL CAPITATION:
December 31, 1995.................................. 313,630 34,744 7,747 356,121
December 31, 1994.................................. 235,174 20,014 -- 255,188
December 31, 1993.................................. 227,561 11,431 -- 238,992
</TABLE>
26
<PAGE> 37
<TABLE>
<CAPTION>
COMMERCIAL SENIOR TOTAL
ENROLLEES ENROLLEES OTHER ENROLLEES
---------- --------- ------ ---------
<S> <C> <C> <C> <C>
PROFESSIONAL CAPITATION:
June 30, 1996...................................... 694,093 66,457 37,715 798,265
June 30, 1995...................................... 551,176 56,133 55,194 662,503
INSTITUTIONAL CAPITATION:
June 30, 1996...................................... 318,331 36,345 11,636 366,312
June 30, 1995...................................... 258,305 32,681 7,223 298,209
</TABLE>
Six Months Ended June 30, 1996 and 1995
For the six months ended June 30, 1996, net revenue was $704 million,
compared to $547 million for the same period in 1995. The increase in net
revenue partially resulted from the affiliation with new physician practices and
the increase in prepaid enrollees, which accounted for $73.1 million and $48.7
million of the increase in net revenue, respectively. The remaining increase
primarily related to existing clinic growth.
Excluding non-recurring items related to the PPSI Merger, operating
expenses, at the clinic level were $615 million, or 87.4% of net revenue for the
six months ended June 30, 1996 compared to $482 million or 88.0% of net revenue
for the same period in 1995. Clinic salaries, wages and benefits decreased as a
percentage of net revenue from the six months ended June 30, 1995 to the six
months ended June 30, 1996 as certain operational efficiencies were implemented
and the IPA business, which requires a low support staff ratio, continued to
grow. Outside hospitalization expense increased from $50 million for the six
months ended June 30, 1995 to $84 million for the six months ended June 30,
1996, and also increased as a percentage of net revenue from 9.2% for the six
months ended June 30, 1995 to 11.9% for the six months ended June 30, 1996. This
is directly related to the increase of the Company's global capitation and
increase in IPA business. General corporate expenses increased from $32 million
during the six months ended June 30, 1995 to $40 million during the six months
ended June 30, 1996. As a percent of net revenue, general corporate expenses
decreased from 5.9% in the six months ended June 30, 1995 to 5.6% in the six
months ended June 30, 1996.
Included in pre-tax loss for the six months ended June 30, 1996 were merger
expenses totaling $34.4 million relating to the business combination with PPSI.
The major components of the $34.4 million included: $13.8 million for
restructuring of operations, $6.6 million in brokerage fees, $5.9 million in
severance costs, $2.6 million in professional fees, $2.4 million for the
impairment of assets and $1.9 million in unamortized bond issue costs.
Years Ended December 31, 1995 and 1994
Net revenue for the year ended December 31, 1995 was $1,154 million, an
increase of $339 million, or 41.5%, over the year ended December 31, 1994. The
increase in net revenue primarily resulted from affiliation with physician
groups in nine new markets and the increase in prepaid enrollees, which
accounted for $76 million and $111 million of the increase in net revenue,
respectively. The remaining increase primarily related to existing clinic growth
and a full year of operations in 1995 for affiliations only in effect for a
portion of 1994.
Excluding nonrecurring items related to the 1995 Mergers, operating
expenses at the clinic level were $1,011 million, or 87.7% of net revenue for
the year ended December 31, 1995, compared to $725 million, or 88.9% of net
revenue for 1994. Clinic salaries, wages and benefits decreased as a percentage
of net revenue during 1995 as certain operational efficiencies were implemented
and the IPA business, which requires a low support staff ratio, continued to
grow. Outside hospitalization expense increased from $87 million for the year
ended December 31, 1994 to $110 million for the year ended December 31, 1995,
but decreased as a percentage of net revenue from 10.7% for the year ended
December 31, 1994 to 9.5% for the year ended December 31, 1995. This percentage
decrease related to the decline in the relationship of prepaid health care to
total net revenue. General corporate expenses increased from $57 million during
the year ended December 31, 1994 to $65 million during the year ended December
31, 1995. As a percentage of net revenue, however, general corporate expenses
decreased from 7.0% in 1994 to 5.6% in 1995. Net income (excluding merger
expenses) for the year ended December 31, 1995 was $25.3 million compared to a
loss of $3.1 million for 1994.
27
<PAGE> 38
Including merger expenses, net income for the year ended December 31, 1995
was $.6 million compared to a net loss of $3.1 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 components of the total $66.6 million charge included: $8.8
million in investment banking fees, $7.3 million in professional fees, $5
million in other transaction costs and $45.5 million in restructuring charges.
The major components of the restructuring charge included: $19.6 million in
severance for identified employees, $8.1 million impairment of assets, $6.4
million abandonment of facilities, $2.6 in noncompatible technology, $2.3
million in unamortized loan costs, $2.2 million related to conforming of
accounting policies and $1.9 million in restructuring of benefit packages.
At December 31, 1995, MedPartners/Mullikin 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 to offset
future taxable income, the net operating loss carryforwards will expire on
various dates through 2010. Approximately $1 million of the $57 million net
operating loss carryforward (which was generated in 1993) is available at a
reduced rate due to certain tax limitations.
In 1994, MedPartners/Mullikin 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 ($25.3 million net income for 1995 excluding merger expenses).
Years Ended December 31, 1994 and 1993
For the year ended December 31, 1994, net revenue was $815 million compared
to $550 million for the year ended December 31, 1993. The increase in net
revenue resulted from the affiliation with 46 physician groups (representing 283
physicians) since December 31, 1993 and the enrollment growth of 58,000 lives
under professional capitation and 16,000 lives under institutional capitation.
The percentage increase in cost of affiliated physician services from 40.9%
of net revenues in 1993 to 42.8% in 1994 was a result of the commencement of
operations of MedPartners/Mullikin's clinics. MedPartners/Mullikin (exclusive of
the 1995 Mergers) had a comparable percentage of 62.2%. The decrease in clinic
salaries, wages and benefits from 20.5% of net revenues in 1993 to 19.5% in 1994
was also a result of the commencement of operations of MedPartners' clinics.
MedPartners (exclusive of the 1995 Mergers) had a comparable percentage of
16.5%.
Clinic rent and lease expense was 3.4% of net revenue for the years ended
December 31, 1994 and December 31, 1993. Other clinic costs were 7.5% of net
revenue for 1993 and 8.3% for 1994.
Net interest expense (income) as a percentage of net revenue will vary
based on the purchase price for the assets of additional practices, the interest
rates for additional borrowings and the amount of excess cash available for
investment. The increase in net interest expense in 1994 was the result of
increased borrowings to fund acquisitions.
Due to MedPartners/Mullikin's limited operating history and cumulative
operating losses, a valuation allowance was established to eliminate deferred
tax benefits generated through December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, MedPartners/Mullikin had working capital of $101
million, including cash and cash equivalents of $56 million. For the first six
months of 1996, cash flow from operations, excluding $25.9 million cash paid
during the six months for merger expenses, was $6.0 million. For the year ended
December 31, 1995, cash flow used in operations was ($13.5) million. This
included $28 million in cash paid for merger expenses. Net of these expenses,
MedPartners/Mullikin experienced cash flow from operations of $14.5 million. For
the years ending December 31, 1993 and 1994, cash flow provided by operations
was $30.6 million and $13.7 million, respectively. MedPartners/Mullikin has
reduced the medical claims outstanding to levels below that required in its
agreements with HMOs, and it does not expect this to have a negative impact on
future cash flows from operations. On a monthly basis, MedPartners/Mullikin's
most significant expenditure is for affiliated physician services. Payment is
made on the fifteenth day of the month following the month in which the services
were provided.
28
<PAGE> 39
For the six months ended June 30, 1996, MedPartners/Mullikin invested $29.7
million in acquisitions of the assets of physician practices, $21.8 million in
equipment for the physician practices and the corporate office and $4.5 million
in intangible assets related to corporate name/trademarks and other intangible
assets. For the year ended December 31, 1995, MedPartners/Mullikin invested
$61.5 million in acquisitions of the assets of physician practices, $39.4
million in equipment for the physician practices and the corporate office and
$7.2 million in intangible assets related to debt issue costs, corporate
name/trademarks and other intangible assets. For the year ended December 31,
1994, MedPartners/Mullikin's investing activities totaled $108.5 million, which
primarily was composed of $57.6 million related to practice acquisitions and
$32.1 million related to the purchase of property and equipment. These
expenditures were funded from approximately $116.3 million from equity proceeds
and $7.8 million in net incremental borrowings. For the year ended December 31,
1993, MedPartners/Mullikin's investing activities totaled $37.6 million of which
$14.3 million related to practice acquisitions and $15.6 million related to the
purchase of property and equipment. These expenditures were funded by $42.7
million derived from equity proceeds.
On February 21, 1995, MedPartners sold 4.4 million shares of Common Stock
at $13.00 per share. Subsequent to that date, the underwriters exercised their
overallotment option for an additional 660,000 shares. MedPartners raised net
proceeds of $60.4 million from the offering, $30.4 million of which was applied
to reduce the indebtedness under MedPartners' then existing credit facility.
On March 13, 1996, MedPartners/Mullikin sold 6.6 million shares of Common
Stock at $30.25 per share. MedPartners/Mullikin raised net proceeds of $194
million, $70 million of which was applied to reduce the indebtedness under the
Company's Revolving Credit and Reimbursement Agreement (the Bank Credit
Facility). In April 1996, $69 million of the proceeds were used to pay-off
MedPartners/Mullikin's convertible subordinated debentures.
Effective November 29, 1995, MedPartners/Mullikin entered into the $150.0
million Bank Credit Facility replacing its then existing revolving credit
facility. Interest is paid quarterly based on LIBOR plus a two percent margin.
No principal is due on the facility until its maturity date of May 10, 1998.
MedPartners/ Mullikin provided a negative pledge on substantially all assets and
granted the banks a first priority security interest in all shares of stock of
its subsidiaries. As of June 30, 1996, there was no balance outstanding under
the facility.
The Bank Credit Facility contains affirmative and negative covenants which,
among other things, require MedPartners/Mullikin to maintain certain financial
ratios (including minimum net worth, minimum fixed charge coverage ratio,
maximum indebtedness to cash flow), limit the amount of additional indebtedness,
and set certain restrictions on investments, mergers and sales of assets. As of
December 31, 1995, MedPartners/ Mullikin was in compliance with the covenants in
the Bank Credit Facility. Additionally, MedPartners/ Mullikin is required to
obtain bank consent for acquisitions with an aggregate purchase price of $15.0
million or more.
MedPartners/Mullikin intends to acquire the assets of additional physician
practices and to fund this growth with existing cash and cash equivalents and
borrowings under the Bank Credit Facility. MedPartners/ Mullikin believes that
its existing cash resources, the use of MedPartners/Mullikin's Common Stock for
selected practice and other acquisitions, and available borrowings under the
Bank Credit Facility and the increased bank credit facility anticipated to be
entered into in connection with the consummation of the Merger, will be
sufficient to meet MedPartners/Mullikin's anticipated acquisition, expansion and
working capital needs for the next twelve months. MedPartners/Mullikin will
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 MedPartners/Mullikin on
a long-term basis (i.e., for a period in excess of 12 months).
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<PAGE> 40
QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data
for 1994, 1995 and 1996. In the opinion of MedPartners/Mullikin'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
---------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
------------- ------------ --------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue........... $ 210,189 $234,422 $259,750 $287,700 $ 299,272 $306,835 $343,285 $360,398
Operating expenses:
Cost of affiliated
physician
services.......... 91,791 97,001 114,272 125,953 132,631 133,955 148,662 152,618
Clinic salaries,
wages and
benefits.......... 38,862 43,889 50,570 54,563 53,760 57,226 56,762 59,838
Outside
hospitalization
expense........... 20,436 26,435 22,193 28,171 30,796 28,774 35,668 47,849
Clinic rent and
lease
expense........... 7,094 8,370 9,717 10,027 10,518 11,563 11,693 12,121
Clinic supplies..... 8,002 10,568 10,983 11,536 11,704 13,521 15,014 15,938
Other clinic
costs............. 15,953 21,005 20,711 23,065 23,661 21,554 31,285 27,868
General corporate
expenses.......... 15,808 13,809 15,703 16,464 15,697 16,849 19,414 20,126
Depreciation and
amortization...... 5,631 6,448 6,605 7,357 7,384 7,742 8,174 8,308
Net interest
expense........... 1,654 1,903 1,885 1,482 2,042 3,034 3,232 (421)
Merger expenses..... -- -- -- 1,051 3,473 62,040 34,448 --
Loss on disposal of
assets............ 412 413 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes............... 4,546 4,581 7,111 8,031 7,606 (49,423) (21,067 ) 16,153
Pro forma income tax
expense (benefit)... 2,363 2,764 2,176 2,235 2,427 (34,071) (5,769 ) 6,129
-------- -------- -------- -------- -------- -------- -------- --------
Pro forma net income
(loss).............. $ 2,183 $ 1,817 $ 4,935 $ 5,796 $ 5,179 $(15,352) $(15,298 ) $ 10,024
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
MedPartners/Mullikin's historical unaudited quarterly financial data for
all periods prior to the effective dates of the 1995 and 1996 Mergers have been
restated to include the results of the merged companies. MedPartners' Quarterly
Reports on Form 10-Q were filed prior to the 1995 and 1996 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
-------------------- -------------------- -------------------- --------------------
AS AS AS AS
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>
Net revenue................ $45,667 $259,750 $57,272 $287,700 $76,019 $299,272 $332,549 $343,285
Income before income
taxes.................... 765 7,111 820 8,031 2,265 7,606 (21,435 ) (21,067)
Income tax expense......... 291 2,176 260 2,235 770 2,427 (5,935 ) (5,769)
Net income................. 474 4,935 560 5,796 1,495 5,179 (15,500 ) (15,298)
</TABLE>
30
<PAGE> 41
THE SPECIAL MEETINGS
GENERAL
This Prospectus-Joint Proxy Statement is being furnished to holders of
MedPartners/Mullikin Common Stock in connection with the solicitation of proxies
by the MedPartners/Mullikin Board of Directors for use at the
MedPartners/Mullikin Special Meeting to consider and vote upon the approval and
adoption of the Plan of Merger and to transact such other business as may
properly come before the MedPartners/Mullikin Special Meeting, including any
adjournments or postponements thereof.
This Prospectus-Joint Proxy Statement is also being furnished to holders of
Caremark Common Stock in connection with the solicitation of proxies by the
Caremark Board for use at the Caremark Special Meeting to consider and vote upon
the approval and adoption of the Plan of Merger and to transact such other
business as may properly come before the Caremark Special Meeting, including any
adjournments or postponements thereof.
Each copy of this Prospectus-Joint Proxy Statement mailed to holders of
MedPartners/Mullikin Common Stock is accompanied by a form of proxy for use at
the MedPartners/Mullikin Special Meeting and each copy of this Prospectus-Joint
Proxy Statement mailed to holders of Caremark Common Stock is accompanied by a
form of proxy to be used at the Caremark Special Meeting.
DATES, PLACES AND TIMES
MedPartners/Mullikin. The MedPartners/Mullikin Special Meeting will be
held at the Wynfrey Hotel, 1000 Riverchase Galleria, Birmingham, Alabama on
September 5, 1996, at 10:00 a.m. Central Time.
Caremark. The Caremark Special Meeting will be held at the Caremark
headquarters at 2211 Sanders Road, Northbrook, Illinois on September 5, 1996, at
9:30 a.m., Central Time.
RECORD DATES; QUORUMS
MedPartners/Mullikin. The MedPartners/Mullikin Board of Directors has
fixed the close of business on July 22, 1996, as the MedPartners/Mullikin Record
Date for the determination of holders of MedPartners/ Mullikin Common Stock
entitled to receive notice of and to vote at the MedPartners/Mullikin Special
Meeting. The presence, in person or by proxy, of the holders of
MedPartners/Mullikin Common Stock entitled to cast a majority of the votes
entitled to be cast at the MedPartners/Mullikin Special Meeting will constitute
a quorum at the MedPartners/Mullikin Special Meeting. Abstentions and broker
non-votes will be included in determining whether a quorum is present.
Caremark. The Caremark Board has fixed the close of business on July 29,
1996, as the Caremark Record Date for the determination of the holders of
Caremark Common Stock entitled to receive notice of and to vote at the Caremark
Special Meeting. The presence, in person or by proxy, of the holders of Caremark
Common Stock entitled to cast a majority of the votes entitled to be cast at the
Caremark Special Meeting will constitute a quorum at the Caremark Special
Meeting. Abstentions and broker non-votes will be included in determining
whether a quorum is present.
VOTES REQUIRED
MedPartners/Mullikin. At the MedPartners/Mullikin Record Date, there were
outstanding and entitled to vote 52,504,180 shares of MedPartners/Mullikin
Common Stock. Each share of MedPartners/ Mullikin Common Stock is entitled to
one vote on each matter that comes before the MedPartners/Mullikin Special
Meeting. The affirmative vote of the holders of shares of MedPartners/Mullikin
Common Stock representing a majority of the shares of MedPartners/Mullikin
Common Stock outstanding and entitled to vote at the MedPartners/Mullikin
Special Meeting is required to approve and adopt the Plan of Merger. Approval of
the Plan of Merger will constitute approval of an amendment to the
MedPartners/Mullikin Certificate to change the name of MedPartners/Mullikin,
Inc. to "MedPartners, Inc."
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<PAGE> 42
As of the MedPartners/Mullikin Record Date, directors and executive
officers of MedPartners/Mullikin and their affiliates beneficially owned an
aggregate of 7,799,254 shares of MedPartners/Mullikin Common Stock (excluding
shares issuable upon exercise of options) or approximately 14.9% of the shares
of MedPartners/Mullikin Common Stock outstanding on such date. The directors and
executive officers of MedPartners/Mullikin and their affiliates have unanimously
indicated their intentions to vote the shares of MedPartners/Mullikin Common
Stock beneficially owned by them FOR the Plan of Merger.
Caremark. At the Caremark Record Date, there were outstanding and entitled
to vote 82,318,626 shares of Caremark Common Stock. Each share of Caremark
Common Stock is entitled to one vote on each matter that comes before the
Caremark Special Meeting. Approval and adoption of the Plan of Merger requires
the affirmative vote of a majority of the issued and outstanding shares of
Caremark Common Stock. As a result, abstentions and broker non-votes will be the
equivalents of votes against the Plan of Merger.
As of the Caremark Record Date, directors and executive officers of
Caremark and their affiliates beneficially owned an aggregate of 406,452 shares
of Caremark Common Stock (excluding shares issuable upon exercise of options) or
less than 1% of the shares of Caremark Common Stock outstanding on such date.
The directors and executive officers of Caremark have indicated their intention
to vote the shares of Caremark Common Stock beneficially owned by them FOR the
Plan of Merger.
In the event that the Plan of Merger is not approved and adopted by the
stockholders of MedPartners/ Mullikin and Caremark, the Plan of Merger may be
terminated in accordance with its terms. See "The Merger -- Termination".
VOTING AND REVOCATION OF PROXIES
Shares of MedPartners/Mullikin Common Stock or Caremark Common Stock
represented by a proxy properly signed and received at or prior to the relevant
Special Meeting, unless subsequently revoked, will be voted in accordance with
the instructions thereon. IF A PROXY IS PROPERLY EXECUTED AND RETURNED WITHOUT
INDICATING ANY VOTING INSTRUCTIONS, SHARES OF MEDPARTNERS/MULLIKIN COMMON STOCK
AND SHARES OF CAREMARK COMMON STOCK REPRESENTED BY THE PROXY WILL BE VOTED FOR
APPROVAL AND ADOPTION OF THE PLAN OF MERGER. ONLY SHARES VOTED FOR THE PROPOSALS
AT THE RESPECTIVE MEETINGS OF MEDPARTNERS/MULLIKIN AND CAREMARK STOCKHOLDERS
WILL BE COUNTED AS VOTED IN FAVOR IN DETERMINING WHETHER SUCH PROPOSAL IS
ADOPTED. THEREFORE, FAILURES TO VOTE, ABSTENTIONS AND BROKER NON-VOTES WILL HAVE
THE SAME EFFECT AS VOTES AGAINST ADOPTION OF THE PROPOSAL. Any proxy given
pursuant to the solicitation may be revoked by the person giving it at any time
before the proxy is voted by the filing of an instrument revoking it or a duly
executed proxy bearing a later date with the Secretary of MedPartners/Mullikin,
for MedPartners/Mullikin stockholders, or with the Secretary of Caremark, for
Caremark stockholders, prior to the vote or at the relevant Special Meeting, or
by voting in person at the appropriate Special Meeting. Attendance at the
relevant Special Meeting will not in and of itself constitute a revocation of a
proxy. The persons named as proxies with respect to the Special Meetings, may
propose and vote for one or more adjournments or postponements of the respective
Special Meetings to permit further solicitation of proxies in favor of the
respective proposals to approve and adopt the Plan of Merger; provided however,
that no proxy which is voted against the respective proposals to approve and
adopt the Plan of Merger will be voted in favor of any such adjournment or
postponement.
Proxies sent via facsimile transmission will be accepted if received not
later than 15 minutes prior to the scheduled commencement of the relevant
Special Meeting. Such proxies may be sent via facsimile to ChaseMellon
Shareholder Services, L.L.C., proxy solicitors for MedPartners/Mullikin at (201)
296-4142, Attention: Donald Messmer, and to Georgeson & Company Inc., Attention:
Ken Ward, proxy solicitors for Caremark, at (212) 440-9009.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
MedPartners/Mullikin and Caremark, who will not be specifically compensated for
such services, may solicit proxies from MedPartners/ Mullikin and Caremark
stockholders, respectively, personally or by telephone or telegram or other
forms of communication. Except as otherwise provided in the Plan of Merger, each
party will bear its own expenses in
32
<PAGE> 43
connection with the solicitation of proxies for its Special Meeting.
MedPartners/Mullikin has retained ChaseMellon Shareholder Services, L.L.C. to
solicit proxies on its behalf and will pay ChaseMellon Shareholder Services,
L.L.C. a fee of approximately $5,000 for these services. MedPartners/Mullikin
will reimburse ChaseMellon Shareholders Services, L.L.C. for out-of-pocket
expenses incurred in connection with such solicitation. Caremark has engaged the
firm of Georgeson & Company Inc. to assist it in the distribution and
solicitation of proxies and has agreed to pay Georgeson & Company Inc. a fee of
approximately $12,500, plus expenses, for its services. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of MedPartners/Mullikin Common Stock or
Caremark Common Stock beneficially owned by others to forward to such beneficial
owners. The Companies may reimburse persons representing such beneficial owners
for the costs of forwarding solicitation materials to such beneficial owners.
See "The Merger -- Expenses; Breakup Fees".
HOLDERS OF CAREMARK COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS. THE PROCEDURE FOR THE EXCHANGE OF CERTIFICATES AFTER THE
MERGER IS CONSUMMATED IS SET FORTH IN THIS PROSPECTUS-JOINT PROXY STATEMENT. SEE
"THE MERGER -- EXCHANGE OF CERTIFICATES".
33
<PAGE> 44
THE MERGER
The description of the Merger contained in this Prospectus-Joint Proxy
Statement summarizes the material provisions of the Plan of Merger; it is not
complete and is qualified in its entirety by reference to the Plan of Merger,
the full text of which is attached hereto as Annex A. All stockholders are urged
to read Annex A carefully in its entirety.
TERMS OF THE MERGER
The acquisition of Caremark by MedPartners/Mullikin will be effected by
means of the merger of the Subsidiary with and into Caremark, with Caremark
being the surviving corporation (the "Surviving Corporation"). The Certificate
of Incorporation and the By-laws of the Subsidiary in effect at the Effective
Time will govern the surviving corporation until amended or repealed in
accordance with applicable law. At the Effective Time, Caremark shall continue
as the surviving corporation under the name "Caremark International Inc."
Pursuant to the Plan of Merger, the name of MedPartners/Mullikin will be changed
to "MedPartners, Inc."
Upon consummation of the Merger, shares of Caremark Common Stock other than
shares held by Caremark or MedPartners/Mullikin (which will be cancelled) will
be converted into the right to receive 1.21 shares of MedPartners/Mullikin
Common Stock. For example, if a Caremark stockholder owned 100 shares of Common
Stock as of the Effective Time, that stockholder would receive 121 shares of
MedPartners/ Mullikin Common Stock in the Merger. Each holder of Caremark Shares
exchanged pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a share of MedPartners/Mullikin Common Stock will receive,
in lieu thereof, cash (without interest) in an amount equal to such fractional
part of a share of MedPartners/Mullikin Common Stock multiplied by the per share
closing price on the NYSE Composite Tape of MedPartners/Mullikin Common Stock on
the date of the Effective Time.
Because the Exchange Ratio of MedPartners/Mullikin Common Stock for
Caremark Common Stock is fixed at 1.21 and will not increase or decrease due to
fluctuations in the market price of either stock, it will not compensate
Caremark stockholders for certain decreases in the market price of
MedPartners/Mullikin Common Stock which could occur before the Effective Time.
As a result, in the event the market price of MedPartners/Mullikin Common Stock
decreases, the value of the MedPartners/Mullikin Common Stock to be received in
the Merger in exchange for Caremark Common Stock would decrease. In the event
the market price of MedPartners/Mullikin Common Stock instead increases, the
value of the MedPartners/Mullikin Common Stock to be received in the Merger in
exchange for Caremark Common Stock would increase. On August 15, 1996, the
closing price of MedPartners/Mullikin Common Stock was $20.63. At such price,
the Equivalent Value of a share of Caremark Common Stock would be $24.96 and the
aggregate Merger Consideration would be approximately $2,054,364,210. The actual
market price of the MedPartners/Mullikin Common Stock may vary, which will cause
a corresponding change in the Equivalent Value and the aggregate Merger
Consideration. Additionally, the Equivalent Value may differ from the actual
market price of Caremark Common Stock. Each stockholder is urged to obtain
updated market information.
MedPartners/Mullikin and Caremark agreed to a fixed Exchange Ratio with the
intent that the respective stockholders of MedPartners/Mullikin and Caremark
would immediately begin sharing the potential risks and rewards of the Merger
pending the closing of the Merger. For this reason, the Plan of Merger contains
no condition to closing that MedPartners/Mullikin or Caremark receive an updated
fairness opinion from their respective financial advisors. The fairness opinions
received by MedPartners/Mullikin and Caremark from their respective financial
advisors prior to the execution of the Plan of Merger are described under
"-- Opinions of Financial Advisors".
All options to acquire Caremark Common Stock which are outstanding at the
Effective Time, whether or not then vested or exercisable, will be converted
into and become rights with respect to MedPartners/Mullikin Common Stock, such
that each Caremark stock option so assumed shall be exercisable for that number
of shares of MedPartners/Mullikin Common Stock equal to the number of Caremark
Shares subject thereto multiplied by the Exchange Ratio, and shall have an
exercise price per share equal to the Caremark exercise price divided by the
Exchange Ratio.
During the period between the date of this Prospectus-Joint Proxy Statement
and the time of the Special Meetings, MedPartners/Mullikin and Caremark
stockholders may obtain updated information regarding the market prices for the
MedPartners/Mullikin Common Stock and the Caremark Common Stock, by calling a
representative of MedPartners/Mullikin toll free at 1-800-563-7126.
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<PAGE> 45
STOCKHOLDERS ACTUALLY RECEIVE THEIR SHARES OF MEDPARTNERS/MULLIKIN COMMON
STOCK AFTER THE MERGER IS COMPLETED. SEE "-- EXCHANGE OF CERTIFICATES".
BACKGROUND OF THE MERGER
In December 1995 and January 1996, Caremark separately engaged CS First
Boston and Merrill Lynch & Co. ("Merrill Lynch") to advise the corporation as to
potential strategic opportunities it could pursue to strengthen its capital
structure, provide it with the financial flexibility required to grow its
business and create the best long-term growth and valuation profile for its
stockholders. CS First Boston and Merrill Lynch generally discussed with
Caremark the possibility of a sale or spin off of a principal business of
Caremark, as well as a sale of Caremark in its entirety. In the course of
exploring these potential strategic options Caremark received the expression of
interest from MedPartners/Mullikin described below. Given the unique opportunity
offered by a business combination with MedPartners/Mullikin, no other specific
transaction was explored as an alternative to the Merger. Caremark retained CS
First Boston to be its exclusive financial advisor in connection with the
Merger.
In late January 1996, Larry R. House, Chairman, President and Chief
Executive Officer of MedPartners/ Mullikin, telephoned C.A. Lance Piccolo,
Chairman and Chief Executive Officer of Caremark, to arrange a meeting to
discuss the future of the health care industry and the role of
MedPartners/Mullikin and Caremark in that industry. Messrs. House and Piccolo
met in mid-February and concluded that they both shared principally the same
strategic vision for the direction of the health care industry which they
believed would be increasingly physician-led. Shortly thereafter, Mr. House
expressed an interest in combining MedPartners/ Mullikin and Caremark.
On February 26, 1996, representatives of CS First Boston discussed
Caremark's strategic alternatives with the Caremark Board. In light of Mr.
House's recent expression of interest, CS First Boston also discussed with the
Caremark Board a brief historical background on MedPartners/Mullikin, including
the structure of its recent acquisitions, its financial statements, its current
stock price, and a summary of the potential MedPartners/Mullikin transaction.
The Caremark Board authorized its finance committee and CS First Boston, with
the assistance of Caremark's senior management, to pursue further discussions
with MedPartners/Mullikin.
On March 22, 1996, members of senior management of MedPartners/Mullikin and
Caremark and representatives of Smith Barney and CS First Boston, met to discuss
the businesses of both companies and the potential benefits of a combination.
Throughout March and early April the finance committee of the Caremark Board,
together with CS First Boston and Caremark's senior management, continued to
evaluate Caremark's strategic opportunities, and kept the Caremark Board
apprised of their progress, including the discussions with MedPartners/Mullikin.
On April 4, 1996, at a special meeting of the Board of Directors of
MedPartners/Mullikin, the MedPartners/Mullikin Board of Directors reviewed with
the senior management of MedPartners/Mullikin and representatives of Smith
Barney certain matters relating to the proposed transaction, including the
potential merits of a business combination involving MedPartners/Mullikin and
Caremark as well as the nature of discussions to date between the two companies.
The MedPartners/Mullikin Board of Directors authorized senior management and
Smith Barney to conduct business, legal and financial due diligence of Caremark
in anticipation of the negotiations of a definitive agreement pursuant to which
MedPartners/ Mullikin would acquire Caremark.
On April 11, 1996, Mr. Piccolo, Roger L. Headrick, Chairman of the finance
committee, and a representative of CS First Boston met with Mr. House, an
outside director of MedPartners/Mullikin and a representative of Smith Barney to
discuss the organizational structure of an entity that would be formed by the
combination of Caremark with MedPartners/Mullikin. On April 12, 1996, the
Caremark Board held a special meeting at which Messrs. Piccolo and Headrick
reported on the April 11 meeting with Mr. House. The Caremark Board directed
Messrs. Piccolo and Headrick, in coordination with CS First Boston, to continue
their negotiations and initiate thorough mutual due diligence with
MedPartners/Mullikin.
On April 29, 1996, at the Caremark Board's annual meeting, representatives
of CS First Boston and Caremark's senior management reviewed with the Caremark
Board the status of discussions and due diligence concerning
MedPartners/Mullikin. CS First Boston also reviewed materials evaluating the
proposed transaction from a financial point of view. The Caremark Board directed
its finance committee, senior management and First Boston to continue their
negotiations and mutual due diligence with MedPartners/Mullikin.
35
<PAGE> 46
During the next several weeks, representatives of MedPartners/Mullikin and
Caremark completed their respective financial and legal due diligence and
continued to negotiate the terms of the proposed transaction. The primary areas
of negotiation were: the structure of the deal, including the fixed Exchange
Ratio; pricing; the consulting agreements; employee benefits; the breakup fee;
and the continuing indemnification for directors and officers of Caremark. There
were also the usual and customary negotiations concerning the representations
and warranties and conditions to closing which normally apply in a transaction
of this type.
During early May, 1996, the finance committee of the Caremark Board met a
number of times to discuss the results of the mutual due diligence, as well as
the negotiations, and CS First Boston's views with respect to each of Caremark
and MedPartners/Mullikin and the entity that would result from a combination of
the two companies. On May 10, 1996, the Caremark Board reviewed these same
issues. CS First Boston also reported an exchange ratio at which
MedPartners/Mullikin had indicated they would pursue a transaction with
Caremark. Based upon the proposed exchange ratio, the finance committee of the
Caremark Board determined that it would explore with MedPartners/Mullikin the
possibility of increasing the proposed exchange ratio. CS First Boston held
further conversations with Smith Barney to that effect. Thereafter, Smith Barney
indicated to CS First Boston that MedPartners/Mullikin would increase the
exchange ratio to 1.21 shares of MedPartners/Mullikin Common Stock for each
share of Caremark Common Stock, but would go no higher.
From May 10, 1996 through May 13, 1996, senior management of each of
Caremark and MedPartners/ Mullikin and their respective legal and financial
advisors negotiated the definitive terms of the Plan of Merger.
On May 13, 1996, the Caremark Board met to consider approval of the Plan of
Merger. CS First Boston delivered to the Caremark Board its oral opinion,
subsequently confirmed in writing, that, as of such date, the consideration to
be received by holders of Caremark Common Stock in connection with the proposed
Merger was fair to such stockholders from a financial point of view. For
purposes of the Caremark Board's further understanding of CS First Boston's
opinion, CS First Boston also reviewed with the Caremark Board certain financial
analyses performed by CS First Boston in connection with such opinion. See
"-- Opinions of Financial Advisors -- Caremark". Caremark's outside legal
advisors with respect to the Merger reviewed the terms of the Merger from a
legal perspective and advised the Board as to its legal obligations in
considering whether to approve the proposed transaction.
On May 13, 1996, the MedPartners/Mullikin Board of Directors met to
consider approval of the Plan of Merger. At such meeting, Smith Barney rendered
its oral opinion (subsequently confirmed by delivery of a written opinion dated
May 13, 1996) to the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the Exchange Ratio was fair, from a
financial point of view, to MedPartners/ Mullikin, and reviewed with the
MedPartners/Mullikin Board of Directors certain financial analyses performed by
Smith Barney in connection with such opinion. See "-- Opinions of Financial
Advisors -- MedPartners/Mullikin". MedPartners/Mullikin's counsel then reviewed
the terms of the Merger and answered questions posed by certain of the
directors.
After a full discussion of all of the relevant issues and upon
consideration of the factors described under "-- Recommendations of the Boards
of Directors", the Boards of Directors of both Caremark and MedPartners/Mullikin
concluded that the Plan of Merger was fair to and in the best interests of their
respective stockholders and each unanimously approved the Plan of Merger. The
definitive Plan of Merger was executed by the parties on the evening of May 13,
1996.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
MedPartners/Mullikin. By the unanimous vote of the members of the
MedPartners/Mullikin Board of Directors, at a special meeting held on May 13,
1996, the MedPartners/Mullikin Board of Directors determined that the proposed
Merger, and the terms and conditions of the Plan of Merger, were fair and in the
best interests of MedPartners/Mullikin and resolved to recommend that the
stockholders of MedPartners/ Mullikin vote FOR approval and adoption of the Plan
of Merger. See "-- Background of the Merger". In reaching its conclusion to
enter into the Plan of Merger and recommending that the stockholders of
MedPartners/Mullikin vote FOR the approval and adoption of the Plan of Merger,
the MedPartners/Mullikin Board of Directors considered a number of factors. The
material factors considered by the MedPartners/
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Mullikin Board of Directors in reaching its conclusion to approve and recommend
the Plan of Merger are set forth as follows:
(i) the terms and conditions of the Plan of Merger, including the
Exchange Ratio of Caremark Common Stock for MedPartners/Mullikin Common
Stock which was considered to be fair in light of the financial condition,
business, prospects and opportunities of MedPartners/Mullikin and Caremark
and the stock trading history of Caremark;
(ii) the Merger will enhance MedPartners/Mullikin's leadership role in
the provision of physician-directed and patient-centered health care
services nationwide. Based on its review of the health care industry the
MedPartners/Mullikin Board of Directors determined that the combined
company that would result from the Merger would be better positioned in a
rapidly consolidating health care industry;
(iii) the combination will benefit from the depth and breadth of
management and expertise at both companies;
(iv) the combination of Caremark's pharmacy benefit management and
disease management business with MedPartners/Mullikin's physician network
will allow the combined company to offer insurance companies and HMOs
complete health care solutions. The MedPartners/Mullikin Board of Directors
determined that the strong PPM business that would result from a
combination of MedPartners/Mullikin and Caremark would be further enhanced
by Caremark's PBM business;
(v) the perceived strengths of the combined company, including the
potential developments and information that are expected to be shared
between the two companies after the Merger is consummated, and the belief
of the directors that Caremark could be integrated without disrupting or
adversely affecting the existing business operations of
MedPartners/Mullikin or Caremark;
(vi) the belief that the combined company will yield operational and
financial synergies and cost savings;
(vii) the opinion of the MedPartners/Mullikin Board of Directors that
the issuance of the MedPartners/Mullikin Common Stock in the Merger is not
believed to be dilutive to earnings;
(viii) The MedPartners/Mullikin Board of Directors' review of the
terms of the Plan of Merger, including, without limitation, the fixed
exchange ratio which allows the value of the consideration to be paid to
Caremark's stockholders to vary with fluctuations in the value of the
MedPartners/Mullikin Common Stock. See "The Merger -- Terms of the Merger".
(ix) the opinion of Smith Barney dated May 13, 1996, to the effect
that, as of the date of such opinion, and based upon and subject to certain
matters stated therein, the Exchange Ratio was fair, from a financial point
of view, to MedPartners/Mullikin and that Smith Barney is not required
under the Plan of Merger to reaffirm its fairness opinion as of any date
subsequent to May 13, 1996. See "-- Opinions of Financial
Advisors -- MedPartners/Mullikin".
(x) the Merger is expected to be treated as a pooling of interests
under GAAP; and
(xi) the Merger is expected to be treated as a tax-free reorganization
under the Code.
In considering the disadvantages of the Merger, the MedPartners/Mullikin
Board of Directors addressed the following material factors: the risk that
MedPartners/Mullikin would not be able to successfully integrate the businesses
of Caremark with that of MedPartners/Mullikin and thus not realize the expected
synergies, including the fact that an unsuccessful integration would interrupt
its normal business processes; the risks of the businesses of Caremark other
than its PPM business; the potential volatility of the market price for stocks
in the health care industry, the potential of an adverse outcome to the
outstanding litigation to which Caremark is a party and the possible adverse
effect on the combined company; and the significant cash resources needed to
satisfy the remaining payments related to the private payor settlements and
their effect on the cash resources of the combined company.
The MedPartners/Mullikin Board of Directors considered that after the
Merger, the current stockholders of MedPartners/Mullikin will own approximately
35% and the current stockholders of Caremark will own approximately 65% of the
combined company resulting from the Merger. The MedPartners/Mullikin Board of
Directors also reviewed the size of the termination fee payable in the event the
Plan of Merger is terminated, in relation to the size of Caremark and
MedPartners/Mullikin and the potential benefits of the Merger. See "Expenses;
Breakup Fees". The MedPartners/Mullikin Board of Directors reviewed the
circumstances under
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which such fee would be payable by MedPartners/Mullikin or payable to
MedPartners/Mullikin, as well as restrictions on MedPartners/Mullikin's ability
to solicit potential acquirees other than Caremark prior to the closing of the
Merger. The termination fee and the restrictions on solicitation of alternate
acquirors may have the effect of decreasing the chances of MedPartners/Mullikin
engaging in a business combination other than the Merger. See "No Solicitation
of Transactions".
At the time the MedPartners/Mullikin Board of Directors voted to approve
and recommend the Merger, it was aware of the receipt of a letter from
MedPartners/Mullikin's independent auditors that the companies may be capable of
consummating the Merger as a pooling of interests, and did not attempt to decide
at that time upon a course of conduct or recommendation in the event Merger
could not be accounted for as a pooling of interests. See "Accounting
Treatment".
In view of the wide variety of factors considered in connection with the
evaluation of the Merger, the MedPartners/Mullikin Board of Directors did not
attempt to quantify or otherwise assign relative weights to the specific factors
it considered in reaching its determination.
Caremark. By the unanimous vote of the members of the Board of Directors
of Caremark at a special meeting held on May 13, 1996, the Caremark Board
determined that the proposed Merger, and the terms and conditions of the Plan of
Merger, were fair to and in the best interest of the Caremark the stockholders
and resolved to recommend that the stockholders of Caremark vote FOR approval
and adoption of the Plan of Merger. See "-- Background of the Merger". In
reaching its conclusion to enter into the Plan of Merger and to recommend that
the stockholders of Caremark vote FOR the approval and adoption of the Plan of
Merger, the Caremark Board considered a number of factors. The material factors
considered by the Caremark Board in reaching its conclusion to approve and
recommend the Plan of Merger are as follows:
(i) the Caremark Board's review and analysis of the financial
condition, results of operations, cash flows and business of
MedPartners/Mullikin and the prospects for successfully combining the
Caremark and MedPartners/Mullikin businesses and operations. Based on these
factors, as well as those discussed below, Caremark's Board determined that
the consideration to be received by the stockholders of Caremark in the
Merger reflected an appropriate percentage ownership of the combined entity
and that the Merger presented an attractive growth opportunity for Caremark
that could not be achieved as quickly, if at all, if Caremark were to
remain an independent entity;
(ii) the Caremark Board's review of Caremark's operating environment,
including, but not limited to, the continued consolidation and increasing
competition in the health care industry, the prospect for further changes
in this industry and the importance of economies of scale in being able to
capitalize on developing opportunities in this industry. Based on this
review, the Caremark Board determined that the combined company that would
result from the Merger would be better positioned in terms of size and
geographic scope in a rapidly consolidating health care industry;
(iii) the synergies expected to be realized by the combined company.
The Caremark Board determined that the strong PPM business that would
result from a combination of Caremark and MedPartners/Mullikin would be
further enhanced by Caremark's PBM business;
(iv) the Caremark Board's review, based in part on the analysis of CS
First Boston, of Caremark's potential strategic alternatives including the
possibility of engaging in a business combination with a company other than
MedPartners/Mullikin, or remaining an independent entity and raising
additional equity capital. Based on its review of these potential strategic
options, the Caremark Board determined that none of these options were
either likely to be achieved or likely to offer the same prospects for
growth as the proposed Merger;
(v) the Caremark Board's review of the terms of the Plan of Merger,
including, without limitation, the fixed Exchange Ratio which allows the
value of the consideration to be received by Caremark's stockholders to
vary with fluctuations in the value of MedPartners/Mullikin Common Stock
(see "The Merger -- Terms of the Merger"), and certain covenants in the
Plan of Merger which restrict the manner in which Caremark may conduct its
business pending the Merger. See "-- Business Pending the Merger". In light
of these factors the Caremark Board considered the potential detrimental
effect on Caremark's business if the Merger failed to be completed. In this
regard, the Caremark Board negotiated for relatively limited conditions to
closing in the Plan of Merger in order to increase the likelihood that the
Merger would be consummated;
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(vi) the opinion and related analyses of CS First Boston that, as of
the date of its opinion, the consideration to be received by holders of
Caremark Common Stock in connection with the proposed Merger was fair from
a financial point of view and that CS First Boston is not required under
the Plan of Merger to reaffirm its fairness opinion as of any date
subsequent to May 13, 1996. See "-- Opinions of Financial
Advisors -- Caremark". In concluding that the Merger was fair to and in the
best interests of Caremark's stockholders, the Caremark Board relied, among
other things, on CS First Boston's fairness opinion. The Caremark Board
determined not to require an updated fairness opinion from its financial
advisor in order to limit the conditions to closing for the reasons
described above;
(vii) the Caremark Board's belief that the terms of the Plan of Merger
are attractive for the reasons discussed above and in that the Plan of
Merger allows the Caremark stockholders to become stockholders in a
combined company which would be larger and more geographically diverse;
(viii) the potential immediate and long-term benefits of the Merger in
providing value to the Caremark stockholders. In this regard, the Caremark
Board determined in reliance, among other things, on CS First Boston's
financial presentation that the Merger would not be dilutive to the
earnings of the combined company. In addition, the Caremark Board believes
that the long-term growth prospects offered by the Merger will be superior
to Caremark's growth prospects were it to remain an independent entity;
(ix) the Caremark Board's belief that certain valuable employees of
Caremark might choose to terminate their employment with Caremark pending
closing of the Merger due to uncertainties created by the pending Merger.
In this regard, the Caremark Board concluded that the Plan of Merger, which
contained provisions for a retention bonus pool to be made available to
certain valuable non-executive employees, would mitigate this concern;
(x) the expectation that the Merger will generally be a tax-free
transaction to Caremark and its stockholders. See "-- Federal Income Tax
Consequences". The Caremark Board recognized that the consideration to be
received by the Caremark stockholders in the Merger would be more valuable
if the receipt of such consideration was not treated as a taxable event;
and
(xi) the expectation that the Merger will be treated as a pooling of
interests under GAAP.
The Caremark Board also reviewed the size of the termination fee payable in
the event the Plan of Merger is terminated, in relation to the size of Caremark
and MedPartners/Mullikin and the potential benefits of the Merger. See
"-- Expenses; Breakup Fees". The Caremark Board reviewed the circumstances under
which such fee would be payable by Caremark or payable to Caremark, as well as
restrictions on Caremark's ability to solicit potential acquirors other than
MedPartners/Mullikin prior to the closing of the Merger. The termination fee and
the restrictions on solicitation of alternate acquirors may have the effect of
decreasing the chances of Caremark engaging in a business combination other than
the Merger. See "-- No Solicitation of Transactions". Additionally, the Caremark
Board considered the risks described under "Risk Factors -- Risks Relating to
the Merger; Acquisitions; -- Risks Relating to MedPartners/Mullikin's Growth
Strategy; -- Risks Relating to Capital Requirements; and -- Possible Volatility
of Stock Price".
At the time the Caremark Board voted to approve and recommend the Merger,
it was aware of the receipt of letters from Caremark's independent auditors that
the companies were capable of consummating the Merger as a pooling of interests,
and did not attempt to decide at that time upon a course of conduct or
recommendation in the event the Merger could not be accounted for as a pooling
of interests. See "-- Accounting Treatment".
In addition, the Caremark Board reviewed the severance arrangements of
executive officers of Caremark, the terms of the consulting agreements to be
entered into by certain key executive officers of Caremark, and other employee
benefit provisions of the Plan of Merger described below under "-- Additional
Interests of Certain Persons in the Merger". The Caremark Board was aware that
such arrangements may give certain individuals interests in the Merger that are
in addition to the interests of stockholders generally.
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In view of the wide variety of factors considered in connection with the
evaluation of the Merger, the Caremark Board did not attempt to quantify or
otherwise assign relative weights to the specific factors it considered in
reaching its determination.
OPINIONS OF FINANCIAL ADVISORS
MedPartners/Mullikin.
Smith Barney was retained by MedPartners/Mullikin to act as its financial
advisor in connection with the Merger. In connection with such engagement,
MedPartners/Mullikin requested that Smith Barney evaluate the fairness, from a
financial point of view, to MedPartners/Mullikin of the consideration to be paid
by MedPartners/Mullikin in the Merger. On May 13, 1996, at a special meeting of
the MedPartners/Mullikin Board held to evaluate the proposed Merger, Smith
Barney rendered to the MedPartners/Mullikin Board of Directors an oral opinion
(subsequently confirmed by delivery of a written opinion dated May 13, 1996) to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the Exchange Ratio was fair, from a financial point of
view, to MedPartners/Mullikin.
In arriving at its opinion, Smith Barney reviewed the Plan of Merger and
held discussions with certain senior officers, directors and other
representatives and advisors of MedPartners/Mullikin and certain senior officers
and other representatives and advisors of Caremark concerning the businesses,
operations and prospects of MedPartners/Mullikin and Caremark. Smith Barney
examined certain publicly available business and financial information relating
to MedPartners/Mullikin and Caremark as well as certain financial forecasts and
other information and data for MedPartners/Mullikin and Caremark which were
provided to or otherwise discussed with Smith Barney by the respective
managements of MedPartners/Mullikin and Caremark, including information relating
to certain strategic implications and operational benefits anticipated from the
Merger. Smith Barney reviewed the financial terms of the Merger as set forth in
the Plan of Merger in relation to, among other things: current and historical
market prices and trading volumes of MedPartners/ Mullikin Common Stock and
Caremark Common Stock; the historical and projected earnings and other operating
data of MedPartners/Mullikin and Caremark; and the capitalization and financial
condition of MedPartners/Mullikin and Caremark. Smith Barney considered, to the
extent publicly available, the financial terms of similar transactions recently
effected which Smith Barney considered relevant in evaluating the Merger and
analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations Smith
Barney considered relevant in evaluating those of MedPartners/Mullikin and
Caremark. Smith Barney also evaluated the potential pro forma financial impact
of the Merger on MedPartners/Mullikin. In addition to the foregoing, Smith
Barney conducted such other analyses and examinations and considered such other
financial, economic and market criteria as Smith Barney deemed appropriate in
arriving at its opinion. Smith Barney noted that its opinion was necessarily
based upon information available, and financial, stock market and other
conditions and circumstances existing and disclosed, to Smith Barney as of the
date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial forecasts
and other information and data provided to or otherwise reviewed by or discussed
with Smith Barney, the managements of MedPartners/Mullikin and Caremark advised
Smith Barney that such forecasts and other data were prepared on bases
reflecting reasonable estimates and judgments as to the future financial
performance of MedPartners/Mullikin and Caremark and the strategic implications
and operational benefits anticipated from the Merger. Smith Barney assumed, with
the consent of the MedPartners/Mullikin Board of Directors, that the Merger will
be treated as a pooling of interests in accordance with GAAP and as a tax-free
reorganization for federal income tax purposes. See "-- Accounting Treatment"
and "-- Federal Income Tax Consequences". Smith Barney's opinion relates to the
relative values of MedPartners/Mullikin and Caremark. Smith Barney did not
express any opinion as to what the value of the MedPartners/Mullikin Common
Stock actually will be when issued to Caremark stockholders pursuant to the
Merger or the price at which the MedPartners/Mullikin Common Stock will trade
subsequent to the Merger. In addition, Smith Barney did not make and was not
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of MedPartners/Mullikin or Caremark nor
did Smith Barney make any physical inspection of the properties or assets of
MedPartners/Mullikin or Caremark. With respect to outstanding litigation and
other proceedings involving Caremark, Smith Barney assumed and relied, with the
consent of the MedPartners/Mullikin Board of Directors, upon the judgment of the
management of MedPartners/
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Mullikin and its advisors that the outcome of such litigation and proceedings is
not expected, individually or in the aggregate, to have a material adverse
effect on the financial condition or results of operations of Caremark. Smith
Barney was not asked to consider, and Smith Barney's opinion did not address,
the relative merits of the Merger as compared to any alternative business
strategies that might exist for MedPartners/Mullikin or the effect of any other
transaction in which MedPartners/Mullikin might engage. Although Smith Barney
evaluated the Exchange Ratio from a financial point of view, Smith Barney was
not asked to and did not recommend the specific consideration payable in the
Merger. No other limitations were imposed by MedPartners/Mullikin on Smith
Barney with respect to the investigations made or procedures followed by Smith
Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED MAY 13, 1996,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX B AND IS INCORPORATED HEREIN BY
REFERENCE. HOLDERS OF MEDPARTNERS/MULLIKIN COMMON STOCK ARE URGED TO READ THIS
OPINION CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS DIRECTED ONLY TO
THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE MEDPARTNERS/MULLIKIN SPECIAL MEETING. THE SUMMARY OF THE OPINION OF
SMITH BARNEY SET FORTH IN THIS PROSPECTUS-JOINT PROXY STATEMENT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion to the MedPartners/Mullikin Board of Directors,
Smith Barney performed a variety of financial and comparative analyses,
including those described below. The summary of such analyses does not purport
to be a complete description of the analyses underlying Smith Barney's opinion.
The preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Smith Barney believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its analyses,
Smith Barney made numerous assumptions with respect to MedPartners/Mullikin,
Caremark, industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of
MedPartners/Mullikin and Caremark. The estimates contained in such analyses and
the valuation ranges resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Smith Barney's opinion and
financial analyses were only one of many factors considered by the
MedPartners/Mullikin Board of Directors in its evaluation of the Merger and
should not be viewed as determinative of the views of the MedPartners/Mullikin
Board of Directors or management with respect to the Exchange Ratio or the
proposed Merger.
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
MedPartners/Mullikin, Caremark and 29 selected publicly traded companies in the
health care industry, consisting of (i) three PBM companies: Express Scripts,
Inc., Systemed Inc. and Value Health, Inc. (the "PBM Companies"), (ii) 17 PPM
companies: Coastal Physician Group, Inc., EmCare Holdings, Inc., InPhyNet
Medical Management, Inc., Sheridan Healthcare, Inc., Sterling Healthcare Group,
Inc., AHI Healthcare Systems, Inc., FPA Medical Management, Inc., PHP Healthcare
Corporation, PhyCor, Inc., American Oncology Resources, Inc., Apogee, Inc.,
OccuSystems, Inc., Orthodontic Centers of America, Inc., Pediatrix Medical
Group, Inc., PhyMatrix Corp., Physician Reliance Network, Inc. and Physicians
Resource Group, Inc. (the "PPM Companies"), and (iii) nine home healthcare
companies: American Home Patient, Inc., Apria Healthcare Group Inc., Coram
Healthcare Corporation, Interim Services Inc., Lincare Holdings Inc., Olsten
Corporation, Option Care, Inc., RoTech Medical Corporation and Transworld Home
Healthcare, Inc. (the "Home Healthcare Companies" and, together with the PBM
Companies and the PPM Companies, the "Selected Companies"). With respect to the
PPM Companies analyzed, Smith Barney focused primarily on multi-specialty PPM
Companies (MedPartners/ Mullikin, PHP Healthcare Corporation and PhyCor, Inc.)
(the "Multi-Specialty PPM Companies"), the operations of which Smith Barney
considered to be most similar to those of Caremark. Smith Barney compared market
values as multiples of, among other things, latest 12 months net income and
estimated calendar 1996 and 1997 net income, and adjusted market values (equity
market value, plus total debt and the
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book value of preferred stock, less cash and cash equivalents) as multiples of,
among other things, latest 12 months earnings before interest, taxes,
depreciation and amortization ("EBITDA"). Smith Barney also compared the debt to
capitalization ratios, profit margins, historical revenue growth and projected
earnings per share ("EPS") growth of MedPartners/Mullikin, Caremark and the
Selected Companies. Net income projections for MedPartners/Mullikin, Caremark
and the Selected Companies were based on estimates of selected investment
banking firms. All multiples were based on closing stock prices as of May 10,
1996. The ranges of multiples of latest 12 months net income, estimated calendar
1996 and 1997 net income and latest 12 months EBITDA of the PBM Companies were
as follows: (i) latest 12 months net income: 25.1x to 42.3x (with a mean of
33.7x and a median of 33.7x); (ii) estimated calendar 1996 net income: 18.6x to
40.2x (with a mean of 29.6x and a median of 30.0x); (iii) estimated calendar
1997 net income: 15.5x to 22.9x (with a mean of 19.2x and a median of 19.2x);
and (iv) latest 12 months EBITDA: 9.1x to 22.9x (with a mean of 16.0x and a
median of 16.0x). The ranges of multiples of latest 12 months net income,
estimated calendar 1996 and 1997 net income and latest 12 months EBITDA of the
Multi-Specialty PPM Companies were as follows: (i) latest 12 months net income:
52.4x to 77.2x (with a mean of 60.9x and a median of 53.1x); (ii) estimated
calendar 1996 net income: 33.8x to 57.3x (with a mean of 45.9x and a median of
46.5x); (iii) estimated calendar 1997 net income: 24.3x to 41.2x (with a mean of
32.1x and a median of 30.7x); and (iv) latest 12 months EBITDA: 16.2x to 45.7x
(with a mean of 29.6x and a median of 26.9x). The ranges of multiples of latest
12 months net income, estimated calendar 1996 and 1997 net income and latest 12
months EBITDA of the Home Healthcare Companies were as follows: (i) latest 12
months net income: 14.5x to 32.4x (with a mean of 23.7x and a median of 21.6x);
(ii) estimated calendar 1996 net income: 12.3x to 27.2x (with a mean of 19.7x
and a median of 17.7x); (iii) estimated calendar 1997 net income: 10.7x to 24.2x
(with a mean of 17.2x and a median of 15.9x); and (iv) latest 12 months EBITDA:
7.2x to 16.0x (with a mean of 10.9x and a median of 10.1x). Applying multiples
of the PBM Companies, the Multi-Speciality PPM Companies and the Home Healthcare
Companies to corresponding financial data for Caremark resulted in an equity
reference range for Caremark of approximately $21.97 to $48.43 per share, as
compared to the per share value implied by the Exchange Ratio of approximately
$31.46 based on a closing stock price of MedPartners/Mullikin Common Stock on
May 10, 1996.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed the purchase price and implied
transaction multiples paid or proposed to be paid in 11 selected transactions in
the health care industry (acquiror/target): (i) four transactions involving PBM
companies: Merck & Co., Inc./Systemed Inc., Value Health, Inc./Diagnostek, Inc.,
Eli Lilly and Company/PCS Health Systems, Inc., SmithKline Beecham
Corporation/Diversified Pharmaceuticals Services Inc. and Merck & Co.,
Inc./Medco Containment Services, Inc. (the "PBM Transactions"); (ii) five
transactions involving PPM companies: MedPartners/Mullikin, Inc./Pacific
Physician Services, Inc., MedPartners, Inc./ Mullikin Medical Enterprises, L.P.,
Coastal Physician Group, Inc./Health Enterprises, Inc., Caremark/ Friendly Hills
HealthCare Network; and Foundation Health Corporation/Thomas-Davis Medical
Centers, P.C. (the "PPM Transactions"); and (iii) one transaction involving home
healthcare transactions: Olsten Corporation/Quantam Health Resources, Inc. (the
"Home Healthcare Transaction" and, together with the PBM Transactions and the
PPM Transactions, the "Selected Transactions"). Smith Barney compared the
purchase prices in such transactions as a multiple of, among other things,
latest 12 months net income and transaction values as a multiple of, among other
things, latest 12 months EBITDA. All multiples for the Selected Transactions
were based on information available at the time of announcement of the
transaction. The ranges of multiples of latest 12 months net income and EBITDA
of the PBM Transactions (excluding outliers) were 15.1x to 37.6x (with a mean of
25.4x and a median of 35.8x) and 8.8x to 22.4x (with a mean of 15.6x and a
median of 18.1x), respectively. The ranges of multiples of latest 12 months net
income and EBITDA for the PPM Transactions were 25.9x to 39.1x (with a mean of
32.1x and a median of 31.4x) and 8.8x to 14.6x (with a mean of 12.1x and a
median of 12.5x), respectively. The multiples of latest 12 months net income and
EBITDA for the Home Healthcare Transaction were 32.7x and 15.6x, respectively.
Applying multiples of the Selected Transactions to corresponding financial data
for Caremark resulted in an equity reference range for Caremark of approximately
$22.36 to $35.56 per share, as compared to the per share value implied by the
Exchange Ratio of approximately $31.46 based on a closing stock price of
MedPartners/ Mullikin Common Stock on May 10, 1996.
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Merger and Acquisition Transactions Analysis" as a comparison is
identical to MedPartners/Mullikin, Caremark or the Merger. Accordingly, an
analysis of the results of the foregoing is not entirely mathematical; rather,
it involves complex considerations and judgments concerning differences in
financial and operating characteristics and
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other factors that could affect the acquisition, public trading or other values
of the Selected Companies, Selected Transactions or the business segment,
company or transaction to which they are being compared.
Contribution Analysis. Smith Barney analyzed the respective contributions
of MedPartners/Mullikin and Caremark to the estimated revenue, EBITDA and net
income of the combined company for, among other things, fiscal year 1996, based
on estimates of selected investment banking firms and without taking into
account potential cost savings and other synergies anticipated by the management
of MedPartners/Mullikin to result from the Merger. This analysis indicated that,
in fiscal year 1996, MedPartners/Mullikin would contribute approximately 32.0%
of revenue, 34.3% of EBITDA, and 32.0% of net income, and Caremark would
contribute approximately 68.0% of revenue, 65.7% of EBITDA and 68.0% of net
income, of the combined company. Immediately following consummation of the
Merger, stockholders of MedPartners/ Mullikin and Caremark would own
approximately 36.3% and 63.7%, respectively, of the combined company.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of Caremark for the fiscal years
1996 through 2000, based on estimates of selected investment banking firms and
assuming, among other things, discount rates of 12.5%, 15.0% and 17.5% and
terminal multiples of EBITDA of 12.0x to 15.0x. This analysis resulted in an
equity reference range for Caremark of approximately $28.07 to $47.01 per share.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected EPS of MedPartners/ Mullikin for the fiscal years ended
1996 and 1997, based on estimates of selected investment banking firms. The
results of the pro forma merger analysis suggested that the Merger could be
accretive to MedPartners/ Mullikin's EPS in fiscal year 1996 (without taking
into account potential cost savings and other synergies anticipated by the
management of MedPartners/Mullikin to result from the Merger) and in fiscal year
1997 (assuming approximately $17.0 million of potential cost savings and other
synergies anticipated by the management of MedPartners/Mullikin to result from
the Merger are achieved). The actual results achieved by the combined company
may vary from projected results and the variations may be material.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) MedPartners/Mullikin's
and Caremark's historical and projected financial results; (ii) the history of
trading prices and volume for MedPartners/Mullikin Common Stock and Caremark
Common Stock, including the historical ratio of the daily closing prices of
MedPartners/Mullikin Common Stock to Caremark Common Stock for the period
February 22, 1995 through May 10, 1996; (iii) selected published analysts'
reports on Caremark, including analysts' estimates as to the earnings growth
potential of Caremark; and (iv) the pro forma ownership of the combined company.
Pursuant to the terms of Smith Barney's engagement, MedPartners/Mullikin
has agreed to pay Smith Barney for its services in connection with the Merger an
aggregate financial advisory fee of approximately $11.5 million, based on the
closing price of MedPartners/Mullikin Common Stock of $20.63 on August 15, 1996.
MedPartners/Mullikin also has agreed to reimburse Smith Barney for travel and
other out-of-pocket expenses incurred in performing its services, including the
fees and expenses of its legal counsel, and to indemnify Smith Barney and
related persons against certain liabilities, including liabilities under the
federal securities laws, arising out of Smith Barney's engagement.
Smith Barney has advised MedPartners/Mullikin that, in the ordinary course
of business, Smith Barney and its affiliates may actively trade or hold the
securities of MedPartners/Mullikin and Caremark for their own account or for the
account of customers and, accordingly, may at any time hold a long or short
position in such securities. Smith Barney has in the past provided financial
advisory and investment banking services to MedPartners/Mullikin unrelated to
the Merger, for which Smith Barney has received compensation. In addition, Smith
Barney and its affiliates (including Travelers Group Inc. and its affiliates)
may maintain relationships with MedPartners/Mullikin and Caremark.
Smith Barney is a nationally recognized investment banking firm and was
selected by MedPartners/ Mullikin based on Smith Barney's experience and
expertise with respect to merger and acquisition transactions (particularly in
the healthcare industry) and familiarity with MedPartners/Mullikin and its
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business. Smith Barney regularly engages in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. MedPartners/ Mullikin did not seek to retain the financial advisory
services of any financial advisor other than Smith Barney in connection with the
proposed Merger.
Caremark
Opinion of CS First Boston to the Caremark Board. At the meeting of the
Caremark Board held on May 13, 1996, CS First Boston delivered to the Caremark
Board its oral opinion, subsequently confirmed in writing, that, as of May 13,
1996, the consideration to be received by holders of Caremark Common Stock in
connection with the proposed Merger was fair to such stockholders from a
financial point of view. No limitations were imposed by Caremark with respect to
the investigations made or the procedures followed by CS First Boston in
rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF CS FIRST BOSTON WHICH SETS FORTH
THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED HERETO AS ANNEX C AND IS INCORPORATED HEREIN BY
REFERENCE. OWNERS OF CAREMARK COMMON STOCK ARE URGED TO READ THIS OPINION
CAREFULLY AND IN ITS ENTIRETY. CS FIRST BOSTON'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS OF THE CONSIDERATION TO BE RECEIVED IN THE MERGER FROM A FINANCIAL
POINT OF VIEW, AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED
TRANSACTIONS, NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE CAREMARK SPECIAL MEETING. THE SUMMARY OF
THE OPINION SET FORTH IN THIS PROSPECTUS-JOINT PROXY STATEMENT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, CS First Boston, among other things, (i)
reviewed the terms and conditions of the Plan of Merger; (ii) analyzed certain
historical business and financial information relating to Caremark and
MedPartners/Mullikin; (iii) reviewed certain financial forecasts and other data
provided to CS First Boston by Caremark relating to the business of Caremark and
by MedPartners/Mullikin relating to the business of MedPartners/Mullikin; (iv)
conducted discussions with members of Caremark's and MedPartners/Mullikin's
senior management with respect to the business and prospects of Caremark and
MedPartners/Mullikin and the strategic objectives of each; (v) reviewed public
information with respect to certain other companies in lines of business that CS
First Boston believed to be generally comparable to the businesses of Caremark
and MedPartners/Mullikin; (vi) reviewed the financial terms of certain recent
business combinations in the healthcare industry specifically and in other
industries generally to the extent that such information was publicly available;
(vii) reviewed the historical stock prices and trading volumes of Caremark
Common Stock and MedPartners/Mullikin Common Stock and the historical ratio of
the public trading price per share of Caremark Common Stock to the public
trading price per share of MedPartners/ Mullikin Common Stock; and (viii)
conducted such other financial studies, analyses and investigations as CS First
Boston deemed appropriate.
CS First Boston relied on the accuracy and completeness, in all material
respects, of the financial and other information provided to it by Caremark and
MedPartners/Mullikin and assumed no responsibility for independent verification
of any of the foregoing information. With respect to the financial forecasts, CS
First Boston assumed that such forecasts had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Caremark and MedPartners/Mullikin as to the future financial
performance of Caremark and MedPartners/Mullikin. CS First Boston expressed no
view as to such forecasts or the assumptions on which they are based. CS First
Boston's opinion was based on economic, monetary and market conditions existing
on the date of its opinion. CS First Boston neither made nor assumed any
responsibility for making any independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of Caremark or MedPartners/Mullikin,
nor was CS First Boston furnished with any such evaluations or appraisals. CS
First Boston assumed, with Caremark's consent, that in the course of obtaining
the necessary regulatory and third-party consents for the Merger, no restriction
would be imposed that would have any material adverse effects on the
contemplated benefits of the Merger or the transactions contemplated thereby. In
connection with rendering its opinion, CS First Boston understood that the
Merger is intended to be accounted for as a pooling of interests in accordance
with generally accepted accounting
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principles, as described in APB Opinion No. 16. See "-- Accounting Treatment".
CS First Boston's opinion was necessarily based upon information available to it
and on financial, stock market and other conditions as they existed and as they
could be evaluated as of the date of the opinion. CS First Boston's opinion did
not address Caremark's underlying business decision to effect the Merger. CS
First Boston expressed no opinion as to what the value of the
MedPartners/Mullikin Common Stock actually would be when issued to the holders
of Caremark Common Stock pursuant to the Merger, or the prices at which such
MedPartners/ Mullikin Common Stock would trade subsequent to the Merger, the
latter of which could vary depending upon, among other factors, changes in
interest rates, dividend rates, market conditions, general economic conditions
and other factors that generally influence the price of securities.
In arriving at its opinion and making its presentation to the Caremark
Board at the May 13, 1996 meeting, CS First Boston considered and discussed
certain financial analyses and other factors. The following paragraphs refer to
CS First Boston's analysis of the Exchange Ratio:
Contribution Analysis: CS First Boston compared the relative ownership
that would result from the Exchange Ratio of the stockholders of Caremark and
the stockholders of MedPartners/Mullikin of 63.8% and 36.2%, respectively, in
the surviving corporation, to the projected relative income statement
contributions attributable to the equity of each of Caremark and
MedPartners/Mullikin to the revenue, earnings before interest, taxes,
depreciation and amortization ("EBITDA") and net income of the surviving
corporation. This contribution analysis indicated that Caremark and
MedPartners/Mullikin could be expected to contribute 66.2% and 33.8%
respectively, of revenue, 63.7% and 36.3%, respectively, of EBITDA and 67.6% and
32.4%, respectively, of net income for the year ending December 31, 1996, and
65.4% and 34.6%, respectively, of revenue, 61.7% and 38.3%, respectively, of
EBITDA, and 65.0% and 35.0%, respectively, of net income for the year ending
December 31, 1997, to the surviving corporation. Comparing 1996 to 1997, CS
First Boston noted that MedPartners/Mullikin's relative contributions to the
surviving corporation's revenue, EBITDA and net income were all projected to
increase. CS First Boston further noted that, given the expectation that
MedPartners/Mullikin's revenue, EBITDA and net income would grow at a faster
rate than those of Caremark, MedPartners/Mullikin's relative contributions to
the surviving corporation for periods beyond 1997 could be expected to continue
to increase.
CS First Boston also considered the relative values contributed to the
surviving corporation by Caremark and MedPartners/Mullikin. As discussed below,
CS First Boston performed discounted cash flow, comparable company and
comparable acquisition analyses on Caremark's segments (for certain smaller
segments of Caremark, CS First Boston only performed, and only deemed relevant,
a discounted cash flow analysis), determined a reference range for each, and
made certain adjustments to reflect corporate overhead, option proceeds, cash on
hand, debt obligations and other items. Similarly, CS First Boston also
performed discounted cash flow, comparable company and comparable acquisition
analyses on MedPartners/Mullikin, determined a reference range, and made certain
adjustments for cash on hand and debt obligations. CS First Boston noted the
relative value contributions of the two companies, as compared to the relative
ownership of the stockholders of Caremark and the stockholders of
MedPartners/Mullikin of 63.8% and 36.2%, respectively. This analysis indicated
that, based on the reference range valuations, Caremark could be expected to
contribute between 57.5% and 62.1% of the combined value. Based on discounted
cash flow analysis ranges, Caremark could be expected to contribute between
55.1% and 60.4% of the combined value. Based on comparable company analysis
ranges, Caremark could be expected to contribute between 54.3% and 59.7% of the
combined value. Based on comparable acquisition analysis ranges, Caremark could
be expected to contribute between 59.1% and 60.2% of the combined value.
Relative Trading Value Analysis: As part of its analysis, CS First Boston
reviewed the trading patterns of Caremark and MedPartners/Mullikin since January
1, 1996. CS First Boston noted that Caremark's Common Stock price was near the
high end of its 1996 range and that Caremark's price to earnings ratio ("P/E")
had increased from 14.1x to over 22.4x during 1996, while published market
expectations of earnings had fallen slightly (from $1.27 to $1.24).
MedPartners/Mullikin's Common Stock price was near the low end of its 1996
range. Its P/E had declined from 45.0x to 32.9x, while its expected earnings per
share ("EPS") had increased steadily from $0.72 to $0.79.
CS First Boston also noted that MedPartners/Mullikin's P/E of 32.9x was
lower than the 48.6x average P/E of other selected large capitalization
physicians practice management companies (American Oncology Resources, Inc.,
PhyCor, Inc. and Physician Reliance Network, Inc.).
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CS First Boston also reviewed the historical ratio of the public trading
prices of MedPartners/Mullikin Common Stock to Caremark Common Stock since
MedPartners/Mullikin's February 1995 initial public offering. Such analysis
indicated that the implicit exchange ratio varied in a range between 0.60 and
1.12 MedPartners/Mullikin shares per Caremark share and averaged less than 1.00,
as compared to the Exchange Ratio of 1.21.
The following paragraphs describe CS First Boston's analyses of Caremark:
For purposes of its opinion, CS First Boston arrived at a range of values
for Caremark by separately analyzing each of the following Caremark segments:
PBM; PPM; Disease Management business based in Redlands, California
("DM-Redlands"); Disease Management business based in Northbrook, Illinois ("DM-
Northbrook"); and International Operations. CS First Boston utilized three
principal valuation methodologies in valuing these businesses: a discounted cash
flow analysis, a comparable company analysis and a comparable acquisition
analysis. Discounted cash flow analysis provides insight into the intrinsic
value of a company based on projected earnings and capital requirements.
Comparable company analysis analyzes a company's operating performance and
outlook relative to a group of publicly-traded peers to determine an implied
unaffected market trading value. Comparable acquisition analysis provides a
valuation range based upon financial information of companies in the same or
similar industries that have been acquired in recent transactions. No company
used in the comparable company analyses described below is identical to the PBM,
PPM, DM-Redlands, DM-Northbrook or International Operations segments of
Caremark, and no acquisition used in the comparable acquisition analysis
described below is identical to the Merger. Accordingly, interpreting the
results of the analyses described below necessarily involves complex
considerations and judgments concerning the differences in financial and
operating characteristics of the companies, and other factors that could affect
the public trading value, or the acquisition value, of the companies to which
they are being compared.
PBM
Discounted Cash Flow Analysis: The stand-alone discounted cash flow
valuation of PBM was determined by adding (i) the present value of projected
free cash flows over the five-year period from 1996 to 2000 and (ii) the present
value of PBM's terminal value in the year 2000. The range of terminal values for
PBM's common equity at the end of the five-year period was calculated by
applying a range of multiples (from 9.0x to 11.0x) to PBM's EBITDA and by
projecting a range of nominal perpetual growth rates of PBM's unlevered free
cash flow after 2000 ranging from 7.0% to 9.0%. This range of terminal values
represents PBM's value beyond the year 2000, and assumes that PBM will perform
in accordance with its management's forecast and certain variations thereof. The
cash flows and terminal values of PBM were discounted to present value using
different discount rates (ranging from 10% to 16%) chosen to reflect various
assumptions regarding PBM's estimated cost of capital.
Comparable Company Analysis: CS First Boston compared certain financial
information of PBM with the following group of companies that CS First Boston
believed to be appropriate for comparison: Caremark; Express Scripts, Inc.,
SysteMed Inc. and Value Health, Inc. The financial information compared included
market value; common stock price and last 12-month's ("LTM") performance;
certain historical revenue and earnings parameters and revenue growth rate and
margin data; total debt as a percentage of total capital and total equity; the
ratios of estimated 1996 P/E to estimated five-year growth rate and other P/E to
growth rate parameters; adjusted market value (equity value plus total debt,
less cash and cash equivalents) as a multiple of LTM revenue, EBITDA and
earnings before income and taxes ("EBIT"); market value as a multiple of
tangible book value; and the ratio of the present stock price to LTM; 1996
estimated and 1997 EPS. CS First Boston then derived from this and other data,
based on the relative comparability of the financial performance of the
comparable companies to that of PBM, the appropriate multiple ranges for its
valuation. The multiples for the comparable companies varied from 0.4x to 1.4x
revenues; 8.5x to 22.3x EBITDA; 11.1x to 25.6x EBIT; 1.8x to 40.7x tangible book
value; 15.1x to 41.3x LTM EPS; 18.1x to 41.1x 1996 estimated EPS; and 11.1x to
23.7x 1997 estimated EPS.
Comparable Acquisition Analysis: The transactions used in this analysis
included Merck-Medco Managed Care, Inc.'s proposed acquisition of SysteMed Inc.;
Value Health, Inc.'s acquisition of Diagnostek; Value Health, Inc.'s acquisition
of Prescription Drug Service, Inc.; Eli Lilly and Company's acquisition of PCS
Health Systems Inc.; SmithKline Beecham Corporation's acquisition of Diversified
Pharmaceutical Services, Inc. (United HealthCare Corporation); and Merck & Co.,
Inc.'s acquisition of Medco Cost Containment Services. The financial information
compared in the analysis included the adjusted price paid
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(equity value plus total debt and minority interest, less cash and cash
equivalents) for the acquired company as a multiple of LTM sales, EBITDA and
EBIT; equity purchase price as a multiple of LTM net income and book value;
price paid per covered life; and the premium paid per share over the market
price. CS First Boston then derived from this and other data, based on the
relative comparability of the comparable acquisitions to that of the Merger, the
appropriate multiple ranges for its valuation. The multiples for the comparable
acquisitions varied from 0.4x to 22.6x revenues; 8.9x to 24.1x EBITDA; 12.8x to
80.0x EBIT; 15.1x to 130.0x net income; and 1.6x to 37.9x book value.
PPM
Discounted Cash Flow Analysis: The stand-alone discounted cash flow
valuation of PPM was determined by adding (i) the present value of projected
free cash flows over the five-year period from 1996 to 2000 and (ii) the present
value of PPM's terminal value in the year 2000. The range of terminal values for
PPM's common equity at the end of the five-year period was calculated by
applying a range of multiples (from 10.0x to 12.0x) to PPM's EBITDA and by
projecting a range of nominal perpetual growth rates of PPM'S unlevered free
cash flow after 2000 ranging from 7.0% to 9.0%. This range of terminal values
represented PPM's value beyond the year 2000, and assumes that PPM will perform
in accordance with its management's forecast and certain variations thereof. The
cash flows and terminal values of PPM were discounted to present value using
different discount rates (ranging from 10% to 16%) chosen to reflect various
assumptions regarding PPM's estimated cost of capital.
Comparable Company Analysis: CS First Boston compared certain financial
information of PPM with the following group of companies that CS First Boston
believed to be appropriate for comparison: AHI Healthcare Systems, Inc.,
American Oncology Resources, Inc., FPA Medical Management, Inc., Inphynet
Medical Management Inc., MedPartners/Mullikin, PhyCor, Inc., Physician Reliance
Network, Inc., and Sheridan Healthcare, Inc. The financial information compared
included market value; common stock price and LTM performance; certain
historical revenue and earnings parameters and revenue growth rate and margin
data; total debt as a percentage of total capital and total equity; the ratios
of estimated 1996 P/E to estimated five-year growth rate and other P/E to growth
rate parameters; adjusted market value (equity value plus total debt, less cash
and cash equivalents) as a multiple of last reported quarter's annualized ("run
rate") revenue, EBITDA and EBIT; market value as a multiple of tangible book
value; and the ratio of present stock price to run rate, 1996 estimated and 1997
estimated EPS. CS First Boston then derived from this and other data, based on
the relative comparability of the comparable companies to that of PPM, the
appropriate multiple ranges for its valuation. The multiples for the comparable
companies varied from 0.5x to 5.7x revenues; 6.1x to 29.0x EBITDA; 13.5x to
45.8x EBIT; 4.3x to 27.4x tangible book value; 24.7x to 92.2x run rate EPS;
16.0x to 55.3x 1996 estimated EPS; and 10.5x to 40.2x 1997 estimated EPS.
Comparable Acquisition Analysis: The transactions used in this analysis
included: MedPartners/ Mullikin's acquisition of Pacific Physician Services,
Inc.; MedPartners' acquisition of Mullikin Medical Enterprises; Pacific
Physician Services, Inc.'s acquisition of Team Health Group, Inc.; Sterling
Healthcare Group, Inc.'s acquisition of Medical Network, Inc.; SAMA Holdings,
Inc.'s acquisition of Southeastern Anesthesia Management Associates, Inc.;
Coastal Healthcare Group, Inc.'s acquisition of Southeast Health Systems, Inc.
and Medical Associate Systems, Inc.; PhyCor, Inc.'s acquisition of Holt-Krock
Clinic and Arrex Chemical and Laboratory Company; PhyCor, Inc.'s acquisition of
Lexington Clinic, P.S.C.; and Frost Hanna Halpryn Capital Group, Inc.'s
acquisition of Sterling Healthcare, Inc. and Sterling Miami, Inc. The financial
information compared in the analysis included the adjusted price paid (equity
value plus total debt and minority interest, less cash and cash equivalents) for
the acquired company as a multiple of LTM sales, EBITDA and EBIT; equity
purchase price as a multiple of LTM net income and book value; and the premium
paid per share over the market price. CS First Boston then derived from this and
other data, based on the relative comparability of the comparable acquisitions
to that of the Merger, the appropriate multiple ranges for its valuation. The
multiples for the comparable acquisitions varied from 0.7x to 1.2x revenues;
5.7x to 21.1x EBITDA; 5.9x to 57.7x EBIT; 13.3x to 55.3x net income; and 2.3x to
33.4x book value.
DM-Redlands
Discounted Cash Flow Analysis: The stand-alone Discounted Cash Flow
valuation of DM-Redlands was determined by adding (i) the present value of
projected free cash flows over the five-year period from 1996 to 2000 and (ii)
the present value of DM-Redlands' terminal value in the year 2000. The range of
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terminal values for DM-Redlands' common equity at the end of the five-year
period was calculated by applying a range of multiples (from 7.0x to 9.0x) to
DM-Redlands' EBITDA and by projecting a range of nominal perpetual growth rates
of DM-Redlands' unlevered free cash flow after 2000 ranging from 5.0% to 7.0%.
This range of terminal values represented DM-Redlands' value beyond the year
2000, and assumes that DM-Redlands will perform in accordance with its
management's forecast and certain variations thereof. The cash flows and
terminal values of DM-Redlands were discounted to present value using different
discount rates (ranging from 10% to 16%) chosen to reflect various assumptions
regarding DM-Redlands' estimated cost of capital.
Comparable Company Analysis: CS First Boston compared certain financial
information of DM-Redlands with the following group of companies that CS First
Boston believed to be appropriate for comparison: Chronimed, Inc.; Quantum
Health Resources, Inc.; and The Care Group, Inc. The financial information
compared included market value; common stock price and LTM performance; certain
historical revenue and earnings parameters and revenue growth rate and margin
data; total debt as a percentage of total capital and total equity; the ratios
of estimated 1996 P/E to estimated five-year growth rate and other P/E to growth
rate parameters; adjusted market value (equity value plus total debt, less cash
and cash equivalents) as a multiple of LTM revenue, EBITDA and EBIT; market
value as a multiple of tangible book value; and the ratio of the present stock
price to LTM, 1996 estimated and 1997 estimated EPS. CS First Boston then
derived from this and other data, based on the relative comparability of the
comparable companies to that of DM-Redlands, the appropriate multiple ranges for
its valuation. The multiples for the comparable companies varied from 0.5x to
3.9x revenues; 6.9x to 85.3x EBITDA; 10.0x to 16.9x EBIT; 1.4x to 6.0x tangible
book value; 18.8x to 24.3x LTM EPS; 20.6x to 46.4x 1996 estimated EPS; and 19.4x
to 37.8x 1997 estimated EPS.
Comparable Acquisition Analysis: The transactions used in this analysis
included: Olsten Corporation's proposed acquisition of Quantum Health Resources,
Inc.; DURA Pharmaceuticals, Inc.'s acquisition of Health Script Pharmacy
Services, Inc.; Health Management, Inc.'s acquisition of Caremark's Clozaril(R)
Patient Management Business; Beverly Enterprises, Inc.'s acquisition of Pharmacy
Management Services, Inc.; Transworld Home HealthCare, Inc.'s acquisition of
RespiFlow, Inc. and MK Diabetic Support Services, Inc.; Homecare Management,
Inc.'s acquisition of Murray Group; and Quantum Health Resources' acquisition of
Factor Care Plus, Inc. The financial information compared in the analysis
included the adjusted price paid (equity value plus total debt and minority
interest, less cash and cash equivalents) for the acquired company as a multiple
of LTM sales, EBITDA and EBIT; equity purchase price as a multiple of LTM net
income and book value; and the premium paid per share over the market price. CS
First Boston then derived from this and other data, based on the relative
comparability of the comparable acquisitions to that of the Merger, the
appropriate multiple ranges for its valuation. The multiples for the comparable
acquisitions varied from 0.4x to 1.6x revenues; 3.8x to 17.6x EBITDA; 3.9x to
21.9x EBIT; 6.5x to 35.5x net income; and 2.4x to 7.7x book value.
DM-Northbrook
Discounted Cash Flow Analysis: The stand-alone discounted cash flow
valuation of DM-Northbrook was determined by adding (i) the present value of
projected free cash flows over the five-year period from 1996 to 2000 and (ii)
the present value of DM-Northbrook's terminal value in the year 2000. The 1996
to 2000 projections were based on projections prepared by the management of
Caremark. The range of terminal values for DM-Northbrook's common equity at the
end of the five-year period was calculated by applying a range of multiples
(from 2.0x to 4.0x) to DM-Northbrook's EBITDA and by projecting a range of
nominal perpetual growth rates of DM-Northbrook's unlevered free cash flow after
2000 ranging from -7.5% to -2.5%. This range of terminal values represented
DM-Northbrook's value beyond the year 2000, and assumes that DM-Northbrook will
perform in accordance with its management's forecast and certain variations
thereof. The cash flows and terminal values of DM-Northbrook were discounted to
present value using different discount rates (ranging from 10% to 16%) chosen to
reflect various assumptions regarding DM-Northbrook's estimated cost of capital.
International Operations
Discounted Cash Flow Analysis: The stand-alone valuation of International
Operations was determined by adding (i) the present value of projected free cash
flows over the five-year period from 1996 to 2000 and (ii) the present value of
International Operations' terminal value in the year 2000. The range of terminal
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values for International Operations' common equity at the end of the five-year
period was calculated by applying a range of multiples (from 8.0x to 10.0x) to
International Operations' EBITDA. This range of terminal values represented
International Operations' value beyond the year 2000, and assumes that
International Operations will perform in accordance with its management's
forecast and certain variations thereof. The cash flows and terminal values of
International Operations were discounted to present value using different
discount rates (ranging from 10% to 16%) chosen to reflect various assumptions
regarding International Operations' estimated cost of capital.
The following paragraphs describe CS First Boston's analyses of the Merger
Consideration:
Pro Forma Merger Analysis: CS First Boston noted that, based upon
estimates prepared by Caremark and MedPartners/Mullikin and after giving effect
to synergies estimated to result from the Merger, the Merger would be accretive
to Caremark's 1997 estimated EPS by 4.4%. CS First Boston noted that the
anticipated growth rate for the Surviving Corporation would be higher than the
growth rate for Caremark alone. In this analysis, CS First Boston assumed that
MedPartners/Mullikin would perform substantially in accordance with the earnings
forecasts provided to CS First Boston. The actual results achieved by
MedPartners/Mullikin may vary from projected results and the variations may be
material.
Trading Value Analysis: For purposes of the Caremark Board's further
understanding of the transaction, CS First Boston evaluated the potential
trading value of the combined company. CS First Boston applied a range of
multiples that it derived from an analysis of the multiples, growth rates, and
corresponding ratios accorded to certain companies that CS First Boston
determined to be comparable to MedPartners/Mullikin to MedPartners/Mullikin's
estimated 1997 pro forma EPS (which estimate gave effect to, among other things,
the estimated combined net income of Caremark and MedPartners/Mullikin and
certain estimated synergies) to arrive at a range of projected values for the
shares of common stock of MedPartners/Mullikin. In this analysis, CS First
Boston assumed that MedPartners/Mullikin would perform substantially in
accordance with the earnings forecasts provided to CS First Boston. The actual
results achieved by MedPartners/Mullikin may vary from projected results and the
variations may be material. As noted above, CS First Boston expressed no opinion
as to what the value of MedPartners/Mullikin Common Stock actually would be when
issued to the holders of Caremark Common Stock pursuant to the Merger, or the
prices at which such MedPartners/ Mullikin Common Stock would trade subsequent
to the Merger, the latter of which could vary depending upon, among other
factors, changes in interest rates, dividend rates, market conditions, general
economic conditions and other factors that generally influence the price of
securities.
The summary set forth above does not purport to be a complete description
of the analyses performed by CS First Boston. In addition, CS First Boston
believes that its analyses must be considered as a whole and that selecting
portions of such analyses and of the factors considered by it, without
considering all of such analyses and factors, could create an incomplete view of
the process underlying the analyses set forth in the opinion and the
presentation. The preparation of a fairness opinion is a complex process and is
not necessarily susceptible to partial analysis or summary description. With
regard to the comparable acquisition analyses and the comparable company
analyses summarized above, CS First Boston selected comparable public companies
on the basis of various factors, including the size of the public company and
similarity of the line of business; however, no public company utilized as a
comparison is identical to Caremark, MedPartners/Mullikin or the business
segments for which a comparison was made. Accordingly, an analysis of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies and other factors that could affect the acquisition or
public trading value of the comparable companies to which Caremark,
MedPartners/Mullikin or their respective business segments are being compared.
In performing its analyses, CS First Boston made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond Caremark's or MedPartners/Mullikin's
control. Any estimates contained in such analyses are not necessarily indicative
of actual past or future results or values, which may be significantly more or
less than such estimates. Estimates of values of companies or parts of companies
do not purport to be appraisals or necessarily to reflect the price at which
such companies or parts may actually be sold, and such estimates are inherently
subject to uncertainty.
CS First Boston is an internationally recognized investment banking firm
that regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions. The Caremark Board selected CS First
Boston to act as its financial advisor in connection with the Merger on the
basis of CS First
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Boston's international reputation, Caremark's prior relationship with CS First
Boston and CS First Boston's familiarity with Caremark.
CS First Boston has acted as financial advisor to Caremark in connection
with the Merger and will receive a fee for its services, a significant portion
of which is contingent upon the consummation of the Merger. In the ordinary
course of CS First Boston's business, CS First Boston and its affiliates may
actively trade the debt and equity securities of Caremark and
MedPartners/Mullikin for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Certificate of
Merger, executed in accordance with the relevant provisions of the DGCL, with
the Secretary of State of the State of Delaware, or at such other time as
MedPartners/Mullikin, the Subsidiary and Caremark agree should be specified in
the Certificate of Merger. The Plan of Merger requires that all filings required
under the DGCL be made as soon as practicable on or after the date which is no
later than the second business day following satisfaction or waiver of the
separate conditions to the obligations of each party to consummate the Merger,
or at such other time as may be agreed upon by MedPartners/Mullikin and
Caremark.
EXCHANGE OF CERTIFICATES
Exchange Agent. Prior to the Effective Time, MedPartners/Mullikin will
enter into an agreement with the Exchange Agent, which will provide that
MedPartners/Mullikin shall deposit with the Exchange Agent as of the Effective
Time, for the benefit of the holders of Caremark Shares, (i) certificates
representing the shares of MedPartners/Mullikin Common Stock issuable and (ii)
cash in an amount equal to the aggregate amount required to be paid in lieu of
fractional interests of MedPartners/Mullikin Common Stock, pursuant to the Plan
of Merger, in exchange for outstanding Caremark Shares.
Exchange Procedures. As soon as reasonably practicable after the Effective
Time, the Exchange Agent will mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Caremark Common Stock (the "Certificates"), (i) a letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as MedPartners/Mullikin may reasonably specify), and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of MedPartners/Mullikin Common Stock. Upon
surrender of a Certificate to the Exchange Agent or to such other agent or
agents as may be appointed by MedPartners/Mullikin, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing that number of whole
shares of MedPartners/Mullikin Common Stock and cash which such holder has the
right to receive pursuant to the provisions of the Plan of Merger. If any cash
or any certificate representing MedPartners/Mullikin Shares is to be paid to or
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, a certificate representing the proper number of
shares of MedPartners/Mullikin Common Stock may be issued to a person other than
the person in whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such issuance shall pay to the Exchange Agent
any transfer or other taxes required by reason of the issuance of shares of
MedPartners/Mullikin Common Stock to a person other than the registered holder
of such Certificate or establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not applicable. Until surrendered as contemplated
by the Plan of Merger, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
certificate representing shares of MedPartners/Mullikin Common Stock and cash in
lieu of any fractional shares of MedPartners/Mullikin Common Stock as
contemplated by the Plan of Merger. No interest will be paid or will accrue on
any cash payable in lieu of any fractional shares of MedPartners/Mullikin Common
Stock. To the extent permitted by law, former holders of record of Caremark
Common Stock shall be entitled to vote after the Effective Time at any meeting
of MedPartners/Mullikin stockholders the number of whole shares of
MedPartners/Mullikin Common Stock into which their respective shares of Caremark
Common Stock are converted, regardless of whether such holders have exchanged
their Certificates for certificates representing MedPartners/Mullikin Common
Stock in accordance with the Plan of Merger.
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At the Effective Time, holders of Caremark Common Stock immediately prior
to the Effective Time will cease to be, and shall have no rights as, holders of
Caremark Common Stock, other than the right to receive shares of
MedPartners/Mullikin Common Stock into which such shares have been converted and
any fractional share payment and any dividends or other distributions to which
they may be entitled under the Plan of Merger.
None of MedPartners/Mullikin, Caremark or the Exchange Agent will be liable
to any holder of Caremark Common Stock for any shares of MedPartners/Mullikin
Common Stock (or dividends or other distributions with respect thereto) or cash
in lieu of fractional shares delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
CONDITIONS TO THE MERGER
The obligation of MedPartners/Mullikin to consummate the Merger is subject
to, among others, the following conditions: (i) Caremark shall have performed in
all material respects all of its obligations required to be performed by the
Plan of Merger at or prior to the Closing Date; (ii) the representations and
warranties of Caremark set forth in the Plan of Merger shall be true and correct
in all material respects, as of both the date of the Plan of Merger and the
Closing Date except to the extent an earlier date is specified, in which case
such representations and warranties shall be true and correct in all material
respects, as of such earlier date; (iii) MedPartners/Mullikin shall have
received the opinion of Haskell Slaughter & Young, L.L.C. that the Merger
constitutes a tax-free reorganization under the Code and the opinion of
Wachtell, Lipton, Rosen & Katz with respect to certain other matters; (iv)
receipt of all consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board or other regulatory body
required in connection with the execution, delivery and performance of the Plan
of Merger shall have been obtained or made, except for filings in connection
with the Merger and any documents required to be filed after the Effective Time.
The obligation of Caremark to consummate the Merger is subject to, among
others, the following conditions: (i) MedPartners/Mullikin and the Subsidiary
shall have performed in all material respects all of their obligations as
required by the Plan of Merger at or prior to the Closing Date; (ii) the
representations and warranties of MedPartners/Mullikin and the Subsidiary set
forth in the Plan of Merger are true and correct in all material respects as of
both the date of the Plan of Merger and the Closing Date, except to the extent
an earlier date is specified, in which case such representations and warranties
shall be true and correct in all material respects, as of such earlier date; and
(iii) Caremark shall have received the opinion of Wachtell, Lipton, Rosen & Katz
that the Merger constitutes a tax-free reorganization under the Code and the
opinion of Haskell Slaughter & Young, L.L.C. with respect to certain other
matters; and (iv) receipt of all consents, authorizations, orders and approvals
of (or filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution, delivery and
performance of the Plan of Merger shall have been obtained or made, except for
filings in connection with the Merger and any documents required to be filed
after the Effective Time.
The obligation of each of MedPartners/Mullikin, the Subsidiary and Caremark
to consummate the Merger is subject to certain additional conditions, including
the following: (i) no order, decree or injunction by a court of competent
jurisdiction preventing the consummation of the Merger or imposing any material
limitation on the ability of MedPartners/Mullikin effectively to exercise full
rights of ownership of the common stock of Caremark following the Effective Time
or any material portion of the assets or business of Caremark, shall be in
effect; (ii) no statute, rule or regulation shall have been enacted by the
government of the United States or any state, municipality or other political
subdivision thereof that makes the consummation of the Merger or any other
transaction contemplated by the Plan of Merger illegal; (iii) any waiting period
(and any extension thereof) applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated; (iv) the Merger shall have
been approved by the requisite votes of the holders of the outstanding shares of
Caremark Common Stock and the holders of the outstanding shares of
MedPartners/Mullikin Common Stock entitled to vote thereon; (v) the shares of
MedPartners/Mullikin Common Stock to be issued in connection with the Merger
shall have been listed on the NYSE, upon official notice of issuance, and
MedPartners/Mullikin shall be registered or qualified in transactions qualified
or exempt from registration under applicable securities laws of such states of
the United States as may be required; and (vi) MedPartners/Mullikin and Caremark
shall each have received at closing a letter from Ernst & Young LLP with regard
to pooling of interests accounting for the Merger under Accounting
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Principles Board Opinion No. 16 if closed and consummated in accordance with the
Plan of Merger; and (vii) the Registration Statement, of which this
Prospectus-Joint Proxy Statement forms a part, shall have been declared
effective under the Securities Act and shall not be subject to any stop order.
REPRESENTATIONS AND COVENANTS
Under the Plan of Merger, MedPartners/Mullikin, the Subsidiary and Caremark
have each made a number of customary representations regarding the organization
and capital structures of the respective companies and their affiliates, their
operations, financial condition and other matters, including their authority to
enter into the Plan of Merger and to consummate the Merger. Under the Plan of
Merger, MedPartners/ Mullikin and Caremark have each agreed not to encourage,
solicit, participate in or initiate discussions or negotiations with or provide
any information to any third party concerning any merger, sale of assets, sale
of or tender offer for its shares or similar transactions, except that each of
the companies may furnish information to and negotiate with an unsolicited third
party consistent with the good faith exercise by the respective Boards of
Directors of their fiduciary obligations.
REGULATORY APPROVALS
As conditions precedent to the consummation of the Merger, the Plan of
Merger requires, among other things, that no statute, rule or regulation shall
have been enacted by the government (or any governmental agency) of the United
States or any state, county, municipality or other political subdivision thereof
that makes the consummation of the Merger and any other transaction contemplated
thereby illegal.
Certain persons, such as states' attorneys general and private parties,
could challenge the Merger as violative of the antitrust laws and seek to enjoin
the consummation of the Merger and, in the case of private persons, also seek to
obtain treble damages. There can be no assurance that a challenge to the Merger
on antitrust grounds will not be made or, if such a challenge is made, that it
will not be successful. Neither MedPartners/Mullikin nor Caremark intends to
seek any further stockholder approval or authorization of the Plan of Merger as
a result of any action that it may take to resist or resolve any objections by
the FTC or other objections, unless required to do so by applicable law.
The HSR Act provides that certain business mergers (including the Merger)
may not be consummated until certain information has been furnished to the DOJ
and the FTC and certain waiting period requirements have been satisfied. On June
14, 1996 and June 7, 1996, respectively, MedPartners/Mullikin and Caremark made
their respective filings with the DOJ and the FTC with respect to the Plan of
Merger. Under the HSR Act, the date of MedPartners/Mullikin's filings commenced
a 30-day waiting period during which the Merger may not be consummated, unless
such waiting period is terminated earlier, or is extended by a request for
additional information. Such a request was made on July 12, 1996 and
MedPartners/Mullikin and Caremark are fully cooperating with the FTC's review.
It is anticipated the waiting period will be terminated by the time of the
Special Meetings although there can be no assurance of this.
MedPartners/Mullikin and Caremark believe that the Merger does not violate the
antitrust laws and intend to resist vigorously any assertion to the contrary by
the FTC, the DOJ or others. Any such resistance would delay consummation of the
Merger, perhaps for a considerable period. Prior to the Merger, the FTC, the DOJ
or others could take action under the antitrust laws, including, prior to the
Effective Time, seeking to enjoin the consummation of the Merger or, after the
Effective Time, seeking the divestiture by MedPartners/Mullikin of all or any
part of the assets of Caremark acquired in the Merger. There can be no assurance
that a challenge to the Merger on antitrust grounds will not be made or, if such
a challenge is made, that it would not be successful.
The operations of each of MedPartners/Mullikin and Caremark are subject to
a substantial body of federal, state, local and accrediting body laws, rules and
regulations relating to the conduct, licensing and development of health care
businesses and facilities. As a result of the Merger, a number of the
arrangements between Caremark and third-party payors may be deemed to have been
transferred, requiring the approval and consent of such payors. In addition, a
number of the facilities operated by Caremark may be deemed to have been
transferred, requiring the consents or approvals of various state licensing
and/or health regulatory agencies. In some instances, new licenses may be
required to be obtained. It is anticipated that, prior to the time this
Prospectus-Joint Proxy Statement is mailed to the MedPartners/Mullikin and
Caremark stockholders, all filings required to be made to obtain the consents
and approvals required from federal and state health care regulatory bodies and
agencies will have been made. However, certain of such filings cannot be made
under the applicable laws, rules and regulations until after the Effective Time.
Although no assurances to this
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effect can be given, it is not anticipated that the parties will be unable to
obtain any required consent or approval.
BUSINESS PENDING THE MERGER
The Plan of Merger provides that, during the period from the date of the
Plan of Merger to the Effective Time, except as provided in the Plan of Merger,
Caremark and MedPartners/Mullikin will use their reasonable best efforts to
preserve intact their present business organization, to keep available to
MedPartners/Mullikin and the surviving corporation the services of the present
employees of Caremark and MedPartners/Mullikin, and to maintain the goodwill of
customers, suppliers and others having business dealings with Caremark and
MedPartners/Mullikin.
Under the Plan of Merger, Caremark has agreed that it will not (other than
as required pursuant to or contemplated by the terms of the Plan of Merger and
related documents and other than with respect to transactions for which binding
commitments have been entered into prior to the date of the Plan of Merger and
certain other transactions disclosed to MedPartners/Mullikin), without first
obtaining the written consent of MedPartners/Mullikin, (i) encumber any asset or
enter into any transaction or make any contract or commitment relating to its
properties, assets and business, other than in the ordinary course of business
or as otherwise disclosed in the Plan of Merger; (ii) enter into any employment
contract in which the cash compensation is in excess of $150,000 or the term of
which is greater than one year, which is not terminable upon notice of 30 days
or less, at will and without penalty to Caremark, except as provided in the Plan
of Merger; (iii) enter into any contract or agreement which cannot be performed
within three months or which involves the expenditure of over $5,000,000 other
than in the ordinary course of business; (iv) issue or sell, or agree to issue
or sell, any shares of capital stock or other securities of Caremark, except
upon exercise of currently outstanding stock options or pursuant to stock
purchase plans; (v) make any payment or distribution to the trustee under any
bonus, pension, profit-sharing or retirement plan or incur any obligation to
make any such payment or contribution which is not in accordance with its usual
past practice, or make any payment or contributions or incur any obligation
pursuant to or in respect of any other plan or contract or arrangement providing
for bonuses, executive incentive compensation, pensions, deferred compensation,
retirement payments, profit-sharing or the like, establish or enter into any
such plan, contract or arrangement, or terminate any plan; (vi) extend credit to
anyone except in the ordinary course of business consistent with prior
practices; (vii) guarantee the obligation of any person, firm or corporation,
except in the ordinary course of business consistent with prior practices;
(viii) incur any material adverse change; (ix) discharge or satisfy any material
lien or encumbrance, or pay or satisfy any material obligation or liability
(absolute, accrued, contingent or otherwise) which discharge or satisfaction
would have a material adverse effect on Caremark, other than liabilities shown
or reflected on the Caremark Balance Sheet or liabilities incurred since the
date of the Caremark Balance Sheet in the ordinary course of business; (x) incur
any funded indebtedness or increase or establish any reserve for taxes or any
other liability on its books or otherwise provided therefor which would have a
material adverse effect on Caremark, except as may have been required due to
income or operations of Caremark since the date of the Caremark Balance Sheet;
(xi) mortgage, pledge or subject to any lien, charge or other encumbrance any of
the assets, tangible or intangible, which assets are material to the
consolidated business or financial condition of Caremark; (xii) sell or transfer
any of the assets material to the business of Caremark, cancel any material
debts or claims or waive any material rights, except in the ordinary course of
business; (xiii) grant any general or uniform increase in the rates of pay of
employees or any material increase in salary payable or to become payable by
Caremark to any officer or employee, consultant or agent (other than normal
merit increases), or by means of any bonus or pension plan, contract or other
commitment, increase in a material respect the compensation of any officer,
employee, consultant or agent; (xiv) except for this Plan of Merger and any
other agreement executed and delivered pursuant to the Plan of Merger, enter
into any material transaction other than in the ordinary course of business or
permitted under the Plan of Merger; (xv) issue any stock, bonds or other
securities or any options or rights to purchase any of its securities (other
than stock issued upon the exercise of outstanding options under Caremark's
stock option plans or stock purchase plans); or (viii) amend the Caremark
Certificate or the Caremark By-Laws (the "Caremark By-Laws").
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WAIVER AND AMENDMENT
The Plan of Merger provides that, at any time prior to the Effective Time,
MedPartners/Mullikin and the Subsidiary, on the one hand, and Caremark, on the
other hand, may (i) extend the time for the performance of any of the
obligations or other acts of the other party contained in the Plan of Merger;
(ii) waive any inaccuracies in the representations and warranties of the other
party contained in the Plan of Merger or in any document delivered pursuant to
the Plan of Merger; or (iii) subject to the following sentence, waive compliance
with the agreements or conditions under the Plan of Merger. In addition, the
Plan of Merger may be amended at any time upon the written agreement of the
parties to the Plan of Merger provided that, after the Special Meetings, no
amendment may be made which requires further approval of the Caremark or
MedPartners/Mullikin stockholders under the DGCL. The pooling condition may be
waived if waived by each of Caremark, MedPartners/Mullikin and the Subsidiary.
However, neither Caremark, MedPartners/ Mullikin, nor the Subsidiary intends to
waive this condition and, further, in the event that the condition is waived, an
amendment to the Registration Statement of which this Prospectus-Joint Proxy
Statement forms a part will be filed and the vote of the stockholders of the
respective companies resolicited.
TERMINATION
The Plan of Merger may be terminated at any time prior to the Effective
Time, whether before or after the requisite approval of the Plan of Merger by
the stockholders of Caremark: (i) by mutual written consent of
MedPartners/Mullikin, the Subsidiary and Caremark; (ii) by either
MedPartners/Mullikin or Caremark, if there is a material breach on the part of
the other party of any representation, warranty, covenant or other agreement set
forth in the Plan of Merger which is not cured as provided in the Plan of
Merger; (iii) by either MedPartners/Mullikin or Caremark, if any governmental
entity or court of competent jurisdiction shall have issued an order, or taken
any other action permanently enjoining, restraining or otherwise prohibiting the
Merger and such order or other action shall have become final and nonappealable;
(iv) by either MedPartners/Mullikin or Caremark, if the Merger has not been
consummated on or before December 31, 1996 (or such later date as may be
determined under the Plan of Merger), unless the failure to consummate the
Merger by such time is due to the willful and material breach of the Plan of
Merger by the party seeking to terminate the Plan of Merger; provided, however,
that the passage of such period shall be tolled for any part thereof (not to
exceed 60 days in the aggregate) during which any party shall be subject to a
nonfinal order, decree, ruling or action restraining, enjoining or otherwise
prohibiting the consummation of the Merger or the calling or holding of a
meeting of stockholders; (v) by either MedPartners/Mullikin or Caremark, if any
required approval of the Plan of Merger by holders of Caremark Common Stock and
MedPartners/Mullikin Common Stock has not been obtained; and (vii) by either
MedPartners/Mullikin or Caremark, if all of the mutual conditions to the
obligation of both parties to effect the Merger under the Plan of Merger have
been satisfied and any condition to the obligation of the terminating party to
effect the Merger under the Plan of Merger is not capable of being satisfied
prior to December 31, 1996 (or such later date as may be determined under the
Plan of Merger).
NYSE LISTING
A Subsequent Listing Application will be filed with the NYSE to list the
shares of MedPartners/ Mullikin Common Stock to be issued to Caremark
stockholders in connection with the Merger. Although no assurance can be given
that the shares of MedPartners/Mullikin Common Stock so issued will be accepted
for listing, MedPartners/Mullikin anticipates that these shares will qualify for
listing on the NYSE, upon official notice of issuance thereof. It is a condition
to the Merger that such shares of MedPartners/Mullikin Common Stock be approved
for listing on the NYSE, upon official notice of issuance, at the Effective
Time.
RESALE OF MEDPARTNERS/MULLIKIN COMMON STOCK BY AFFILIATES
MedPartners/Mullikin Common Stock to be issued to Caremark stockholders in
connection with the Merger has been registered under the Securities Act.
MedPartners/Mullikin Common Stock received by the Caremark stockholders upon
consummation of the Merger will be freely transferable under the Securities Act,
except for shares issued to any person who may be deemed an "Affiliate" (as such
term is used in Rule 145 promulgated under the Securities Act) of Caremark or
MedPartners/Mullikin. Generally, all shares of MedPartners/Mullikin Common Stock
received by such Affiliates may not be sold until MedPartners/ Mullikin
publishes at least one full month of the combined results of operations of
MedPartners/Mullikin and
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Caremark. MedPartners/Mullikin has agreed that after the end of the first full
calendar month after the Effective Time, it shall cause publication (as defined
in SEC Accounting Series Release No. 135) of the combined results of operations
of MedPartners/Mullikin and Caremark in the First Quarterly Report on Form 10-Q
which shall be filed after such period. In addition, Affiliates of Caremark or
MedPartners/ Mullikin may not sell their shares of MedPartners/Mullikin Common
Stock acquired in connection with the Merger except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 under the Securities Act or another applicable
exemption from the registration requirements of the Securities Act. In general,
under Rule 145 under the Securities Act, for two years following the Effective
Time, an Affiliate (together with certain related persons) would be entitled to
sell shares of MedPartners/Mullikin Common Stock acquired in connection with the
Merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker", as such terms are defined in Rule 144 under the
Securities Act. Additionally, the number of shares to be sold by an Affiliate
(together with certain related persons and certain persons acting in concert)
during such two-year period within any three-month period for purposes of Rule
145 under the Securities Act, may not exceed the greater of 1% of the
outstanding shares of MedPartners/Mullikin Common Stock or the average weekly
trading volume of such stock during the four calendar weeks preceding such sale.
Rule 145 under the Securities Act would remain available to Affiliates only if
MedPartners/Mullikin remained current with its information filings with the SEC
under the Exchange Act, which MedPartners/Mullikin has agreed to do. Two years
after the Effective Time, an Affiliate would be able to sell such
MedPartners/Mullikin Common Stock without such manner of sale or volume
limitations, provided that MedPartners/Mullikin was current with its Exchange
Act information filings and such Affiliate was not then an Affiliate of
MedPartners/Mullikin. Three years after the Effective Time, an Affiliate would
be able to sell such shares of MedPartners/Mullikin Common Stock without any
restrictions so long as such Affiliate was not, and had not been for at least
three months prior thereto, an Affiliate of MedPartners/Mullikin.
ADDITIONAL INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Caremark Board with respect to the
Plan of Merger and the transactions contemplated thereby, Caremark stockholders
should be aware that certain members of the management of Caremark and of the
Caremark Board have certain interests in the Merger that are in addition to the
interests of stockholders of Caremark generally. Certain of these persons may
have participated in the negotiation and consideration of the Plan of Merger as
well as certain of the arrangements described below. The Caremark Board was
aware that such arrangements may give these individuals interests in the Merger
that are in addition to the interests of stockholders generally and concluded
that such additional interests did not affect the negotiation of the terms of
the Merger in a manner that conflicted with or was adverse to the interests of
stockholders generally. The Caremark Board's belief was based on its assessment
of the terms of the Plan of Merger (see "-- Recommendations of the Boards of
Directors -- Caremark") as well as the knowledge that the finance committee of
the Caremark Board, a majority of whose members are independent outside
directors, was involved in the negotiation of the terms of the Merger.
Provision of Employee Benefits. MedPartners/Mullikin has agreed that,
following the Effective Time, (i) it will, or it will cause the Surviving
Corporation to, provide for the benefit of employees of Caremark who become
employees of the Surviving Corporation, an effective and complete employee
benefit program which is competitive in the industries in which it competes,
which benefits shall be no less advantageous than those benefits offered to
similarly situated MedPartners/Mullikin employees, (ii) it will, or it will
cause the surviving corporation to, (A) honor in accordance with their terms all
benefits accrued or vested under specified Caremark employee benefit plans as of
the Effective Time, (B) honor in accordance with their terms specified
contracts, arrangements, commitments, or understandings, (C) vest the benefits
of any employee terminated within 12 months of the Effective Time under the
Caremark's 401 CARE Retirement Savings Plan and Caremark International Inc.
Pension Plan, and (D) maintain and honor in accordance with its terms,
Caremark's Severance Pay and Benefits Plan for six months from and after the
Effective Time. The agreements of MedPartners/Mullikin described in this
paragraph will survive the Merger, and are intended to be for the benefit of,
and be enforceable by, any officer, director, employee, trustee or agent of
Caremark (or any of its subsidiaries) with the expenses, including reasonable
attorneys' fees, that may be incurred by such person in enforcing such
provisions to be paid by MedPartners/Mullikin.
In the Plan of Merger, MedPartners/Mullikin acknowledges and agrees that
the consummation of the Merger will constitute a "Change in Control" of Caremark
for all purposes within the meaning of all Caremark employee benefit plans and
compensation plans or compensation agreements of Caremark.
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Severance Agreements. Caremark is party to severance compensation
agreements with each of its executive officers and certain other key employees.
Under the agreements, these executive officers are entitled to separation pay
and benefits as described below following a Change in Control of Caremark and
(i) the executive's subsequent termination of employment, unless such
termination is voluntary and unprovoked or results from death, disability,
retirement, or cause, or (ii) after a voluntary termination of employment
whether or not for cause, provided that such termination of employment occurs
during a 30-day window period one year after the Change of Control. Consummation
of the Merger will constitute a Change of Control for purposes of the severance
compensation agreements.
Under the severance compensation agreements with the executive officers,
separation pay will equal three years' annualized base salary and target cash
bonus. Certain of the severance agreements with other key employees provide for
one years' annualized base salary and target bonus. In addition, an executive
whose severance compensation agreement is triggered will receive the value of
all deferred or vested awards under all incentive compensation plans, option
plans, the Caremark International Inc. Employee Stock Purchase Plan and any
successor plans and the continuation of certain benefits plans available to such
an executive at the time of his or her termination. Certain of the executives
whose severance compensation agreement is triggered will receive a "gross-up"
payment which, net of all tax, is sufficient to pay any excise tax on "excess
parachute" payments received by such executive from Caremark.
Certain of the executive officers will continue in their present positions
with Caremark and have agreed to terminate their severance compensation
agreements in return for lump sum payments to be made within 30 days of the
Effective Time as follows: James G. Connelly III, President of
Caremark -- $1,786,710; Kristen E. Gibney, Vice President, Pharmaceutical
Services -- $1,306,824; Michele J. Hooper, Vice President, International
Business -- $1,171,824, John M. Pellettiere, Jr., Vice President and Controller
of Caremark $783,030, and K. J. Michael McDonald, Vice President, Disease
Management -- $1,171,824.
Consulting Agreements. The Plan of Merger provides that
MedPartners/Mullikin and Caremark will offer consulting agreements to each of
C.A. Lance Piccolo, Thomas W. Hodson and Diane L. Munson (the "Piccolo
Agreement", "Hodson Agreement" and "Munson Agreement" respectively) which
contain terms and conditions substantially similar to those agreed to by the
parties at the signing of the Plan of Merger.
During the term of the Piccolo Agreement, Mr. Piccolo will be retained by
MedPartners/Mullikin and Caremark as a consultant in connection with their
business. Mr. Piccolo will report directly to the Chairman of the Board of
Directors of MedPartners/Mullikin (the "Chairman") and will provide such
consulting services as shall from time-to-time be requested by the Chairman. Mr.
Piccolo will also serve as a member of the MedPartners/Mullikin Board of
Directors as provided in the Plan of Merger, and during such service his duties
and compensation under the Piccolo Agreement will be in addition to his duties
and compensation as a director.
Unless terminated sooner, the term of the Piccolo Agreement shall be ten
years. Over the course of that ten year period, Mr. Piccolo will be paid
consulting fees totaling $5,373,920. Upon commencement of the term of the
Piccolo Agreement, Mr. Piccolo's employment with Caremark will have been
terminated entitling him to the payments and benefits provided for in his
severance agreement (described above) and the "gross up" provisions of that
agreement will apply to payments made pursuant to the Piccolo Agreement in the
event such consulting payments are determined to be "excess parachute" payments.
Mr. Piccolo will be eligible to participate in all health and medical
employee benefit plans and programs available, from time to time, to employees
of MedPartners/Mullikin and Caremark until he reaches the age of 65. In the
event Mr. Piccolo dies prior to age 65, his spouse will be entitled to receive
these benefits until she reaches the age of 65. After age 65, Mr. Piccolo and
his spouse will be provided with a prescription drug program comparable to that
provided Caremark employees through Caremark's prescription drug benefit
programs.
Mr. Piccolo will be provided with an adequate office, and secretarial
support, as well as reimbursement of reasonable expenses, and will be subject to
certain non-compete and confidentiality restrictions.
During the terms of the Hodson Agreement and the Munson Agreement, Mr.
Hodson and Ms. Munson, respectively, will each be retained by
MedPartners/Mullikin and Caremark as a consultant in connection with the
business of MedPartners/Mullikin and Caremark. Unless terminated sooner, the
terms of the Hodson Agreement and the Munson Agreement shall be for a period of
one year. Over the course of that period, Mr. Hodson and Ms. Munson will be paid
consulting fees of $318,856 and $280,000, respectively. Each of the Hodson
Agreement and the Munson Agreement may be extended on the same terms for an
additional one-year period. Upon commencement of the term of the Hodson
Agreement and the Munson Agreement,
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Mr. Hodson and Ms. Munson's employment with Caremark will have been terminated,
entitling them to severance payments of $1,052,138 and $975,608, respectively,
and the other benefits provided for in their severance agreements (described
above) and the "gross up" provisions of those severance agreements will apply to
payments made pursuant to each of the Hodson Agreement and the Munson Agreement
in the event such consulting payments are determined to be "excess parachute"
payments.
Mr. Hodson and Ms. Munson will not, except as provided in their respective
severance agreements, be eligible to participate in employee benefit plans and
programs available, from time to time, to employees of MedPartners/Mullikin and
Caremark. Mr. Hodson and Ms. Munson will be provided with an adequate office,
and secretarial support, as well as reimbursement of reasonable expenses, and
will be subject to certain non-compete and confidentiality restrictions.
Directors' and Officers' Insurance; Limitation of Liability of Caremark
Directors and Officers. MedPartners/Mullikin has agreed that it will cause the
Surviving Corporation to maintain in effect for not less than three years after
the Effective Time the current policies of directors' and officers' liability
insurance maintained by Caremark with respect to matters occurring prior to the
Effective Time; provided, however, that MedPartners/Mullikin may substitute
therefor policies of at least the same coverage containing terms and conditions
which are no less advantageous to the covered officers and directors and
MedPartners/Mullikin shall not be required to pay an annual premium for such
insurance in excess of two times the last annual premium paid prior to May 13,
1996, but in such case shall purchase as much coverage as possible for such
amount.
From and after the Effective Time, MedPartners/Mullikin will cause the
Surviving Corporation to indemnify and hold harmless to the fullest extent
permitted under applicable law each person who is now, or has been at any time
prior to the date hereof, an officer, director, employee, trustee or agent of
Caremark (and its subsidiaries) including, without limitation, each person
controlling any of the foregoing persons (together with such person's heirs and
representatives, individually, an "Indemnified Party" and collectively, the
"Indemnified Parties"), against all losses, claims, damages, liabilities, costs
or expenses (including attorneys' fees), judgments, fines, penalties and amounts
paid in settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to acts or omissions, or alleged acts
or omissions, by them in their capacities as such, whether commenced, asserted
or claimed before or after the Effective Time and including, without limitation,
liabilities arising under the Securities Act, the Exchange Act and state
corporation laws, in connection with the Merger. MedPartners/Mullikin will cause
the surviving corporation to keep in effect the current provisions in the
Caremark Certificate and the Caremark By-Laws providing for exculpation of
director and officer liability and indemnification of the Indemnified Parties to
the fullest extent permitted under the DGCL, which provisions shall not be
amended except as required by applicable law or except to make changes permitted
by law that would enlarge the Indemnified Parties' right of indemnification.
In the event of any actual or threatened claim, action, suit, proceeding or
investigation in respect of such acts or omissions, MedPartners/Mullikin has
agreed to cause the surviving corporation to pay the reasonable fees and
expenses of counsel selected by the Indemnified Party in advance of the final
disposition of any such action to the full extent permitted by applicable law,
upon receipt of any undertaking required by applicable law, and
MedPartners/Mullikin has agreed to cause the surviving corporation to cooperate
in the defense of any such matter.
Caremark Equity-Based Incentive Awards. Pursuant to the terms of
Caremark's stock-based option and incentive plans, at the Effective Time, each
Caremark stock option will become immediately exercisable and all restrictions
with respect to restricted stock will automatically lapse.
The foregoing interests of members of management or stockholders of
Caremark in the Merger may mean that such persons have personal interests in the
Merger which may not be identical to the interests of nonaffiliated
stockholders.
If the Merger were consummated, the directors and executive officers of
Caremark would receive a total of less than 1% of the MedPartners/Mullikin
Common Stock issued to Caremark stockholders in the Merger (excluding options).
These individuals have unanimously indicated their intentions to vote the shares
of Caremark Common Stock beneficially owned by them FOR the Plan of Merger.
The Plan of Merger provides that MedPartners/Mullikin will cause the
surviving corporation to maintain in effect following the Merger the rights to
indemnification of Caremark officers and directors currently provided for in the
Caremark Certificate and the Caremark By-laws. The Plan of Merger also provides
that MedPartners/Mullikin will cause the surviving corporation to maintain for
not less than three years following the Effective Time the current policies of
directors' and officers' liability insurance maintained by Caremark
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with respect to matters occurring prior to the Effective Time. See
"-- Indemnification of Officers and Directors".
The foregoing interests of members of management of Caremark in the Merger
may mean that such persons have personal interests in the Merger which may not
be identical to the interests of nonaffiliated stockholders. The Caremark Board
was aware of the interests of Caremark management in the Merger when it voted to
approve and recommend the Plan of Merger.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon the receipt by
MedPartners/Mullikin and Caremark of a letter from Ernst & Young LLP to the
effect that they concur with the conclusion of management of
MedPartners/Mullikin and Caremark that the Merger will qualify for
pooling-of-interests accounting treatment if consummated in accordance with the
Plan of Merger. If the Merger does not qualify for pooling of interests
treatment for accounting purposes, the Merger would be treated as a purchase for
accounting purposes. MedPartners/Mullikin, the Subsidiary and Caremark have
agreed not to intentionally take any action that would disqualify treatment of
the Merger as a pooling of interests for accounting purposes. The pooling
condition may be waived if waived by each of Caremark, MedPartners/Mullikin and
the Subsidiary, however, none of Caremark, MedPartners/Mullikin or the
Subsidiary will waive this condition. See "-- Waiver and Amendment".
Under the pooling-of-interests method of accounting, the historical basis
of the assets and liabilities of MedPartners/Mullikin and Caremark will be
combined at the Effective Time and carried forward at their previously recorded
amounts, the stockholders' equity accounts of MedPartners/Mullikin and Caremark
will be combined on MedPartners/Mullikin consolidated balance sheet and no
goodwill or other intangible assets will be created. Consolidated financial
statements of MedPartners/Mullikin issued after the Merger will be restated
retroactively to reflect the consolidated operations of MedPartners/Mullikin and
Caremark as if the Merger had taken place prior to the periods covered by such
consolidated financial statements.
The unaudited pro forma financial information contained in this
Prospectus-Joint Proxy Statement has been prepared using the pooling of
interests accounting method to account for the Merger. Consistent with
pooling-of-interests accounting treatment, the direct costs related to the
Merger will be taken as a non-recurring charge to earnings in the quarter in
which the Merger is consummated. See "Pro Forma Condensed Financial
Information", including the Notes continued therein.
FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the Merger and the exchange by the holders of Caremark Shares of
such shares for shares of MedPartners/Mullikin Common Stock. This summary is not
a complete description of all the consequences of the Merger. Each stockholder's
individual circumstances may affect the tax consequences of the Merger to him or
her. In addition, no information is provided herein with respect to the tax
consequences of the Merger under applicable foreign, state or local laws.
Accordingly, each Caremark stockholder is urged to consult his or her own tax
advisor as to the specific tax consequences of the Merger to such stockholder.
Neither MedPartners/Mullikin nor Caremark has requested or will receive an
advance ruling from the Internal Revenue Service (the "Service") as to the
federal income tax consequences of the Merger. The respective obligations of
Caremark and MedPartners/Mullikin to consummate the Merger are conditioned upon
receipt of certain legal opinions relating to the federal income tax
consequences of the Merger, in form and substance satisfactory to Caremark and
MedPartners/Mullikin and their respective counsel. The opinions of such counsel
are based upon the facts that are described herein, and upon certain customary
representations made by the management of Caremark and by the management of
MedPartners/Mullikin. Such opinions are also based upon the Code, regulations
currently in effect thereunder, current administrative rulings and practice by
the Service, and judicial authority, all of which are subject to change. Any
such change could affect the continuing validity of such opinions and this
discussion. In addition, an opinion of counsel is not binding upon the Service,
and there can be no assurance, and none is hereby given, that the Service will
not take a position which is contrary to one or more positions reflected in the
opinions of such counsel, or that such opinions will be upheld by the courts if
challenged by the Service. Furthermore, MedPartners/Mullikin and Caremark have
agreed in the Plan of Merger not to take any action which would disqualify the
Merger as a reorganization which is tax-free to the stockholders of Caremark
pursuant to Section 368(a) of the Code. EACH HOLDER OF CAREMARK SHARES IS URGED
TO CONSULT SUCH HOLDER'S PERSONAL TAX AND FINANCIAL ADVISORS AS TO
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THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES TO SUCH HOLDER, BASED ON SUCH
HOLDER'S OWN PARTICULAR STATUS AND CIRCUMSTANCES, AND ALSO AS TO ANY STATE,
LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT OF THE MERGER.
It is a condition to the obligation of each of MedPartners/Mullikin and
Caremark to proceed with the Merger that each of them receive an opinion from
its counsel substantially to the effect the federal income tax consequences of
the Merger discussed below are the federal income tax consequences of the
Merger.
MedPartners/Mullikin has received an opinion from Haskell Slaughter &
Young, L.L.C., its counsel concerning certain of the federal income tax
consequences of the Merger, substantially to the effect that:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and MedPartners/Mullikin, the Subsidiary and
Caremark will each be a party to the reorganization within the meaning of
Section 368(b) of the Code;
(ii) No gain or loss will be recognized by MedPartners/Mullikin,
Caremark or the Subsidiary as a result of the Merger;
(iii) No gain or loss will be recognized by a Caremark stockholder who
receives solely shares of MedPartners/Mullikin Common Stock in exchange for
Caremark Shares;
(iv) The receipt of cash in lieu of fractional shares of
MedPartners/Mullikin Common Stock will be treated as if the fractional
shares were distributed as part of the exchange and then were redeemed by
MedPartners/Mullikin. These payments will be treated as having been
received as distributions in full payment in exchange for the stock
redeemed as provided in Section 302(a) of the Code;
(v) The tax basis of the shares of MedPartners/Mullikin Common Stock
received by a Caremark stockholder will be equal to the tax basis of the
Caremark Shares exchanged therefor, excluding any basis allocable to a
fractional share of MedPartners/Mullikin Common Stock for which cash is
received;
(vi) The holding period of the shares of MedPartners/Mullikin Common
Stock received by a Caremark stockholder will include the holding period or
periods of the Caremark Shares exchanged therefor, provided that the
Caremark Shares are held as a capital asset within the meaning of Section
1221 of the Code at the Effective Time.
Caremark has received an opinion from Wachtell, Lipton, Rosen & Katz, its
special counsel, concerning certain of the federal tax consequences of the
Merger, substantially to the effect that the Merger will constitute a
reorganization under Section 368(a) of the Code, and:
(i) No gain or loss will be recognized by Caremark stockholders who
exchange their Caremark Common Stock solely for MedPartners Common Stock in
the Merger (except with respect to cash received in lieu of a fractional
share interest in MedPartners Common Stock, if any);
(ii) The tax basis of the MedPartners Common Stock received by
Caremark stockholders will equal the tax basis of the Caremark Common Stock
surrendered in exchange therefore:
(iii) The holding period of MedPartners Common Stock received by
Caremark stockholders in the Merger will include the period during which
the shares of Caremark Common Stock surrendered in exchange therefore was
held; provided that such Caremark Common Stock was held as a capital asset
by the holder thereof at the Effective Time;
(iv) The receipt of cash in lieu of a fractional shares of
MedPartners/Mullikin Common Stock will be treated as if the fractional
shares were distributed as part of the exchange and then were redeemed by
MedPartners/Mullikin. These payments will be treated as having been
received as distributions in full payment in exchange for the stock
redeemed as provided in Section 302(a) of the Code.
The foregoing discussion is intended only as a summary of the material
federal income tax consequences of the Merger and does not purport to be a
complete analysis or listing of all potential tax effects relevant to a decision
whether to vote in favor of approval and adoption of the Plan of Merger and the
Merger. The discussion does not address the tax consequences arising under the
laws of any state, locality or foreign jurisdiction. Holders of Caremark Shares
are urged to consult their own tax advisors concerning the federal, state, local
and foreign tax consequences of the Merger to them.
NO SOLICITATION OF TRANSACTIONS
Under the Plan of Merger, either MedPartners/Mullikin or Caremark may,
directly or indirectly, furnish information and access, in response to
unsolicited requests therefor, to any corporation, partnership, person or other
entity or group, pursuant to appropriate confidentiality agreements, and may
participate in discussions
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and negotiate with such corporation, partnership, person or other entity or
group concerning any proposal to acquire such party upon a merger, purchase of
assets, purchase of or tender offer for shares of its Common Stock or similar
transaction, if the Board of Directors of MedPartners/Mullikin or Caremark, as
the case may be, determines in its good faith judgment in the exercise of its
fiduciary duties or the exercise of its duties under Rule 14e-2 under the
Exchange Act, after consultation with legal counsel and its financial advisors,
that such action is appropriate in furtherance of the best interest of its
stockholders. Except as described in the previous sentence, MedPartners/Mullikin
or Caremark will not, and will direct each officer, director, employee,
representative and agent of such party not to, directly or indirectly,
encourage, solicit, participate in or initiate discussions or negotiations with
or provide any information to any corporation, partnership, person or other
entity or group concerning any merger, sale of assets, sale of or tender offer
for its shares or similar transactions involving such party.
EXPENSES; BREAKUP FEES
The Plan of Merger provides that all costs and expenses incurred in
connection with the Plan of Merger and the transactions contemplated thereby
shall be paid by the party incurring such expense except that expenses incurred
in connection with filing, printing and mailing the Prospectus-Joint Proxy
Statement and the Registration Statement, shall be shared equally by Caremark
and MedPartners/Mullikin.
If the Plan of Merger is terminated by either MedPartners/Mullikin or
Caremark and within one year after the effective date of such termination such
terminating party is the subject of a Third Party Acquisition Event (as defined
below) with any Person (as defined in Sections 3(a)(9) and 13(d)(3) of the
Exchange Act) (other than a party hereto), then at the time of consummation of
such a Third Party Acquisition Event, such terminating party shall pay to the
non-terminating party a break-up fee of $100 million. Neither party shall enter
into any agreement with respect to any Third Party Acquisition Event which does
not, as a condition precedent to the consummation of such Third Party
Acquisition Event, require such break-up fee to be paid to the non-terminating
party upon such consummation. If a breakup fee becomes due and payable by either
party, and such party fails to pay such amount when due pursuant to the Plan of
Merger and, in order to obtain such payment, suit is commenced which results in
a judgment against such party therefor, the terminating party is required to pay
the non-terminating party's reasonable costs and expenses (including reasonable
attorneys' fees) in connection with such suit, together with interest computed
or any amounts determined to be due pursuant to the Plan of Merger, (computed
from the date upon which such amounts were due and payable pursuant to the Plan
of Merger) and such costs (computed from the dates incurred) at the prime rate
of interest announced from time to time by NationsBank of Georgia, National
Association. The obligations of MedPartners/Mullikin and Caremark to pay breakup
fees shall survive any termination of the Plan of Merger. In the event the
breakup fee becomes payable pursuant to the Plan of Merger, the payment of any
such breakup fee shall be the sole and exclusive remedy of the party receiving
such fee.
For purposes of the Plan of Merger, a "Third Party Acquisition Event" is
deemed to have occurred if: (i) either Caremark or MedPartners/Mullikin, as the
case may be, shall agree to, consummate, or announce its intentions to enter
into any Acquisition Transaction; or (ii) any person (other than a party hereto
or its affiliates) shall have acquired beneficial ownership (as such term is
defined in Rule 13d-3 under the Exchange Act) or the right to acquire beneficial
ownership of, or a new group has been formed which beneficially owns or has the
right to acquire beneficial ownership of, 10% or more of the outstanding
Caremark Common Stock or MedPartners/Mullikin Common Stock or purchase, lease or
otherwise acquire 10% of the assets of Caremark or MedPartners/Mullikin, as the
case may be.
INDEMNIFICATION
The MedPartners/Mullikin Certificate and the MedPartners/Mullikin By-laws
provide for the elimination of directors' liability for monetary damages arising
from a breach of certain fiduciary obligations and for the indemnification of
directors, officers and agents to the full extent permitted by the DGCL. These
provisions generally provide for indemnification in the absence of gross
negligence or willful misconduct and cannot be amended without the affirmative
vote of a majority of the outstanding shares of MedPartners/ Mullikin Common
Stock entitled to vote thereon.
The Plan of Merger provides that all rights to indemnification for acts or
omissions occurring prior to the Effective Time now existing in favor of the
current or former directors, officers and employees of Caremark as provided in
the Caremark Certificate or the Caremark By-Laws shall survive the Merger and
shall continue in effect in accordance with their terms. See "-- Additional
Interests of Certain Persons in the Merger -- Directors' and Officers'
Insurance; Limitation of Liability of Caremark Directors and Officers".
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Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling
MedPartners/Mullikin pursuant to the foregoing provisions, MedPartners/ Mullikin
has been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
OPERATIONS AND MANAGEMENT
OF MEDPARTNERS/MULLIKIN AFTER THE MERGER
OPERATIONS
After consummation of the Merger, MedPartners/Mullikin will operate the
current businesses of MedPartners/Mullikin and Caremark as a combined entity
under the name MedPartners, Inc. On an operational basis, the PPM segment of the
combined Company's business will be managed by essentially the same individuals
who currently manage MedPartners/Mullikin's PPM operation. The other businesses
currently operated by Caremark, i.e., the PBM business, the disease management
business and the international division will be operated by the Surviving
Corporation, under the direction of the current President and Chief Operating
Officer of Caremark, with each division being managed by its current manager as
part of Caremark. No material disposition or restructuring of either
MedPartners/Mullikin or Caremark or any material part thereof is contemplated as
a result of the Merger.
MANAGEMENT
Larry R. House and C. A. Lance Piccolo, as Chairman of MedPartners/Mullikin
and Caremark, respectively, jointly will be responsible for coordinating all
aspects of transition planning and implementation relating to the Merger
contemplated by the Plan of Merger. If either such person ceases to be a
Chairman of his respective company for any reason, such person's successor as
Chairman will assume his predecessor's responsibilities with respect to
transition planning.
Larry R. House will continue as Chairman, President and Chief Executive
Officer of MedPartners/ Mullikin. Pursuant to the Plan of Merger, immediately
prior to the Effective Time, MedPartners/Mullikin will take all necessary action
to cause C. A. Lance Piccolo to be appointed as the Vice Chairman of the
MedPartners/Mullikin and (ii) cause the MedPartners/Mullikin Board of Directors
to consist of 13 members, four of which may be designated by Caremark (the "New
Board"), such that each class of Directors of the New Board contains a number of
directors designated by Caremark as nearly equal in number as is reasonably
possible. Caremark has designated the following individuals to be appointed to
the MedPartners/ Mullikin Board of Directors: C. A. Lance Piccolo, Thomas W.
Hodson, Roger L. Headrick, and Harry M. Jansen Kraemer, Jr. Each committee of
the New Board will contain at least one member that is a Caremark designated
director. If at any time prior to the third anniversary of the Effective Time,
the number of directors designated by Caremark serving, or that would be serving
following the next stockholders' meeting at which directors are to be elected,
as directors of MedPartners/Mullikin or as members of any committee of the New
Board, would not be in proportion to the initial designation of the New Board as
set forth above, then the New Board shall nominate for election at the next
MedPartners/Mullikin stockholders' meeting at which directors are to be elected,
such person or persons as may be requested by the remaining directors designated
by Caremark to ensure that there shall be a number of directors designated by
Caremark (or the remaining directors designated by Caremark) in proportion to
the initial designation of the New Board as set forth above.
Immediately prior to the Effective Time, MedPartners/Mullikin will and will
cause the Surviving Corporation to elect as officers of the Surviving
Corporation, James G. Connelly, as President and Chief Operating Officer of
Caremark, K.J. Michael McDonald, as Vice President -- Disease State Management,
Kristen E. Gibney as Vice President -- Pharmaceutical Services, John M.
Pellettiere, Jr., as Vice President and Controller of Caremark and Michele J.
Hooper, as Vice President -- International, to the extent such persons accept
the office or position so specified.
Certain executives of Caremark are expected to enter into consulting
agreements providing for specified consulting duties with MedPartners/Mullikin
following the Effective Time. See "The Merger -- Additional Interests of Certain
Persons in the Merger -- Consulting Agreements". From time to time prior to
consummation of the Merger, additional decisions may be made with respect to the
management and operations of MedPartners/Mullikin following the Merger.
Additional information concerning directors and executive officers of
Caremark that continue as officers of Caremark ("Continuing Caremark Officers")
or directors of MedPartners/Mullikin (the "New Directors") is set forth below.
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<PAGE> 72
James G. Connelly III, 50, has been the President and Chief Operating
Officer of Caremark since August 1992. Mr. Connelly was the President of a
subsidiary of Caremark from April 1992 to November 30, 1992. From May 1990 to
November 30, 1992, Mr. Connelly was a Group Vice President of Baxter. Prior to
1990, he was a Corporate Vice President of Baxter, responsible for its hospital
supply business group. Mr. Connelly also serves as a director of Boise Cascade
Office Products Corporation.
Kristen E. Gibney, 48, is a vice president of Caremark, responsible for the
Pharmaceutical Services business. From April 1988 to October 1994, Ms. Gibney
was president of the Prescription Services division.
Roger L. Headrick, 60, has been President and Chief Executive Officer of
the Minnesota Vikings Football Club since 1991. Additionally, since June 1989,
Mr. Headrick has been president and chief executive officer of ProtaTek
International, Inc., a bio-process and biotechnology company that develops and
manufactures animal vaccines. Prior to 1989, he was executive vice president and
chief financial officer of The Pillsbury Company, a food manufacturing and
processing company. Mr. Headrick also serves as a director of Crompton & Knowles
Corporation.
Thomas W. Hodson, 49, has been the Senior Vice President and Chief
Financial Officer of Caremark since August 1992. Mr. Hodson was a group vice
president of Baxter, from April 1992 to November 30, 1992 and from 1990 to 1992
he was a senior vice president of Baxter responsible for financial relations,
strategic planning, acquisitions and divestitures and corporate communications.
From 1988 to 1990, Mr. Hodson was a corporate vice president of Baxter.
Michele J. Hooper, 44, is a vice president of Caremark, responsible for the
International business. From 1992 to June 1993, she was president of Caremark's
international alternate site division. From 1988 to 1991, she was president,
Baxter Canada. Ms. Hooper serves as a director of Dayton Hudson Corporation and
PPG Industries, Inc.
Harry M. Jansen Kraemer Jr., 41, is a Vice President and Chief Financial
Officer of Baxter, a leading manufacturer and marketer of healthcare products
and services, having served in that capacity since November 1993. He was
promoted to the Baxter's three-member Office of the Chief Executive in June 1995
and appointed to Baxter's board of directors in November 1995. In addition to
his duties as Chief Financial Officer he is responsible for Baxter's Global
Hospital Business, Global Renal Business, and the Baxter Japan subsidiary. Mr.
Kraemer has been an employee of Baxter since 1982 as Director of Corporate
Development. He was named Corporate Director of Financial Planning and Analysis
in 1984. From 1986 to 1989 Mr. Kraemer served in a variety of positions,
including Vice President, Group Controller for Baxter's hospital and
alternate-site businesses and president of Baxter's Hospitex Division. In 1990,
he was promoted to Vice President, Finance and Operations for Baxter's
global-business group.
K.J. Michael McDonald, 55, is a vice president of Caremark, responsible for
the Disease Management business. He has served as president of the Therapeutic
Services division since April 1992, having also assumed responsibility for the
Specialty Pharmaceutical Services business in 1994. From 1991 to 1992, Mr.
McDonald was vice president and general manager of Therapeutic Services. From
before 1990 to 1991, he held various positions at Baxter.
John M. Pellettiere, Jr., 46, is a Vice President and the Controller of
Caremark. From April to November 30, 1992, he was vice president, financial
operations for Baxter's Alternate Site Business Group. From June 1991 to April
1992, Mr. Pellettiere was senior vice president of a subsidiary of Caremark.
From January 1986 to 1991, he was vice president and controller for Baxter's
Alternate Site Business Group.
C.A. Lance Piccolo, 56, has been Chairman of the Board and Chief Executive
Officer of Caremark since August 1992. From 1987 until November 30, 1992, Mr.
Piccolo was an executive vice president of Baxter and from 1988 until November
30, 1992, he served as a director of Baxter. Mr. Piccolo also serves as a
director of Crompton & Knowles Corporation.
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<PAGE> 73
Summary of Compensation of Certain Continuing Caremark Officers and New
Directors
The following table set forth a summary of the compensation of the named
executive officers of Caremark, all of whom will be either Continuing Caremark
Officers or New Directors, for the years ended December 31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- AWARDS
RESTRICTED --------------
PERFORMANCE SECURITIES
SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS EARNED OPTIONS COMPENSATION
- ---------------------------- ---- -------- -------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
C.A. Lance Piccolo.......... 1995 $514,800 $234,000 $ 0(1) 159,100 shares $ 59,218(2)
Chairman of the Board and 1994 $495,000 $371,106 -- -- $ 55,350
Chief Executive Officer 1993 $495,000 $350,000 -- -- $ 45,288
James G. Connelly III....... 1995 $344,140 $120,000 $ 0(1) 59,000 shares $ 26,535(2)
President and Chief 1994 $329,700 $177,126 -- -- $ 26,728
Operating Officer 1993 $317,000 $165,375 -- -- $ 27,335
Thomas W. Hodson............ 1995 $306,592 $120,000 $ 0(1) 59,000 shares $ 20,527(2)
Senior Vice President and 1994 $294,800 $177,126 -- -- $ 21,589
Chief Financial Officer 1993 $283,500 $165,375 -- -- $ 25,518
Kristen E. Gibney........... 1995 $248,768 $137,300 $ 0(1) 43,700 shares $ 15,864(2)
Vice President 1994 $239,200 $121,444 $19,688(3) 6,200 shares $ 16,177
1993 $207,500 $ 97,700 -- -- $ 20,816
Michele J. Hooper........... 1995 $224,000 $133,300 $ 0(1) 43,700 shares $ 16,429(2)
Vice President 1994 $208,000 $ 92,220 $ 8,750(3) 2,900 shares $ 17,423
1993 $197,000 $ 79,050 -- -- $ 9,256
</TABLE>
- ---------------
(1) No restricted performance shares were earned in 1995 since the earnings per
share ("EPS") threshold was not achieved. No earned unvested shares were
outstanding at the end of 1995.
(2) Other compensation shown for the continuing executive officers in 1995
includes annual contributions by Caremark to defined contribution plans in
the following amounts; Mr. Connelly $11,806; Ms. Gibney $8,800; and Ms.
Hooper $8,515. Other compensation also includes the dollar value of split
dollar life insurance premiums paid by Caremark in the following amounts:
Mr. Connelly $14,729; Ms. Gibney $7,054; and Ms. Hooper $7,914.
(3) Prior to 1995, the value of restricted performance shares granted was
reported in the table. Restricted performance shares were granted in the
amounts indicated to the following Named Officers during 1994 to recognize
promotions. Ms. Gibney 900 shares and Ms. Hooper 400 shares. The shares are
valued at $21,875 which was the closing stock price on the grant date. Of
the shares that were granted to Ms. Gibney and Hooper, 398 and 177 shares,
respectively, were forfeited since the EPS threshold for 1995 was not
achieved. Because shares granted for a given year can be forfeited if the
EPS threshold for that year is not achieved, Caremark has determined that
the more relevant disclosure of restricted performance share holdings is
based on shares earned rather than shares granted which correlates more
closely with the compensation attributed to a continuing executive officer
for that year. Accordingly, information in the table for 1995 reflects
restricted performance share holdings earned in 1995.
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<PAGE> 74
Option Grants
The following table summarized the grants of stock options awarded to the
Continuing Caremark Officers and the New Directors during 1995 under the
Caremark's 1992 Incentive Compensation Program.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED ANNUAL
SECURITIES OPTIONS RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR OPTION
OPTIONS EMPLOYEES OR BASE TERM(2)
GRANTED(#) IN FISCAL PRICE EXPIRATION -----------------------
(1) YEAR ($/SH) DATE 5% 10%
---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
C.A. Lance Piccolo............. 159,100 8.84% $18.63 12-Dec-05 $1,864,652 $4,723,679
James G. Connelly III.......... 59,900 3.32% $18.63 12-Dec-05 $ 702,028 $1,778,431
Thomas W. Hodson............... 59,900 3.32% $18.63 12-Dec-05 $ 702,028 $1,778,431
Kristen E. Gibney.............. 43,700 2.43% $18.63 12-Dec-05 $ 512,164 $1,297,453
Michele J. Hooper.............. 43,700 2.43% $18.63 12-Dec-05 $ 512,164 $1,297,453
</TABLE>
- ---------------
(1) New options granted under Caremark's 1992 Incentive Compensation Program.
All options were granted at 100% of the fair market value of the Common
Stock on the date of the grant and may be exercised within 10 years. The
options will vest in equal annual installments, over a period of three
years. No option may be exercised until after one year from the grant date
except that, in the event of a change of control all outstanding stock
options will vest immediately.
(2) These columns reflect the potential gains from the options listed if the
price per share of Caremark Common Stock appreciates at a rate of 5% and
10%, less the option exercise price, annually through the expiration date
of the options grant. The 5% and 10% assumed rates of appreciation are
prescribed by the SEC for the purpose of this table.
(3) The price per share of Caremark Common Stock and the aggregate value of
Caremark Common Stock outstanding on December 31, 1995 if the assumed 5%
and 10% appreciation from an $18.63 grant price were to occur through the
term of the option in 2005 would be as reflected in table below. There can
be no assurance that the amounts reflected in the table below will be
achieved.
<TABLE>
<CAPTION>
5% ANNUAL 10% ANNUAL
APPRECIATION APPRECIATION
THROUGH THROUGH
DECEMBER 12, 1998 DECEMBER 12, 2005(3) DECEMBER 12, 2005(3)
----------------- -------------------- --------------------
<S> <C> <C> <C>
Price per share of Common Stock... $ 18.63 $30.35 $48.32
Aggregate Value of Common
Stock for the 81,091,353
shares outstanding at
December 31, 1995............... $ 1.5 billion $2.5 billion $3.9 billion
</TABLE>
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<PAGE> 75
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information for fiscal year 1995 concerning
the exercise of stock options and the value of unexercised stock options granted
under Caremark's 1992 Incentive Compensation Program for the Continuing Caremark
Officers and the New Directors.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1995 DECEMBER 31, 1995(2)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C.A. Lance Piccolo........... None None 521,929 562,475 $ 3,096,344 $ 1,712,327
James G. Connelly III........ None None 217,477 249,025 $ 1,331,218 $ 802,836
Thomas W. Hodson............. None None 195,939 340,125 $ 1,282,449 $ 1,189,555
Kristen E. Gibney............ None None 39,165 145,650 $ 282,402 $ 406,459
Michele J. Hooper............ None None 42,471 117,175 $ 189,600 $ 299,591
</TABLE>
- ---------------
(1) Represents the difference between the closing stock price on the date of the
sale and the option price multiplied by the number of shares.
(2) Calculated based on the share price of the Caremark Common Stock on December
29, 1995 (the last business day of fiscal year 1995) of $18.125, less the
option exercise price. An option is in-the-money if the market value of the
Caremark Common Stock subject to the option exceeds the exercise price.
PENSION PLAN TABLE
The table that follows shows the estimated annual benefits payable upon
retirement to Caremark employees under the Caremark International Inc. Pension
Plan (the "Pension Plan") and the Caremark International Inc. Excess Benefit
Retirement Plan (the "Excess Plan"). Benefits exceeding those permitted under
Section 415 of the Code, or based on annual compensation in excess of $150,000
(commencing in 1989 and indexed for inflation), would be paid pursuant to the
Excess Plan.
<TABLE>
<CAPTION>
YEARS OF PARTICIPATION
-----------------------------------------------
FINAL AVERAGE PAY 15 20 25 30
- ----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 200,000 $ 48,900 $ 65,200 $ 81,500 $ 97,800
300,000 75,200 100,200 125,300 150,300
400,000 101,400 135,200 169,000 202,800
500,000 127,700 170,200 212,800 255,300
600,000 153,900 205,200 256,500 307,800
700,000 180,200 240,200 300,300 360,300
800,000 206,400 275,200 344,000 412,800
900,000 232,600 310,200 387,700 465,300
</TABLE>
The majority of the employees (excluding affiliated clinic employees not
eligible for Caremark benefit plans) of Caremark were eligible to participate
during 1995 in the Pension Plan and in the Excess Plan if their benefits under
the Pension Plan exceeded certain levels. The plans provide an annual benefit at
normal retirement (age 65) equal to 1.75% of the average of any employee's final
average compensation (five highest consecutive calendar years of earnings (as
defined in the plans) out of his or her last ten years of earnings), offset by
1.75% of the estimated primary Social Security benefit payable at age 65 (with a
maximum offset of 60%), multiplied by the employee's years of participation in
the plans. The covered compensation for each of the continuing executive
officers is generally the highest five-year average of the aggregate of the
amounts shown in the "Salary" and "Bonus" columns of the Summary Compensation
table.
As of December 31, 1995, Mr. Piccolo had 26 years of participation, Mr.
Connelly had 24 years of participation, Mr. Hodson had 20 years of
participation, Ms. Gibney had 19 years of participation, and Ms. Hooper had 19
years of participation for the purpose of calculating benefits under the Pension
Plan.
Retirement benefits shown are payable at age 65 in the form of a joint and
survivor annuity in the case of married participants or a single life annuity in
the case of unmarried participants. The benefits shown are net
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<PAGE> 76
of the Social Security offset specified by the plan's benefit formula and
therefore do not include Social Security benefits payable from the federal
government.
SUMMARY OF CAREMARK DIRECTORS' COMPENSATION
Officers of Caremark do not receive any additional compensation for serving
as members of the Caremark Board or any of its committees. Non-employee
directors receive an annual retainer of $33,000. Chairmen of standing committees
and members of the executive committee (other than employees) receive an
additional annual retainer of $5,000.
Caremark has adopted the Caremark International Inc. 1992 Stock Option Plan
for Non-Employee Directors (the "Directors Plan"), pursuant to which each
non-employee director receives, in lieu of one-third of that director's annual
retainer, an option to purchase shares of Caremark Common Stock. Under the
Directors Plan, each non-employee director may elect to receive options in lieu
of all or a portion of the remaining two-thirds of that director's annual
retainer. The initial grants under the Directors Plan provide for options in
lieu of all or a portion of the annual retainer that would be paid through the
date of the Annual Meeting of Stockholders in 1998. Subsequent grants under the
Directors Plan will be made on May 1, 1998 and every five years thereafter and
will provide for options in lieu of all or a portion of the annual retainer that
would be paid through the date of the annual stockholders meeting in the fifth
year after the grant date. Option grants to new directors will be made upon
their initial election or appointment to the Caremark Board and will be prorated
according to the number of months remaining until the next scheduled option
grant date. The exercise price of future options granted under the Directors
Plan will not be less than the greater of par value or the fair market value of
the Common Stock on the date of grant. Options granted under the Directors Plan
become exercisable in five annual installments commencing on the May 1 following
the date of grant. Options granted under the Directors Plan become fully
exercisable upon the death or disability of the director or a change in control
of Caremark. A pro rata portion of an option granted under the Directors Plan
will become immediately exercisable upon termination of directorship for any
reason other than death or disability. Options granted under the Directors Plan
cease to be outstanding as of the earlier of ten years and one day after the
grant date or one year after the date on which the director ceases to be a
director of Caremark for any reason.
All of Caremark's directors have elected to receive all of their
compensation payable through the date of the Annual Meeting of Stockholders in
1998 in the form of options.
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BUSINESS OF MEDPARTNERS/MULLIKIN
GENERAL
MedPartners/Mullikin is a leading PPM company that develops, consolidates
and manages integrated health care delivery systems. Through its network of
affiliated group and IPA physicians, MedPartners/ Mullikin provides primary and
specialty health care services to prepaid managed care enrollees and fee-for-
service patients. MedPartners/Mullikin enhances clinic operations by
centralizing administrative functions and introducing management tools, such as
clinical guidelines, utilization review and outcomes measurement. At June 30,
1996, MedPartners/Mullikin operated in 23 states and was affiliated with more
than 5,777 physicians, including 1,461 in group practices, 3,580 through IPA
relationships and 736 hospital-based physicians. MedPartners/Mullikin physicians
provided prepaid health care to over 798,000 enrollees through 45 HMO
relationships.
MedPartners/Mullikin offers medical group practices and independent
physicians a range of affiliation models. These affiliations are carried out by
the acquisition of physician practice management entities or practice assets,
either for cash or through an equity exchange, or by affiliation on a
contractual basis. In all instances, MedPartners/Mullikin enters into long-term
practice management agreements with the affiliated physicians that provide for
the management of the practices by MedPartners/Mullikin while at the same time
allowing the physicians to maintain their clinical independence.
MedPartners/Mullikin's revenue is derived from the provision of
fee-for-service medical services and from contracts with HMOs which compensate
MedPartners/Mullikin and its affiliated physicians on a prepaid basis. In the
prepaid arrangements, MedPartners/Mullikin, 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 health
coverage to the HMOs. In return, MedPartners/Mullikin, through its affiliated
physicians, is responsible for substantially all of the medical services
required by enrollees. In many instances, MedPartners/Mullikin and its
affiliated physicians accept financial responsibility for hospital and ancillary
health care 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/ Mullikin, through its
affiliated physicians, provides the majority of covered health care services to
enrollees and contracts with hospitals and other health care providers for the
balance of the covered services.
MedPartners/Mullikin's strategy is to develop locally prominent, integrated
health care delivery networks that provide high quality, cost-effective health
care in selected geographic markets. MedPartners/Mullikin implements this
strategy through growth in its existing markets, expansion into new markets
through acquisitions and affiliations, creation of strategic alliances with
hospital partners, HMOs and other third-party payors in its market areas, use of
sophisticated information systems and increasing the operational efficiency of,
and reducing costs associated with, operating MedPartners/Mullikin's network.
RECENT DEVELOPMENTS
On March 19, 1996, MedPartners/Mullikin completed a public offering of a
total of 8,250,000 shares of MedPartners/Mullikin Common Stock, 6,632,800 of
which were sold for the account of MedPartners/ Mullikin and 1,617,200 of which
were sold for the account of certain selling stockholders of MedPartners/
Mullikin. The public offering resulted in net proceeds to MedPartners/Mullikin
of approximately $194 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- MedPartners/Mullikin --
Liquidity and Capital Resources".
On March 11, 1996, MedPartners/Mullikin entered into a Plan and Agreement
of Merger to acquire CHS, in exchange for shares of MedPartners/Mullikin Common
Stock. The transaction is to be a tax-free reorganization accounted for as a
pooling of interests. CHS primarily engages in the organization and management
of physician practices which contract with HMOs to provide physician and related
healthcare services to enrollees. CHS currently provides management services to
primary care medical groups and an IPA. Concurrent with, and as a condition to,
the consummation of the CHS merger, MedPartners/Mullikin will acquire the assets
of New Management, which is owned by the beneficial owners of 50% of CHS. CHS
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<PAGE> 78
provides certain financial services to New Management, which is engaged in the
business of providing certain management and administrative services to West
Hills Hospital. MedPartners/Mullikin has filed a Registration Statement on Form
S-4 with the SEC with respect to the shares of MedPartners/Mullikin Common Stock
to be issued to the stockholders of CHS and the partners of New Management in
connection with such acquisition. Consummation of this acquisition is subject to
a number of conditions, usual in a transaction of this type, including: that the
stockholders of CHS and the partners of New Management approve the transaction;
that the transaction qualify for pooling of interests accounting treatment; and
that the transaction qualify as a tax free reorganization. There is no guarantee
that such conditions will be met. If such conditions are not met, the
acquisition of CHS and New Management may not be consummated. See "Pro Forma
Condensed Financial Information" and the Financial Statements beginning at page
F-1.
On June 28, 1996, MedPartners/Mullikin entered into a Plan and Agreement of
Merger to acquire Summit, in exchange for shares of MedPartners/Mullikin Common
Stock. The transaction is to be a tax free reorganization accounted for as a
pooling of interests. Summit is a multi-specialty group of approximately 70
physicians which serves northern New Jersey. Concurrently with, and as a
condition to, the consummation of the acquisition of Summit,
MedPartners/Mullikin or its subsidiaries will acquire the assets of MRA, which
owns certain real estate and equipment used in the operations of Summit. MRA is
owned by 54 of the 59 shareholders of Summit. MedPartners/Mullikin intends to
file a Registration Statement with the SEC with respect to the shares of
MedPartners/Mullikin Common Stock to be issued to the shareholders of Summit and
the partners of MRA in connection with such acquisition. Consummation of this
acquisition is subject to a number of conditions, including that the
shareholders of Summit and the partners of New Management approve the
transaction, that the transaction qualify as a tax free reorganization and other
conditions usual in transactions of this type. In addition, the closing of the
transaction is conditioned upon the receipt by the parties of a letter from
Ernst & Young LLP, MedPartners/Mullikin's independent auditors, that the
transaction will qualify for pooling of interests accounting treatment. See
"Notes to Pro Forma Condensed Financial Information". There is no guarantee that
such conditions will be met. If such conditions are not met, the acquisition of
Summit and MRA may not be consummated.
On July 3, 1996, MedPartners/Mullikin entered into a Plan and Agreement of
Merger to acquire Cardinal in exchange for shares of MedPartners/Mullikin Common
Stock. The transaction is to be a tax-free reorganization accounted for as a
pooling of interests. Cardinal is a multi-specialty group of 75 physicians which
serves the Triangle area in Raleigh-Durham and includes Research Triangle Park.
In addition to the main campus, Cardinal provides services at 16 clinical
facilities and 15 satellite locations. Cardinal is also affiliated with almost
500 physicians through three IPAs, including Cardinal IPA, Piedmont Physicians
Alliance, Inc. and Eastern Carolina Primary Care Alliance, Inc. The three IPAs,
which are in the early stages of development, already have contracts with five
managed care companies providing service to almost 6,000 enrollees.
MedPartners/Mullikin intends to file a Registration Statement with the SEC with
respect to the shares of MedPartners/Mullikin Common Stock to be issued to the
shareholders of Cardinal in connection with such acquisition. Consummation of
this acquisition is subject to a number of conditions, including that the
shareholders of Cardinal approve the transaction, that the transaction qualify
as a tax free reorganization and other conditions usual in transactions of this
type. In addition, the closing of the transaction is conditioned upon the
receipt by the parties of a letter from Ernst & Young LLP,
MedPartners/Mullikin's independent auditors, that the transaction will qualify
for pooling of interests accounting treatment. See "Notes to Pro Forma Condensed
Financial Information". There is no guarantee that such conditions will be met.
If such conditions are not met, the acquisition of Cardinal may not be
consummated.
On July 24, 1996, MedPartners/Mullikin announced that it had entered into a
Plan and Agreement of Merger to acquire Emergency Professional Services, in
exchange for shares of MedPartners/Mullikin Common Stock. The transaction is to
be a tax free reorganization accounted for as a pooling of interests. Emergency
Professional Services provides emergency department contract management,
in-house physician staff services and staffing to 16 hospitals and six urgent
care centers in northern Ohio and western Pennsylvania. The professional staff
of Emergency Professional Services includes 115 physicians, all of whom are
individual independent contractors. MedPartners/Mullikin intends to file a
Registration Statement with the SEC with respect to the shares of
MedPartners/Mullikin Common Stock to be issued to the shareholders of Emergency
Professional Services in connection with such acquisition. Consummation of this
acquisition is
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subject to a number of conditions, usual in a transaction of this type,
including: that the shareholders of Emergency Professional Services approve the
transaction; that the transaction qualify for pooling of interests accounting
treatment; and that the transaction qualify as a tax free reorganization. There
is no guarantee that such conditions will be met. If such conditions are not
met, the acquisition of Emergency Professional Services may not be consummated.
See "Pro Forma Condensed Financial Information" and the "Financial Statements"
beginning at page F-1.
INDUSTRY
The Health Care Financing Administration ("HCFA") estimates that national
health spending in 1994 was approximately $1 trillion, with physicians
controlling more than 80% of the overall expenditures. The American Medical
Association reports that approximately 565,000 physicians are actively involved
in patient care in the United States, with a growing number participating in
multi-specialty or single-specialty groups. The physician practice management
market is estimated at $200 billion.
Concerns over the accelerating cost of health care have resulted in the
increasing prominence of managed care. As markets evolve from traditional
fee-for-service medicine to managed care, HMOs and health care providers
confront market pressures to provide high quality health care in a
cost-effective manner. Employer groups have begun to bargain collectively in an
effort to reduce premiums and to bring about greater accountability of HMOs and
providers with respect to accessibility, choice of provider, quality of care and
other indicators of consumer satisfaction. The focus on cost-containment has
placed small to mid-sized physician groups and solo practices at a disadvantage
because they typically have higher operating costs and little purchasing power
with suppliers, they often lack the capital to purchase new technologies that
can improve quality and reduce costs and they do not have the cost accounting
and quality management systems necessary for entry into sophisticated
risk-sharing contracts with payors.
Industry experts expect the medical delivery system to evolve into a system
where the primary care physician, often part of a multi-specialty group, manages
and directs health care expenditures. As a result of these developments, primary
care physicians have increasingly become the conduit for the delivery of medical
care by acting as "case managers" and directing referrals to certain
specialists, hospitals, alternate-site facilities and diagnostic facilities. By
contracting directly with payors, organizations that control primary care
physicians are able to reduce the administrative overhead expenses incurred by
HMOs and insurers and thereby reduce the cost of delivering medical services.
As a result of the trends toward increased HMO enrollment and physician
membership in group medical practices, health care providers have sought to
reorganize themselves into health care delivery systems that are better suited
to the managed care environment. Physician groups and IPAs are joining with
hospitals and other institutional providers in various ways to create vertically
integrated delivery systems which provide medical and hospital services ranging
from community-based primary medical care to specialized inpatient services.
These health care delivery systems contract with HMOs to provide hospital and
medical services to enrollees under full risk contracts, under which providers
assume the obligation of providing both the professional and institutional
components of covered health care services to the HMO enrollees.
In order to compete effectively in such an emerging environment, physicians
are concluding that they must have control over the delivery and financial
impact of a broader range of health care services through the acceptance of
global capitation. To this end, groups of independent physicians and medium to
large medical groups are taking steps to assume responsibility and risk for
health care services which they do not provide, such as hospitalization.
Physicians are increasingly abandoning traditional private practice in favor of
affiliations with larger organizations, such as MedPartners/Mullikin, which
offer skilled and innovative management, sophisticated information systems and
capital resources. Many payors and their intermediaries, including governmental
entities and HMOs, are increasingly looking to outside providers of physician
services to develop and maintain quality outcomes, management programs and
patient care data. In addition, such payors and intermediaries look to share the
risk of providing health care services through capitation arrangements which
provide for fixed payments for patient care over a specified period of time.
While the acceptance of greater responsibility and risk provides the opportunity
to retain and enhance market share and operate at a higher level of
profitability, medical groups and independent physicians are concluding that the
acceptance of global capitation carries with it significant requirements for
infrastructure, information systems,
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capital, network resources and financial and medical management. Physicians are
increasingly turning to organizations such as MedPartners/Mullikin to provide
the resources necessary to function effectively in a managed care environment.
STRATEGY
MedPartners/Mullikin's strategy is to develop locally prominent, integrated
health care delivery networks that provide high quality, cost-effective health
care in selected geographic markets. The key elements of this strategy are as
follows:
Expansion of Existing Markets. MedPartners/Mullikin's principal
strategy for expanding its existing markets is through the acquisition of
(through purchase, merger or otherwise) or affiliation with physicians and
medical groups within those markets. MedPartners/Mullikin seeks to acquire
or otherwise affiliate with physician groups, IPAs and other providers with
significant market shares in their local markets and established
reputations for providing quality medical care in order to increase market
share in targeted regions. MedPartners/Mullikin also develops
multi-specialty physician networks that are designed to meet the specific
medical needs of a targeted geographic market. MedPartners/Mullikin seeks
to further enhance its existing market share by increasing enrollment and
fee-for-service business in its existing clinics and IPAs.
MedPartners/Mullikin anticipates further internal growth by expanding more
of its payor contracts to global capitation through PPN. Additionally,
MedPartners/Mullikin believes that increasing marketing activities,
enhancing patient service and improving the accessibility of care will
increase MedPartners/Mullikin's market share.
Expansion into New Markets. MedPartners/Mullikin expands into new
markets through the acquisition of or affiliation with other physician
practice management entities and medical groups. MedPartners/Mullikin
believes it is a leading consolidator in the physician practice management
industry and that the MME acquisition was the first major consolidation in
the industry, followed by the PPSI Merger and the proposed Merger. As a
result of the consolidation of physician practices and the entry of other
physician practice management companies into the market,
MedPartners/Mullikin's management has determined that it is important for
MedPartners/Mullikin to accelerate its rate of expansion through
acquisitions and mergers with entities which already have significant
market penetration. MedPartners/ Mullikin believes that by concentrating on
larger acquisitions and continuing to expand its core of physician groups
and IPAs, as well as its network of hospital affiliations, it will be able
to create vertically integrated health care delivery systems and enhance
its competitive position. MedPartners/Mullikin continually reviews
potential acquisitions and physician affiliations and is currently in
preliminary negotiations with various candidates.
Strategic Alliances. MedPartners/Mullikin believes that strategic
alliances with hospitals and health plans improve the delivery of managed
health care. MedPartners/Mullikin has entered into arrangements with
various hospitals under which a portion of the capitation revenue received
from HMOs for institutional care of enrollees assigned to designated
Company clinics and IPA physicians is deposited into "subcapitated risk
pools" managed by MedPartners/Mullikin. MedPartners/Mullikin believes that
such arrangements can be enhanced through the implementation of the
Restricted License held by PPN. Under these arrangements, the hospital is
at risk in the event that the costs of institutional care exceed the
available funds and MedPartners/Mullikin shares in cost savings and revenue
enhancements. MedPartners/Mullikin believes that through these and other
similar alliances, the providers will devote greater resources to ensuring
the wellness of HMO enrollees, provide high-quality and cost-effective care
and seek to retain and expand their respective market shares. As a result,
it is anticipated that the overall cost of providing care will be
contained, rendering both MedPartners/Mullikin and the participating
providers more appealing to both HMOs and medical care consumers.
MedPartners/ Mullikin and its affiliated physicians have also established
relationships with HMOs pursuant to which MedPartners/Mullikin and the HMOs
share proportionately in the risks and rewards of market trends.
Sophisticated Information Systems. MedPartners/Mullikin believes that
information technology is critical to the growth of integrated health care
delivery systems and that the availability of detailed
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clinical data is fundamental to quality control and cost containment.
MedPartners/Mullikin develops and maintains sophisticated management
information systems which collect and analyze clinical and administrative
data to allow MedPartners/Mullikin to effectively control overhead
expenses, maximize reimbursement and provide effective utilization
management. MedPartners/Mullikin evaluates the administrative and clinical
operations of affiliated practices and re-engineers these functions as
appropriate in conjunction with the implementation of
MedPartners/Mullikin's management information systems to maximize the
benefits of the systems.
Increased Operational Efficiencies and Cost
Reductions. MedPartners/Mullikin is seeking to increase its operating
efficiency through expansion of its market area and number of HMO
enrollees, refinement of its utilization management programs that deliver
information used by its physicians to monitor and improve their practice
patterns, increased specialization, the development of additional in-house
services and through increased emphasis on outpatient care.
MedPartners/Mullikin's networks take advantage of economies of scale
through centralized billing, scheduling, information management and other
functions.
RECENT MAJOR ACQUISITIONS
On November 29, 1995, a business combination between MedPartners and MME
was consummated, pursuant to which MedPartners acquired MME by exchanging a
total of 13,476,855 shares of MedPartners/ Mullikin Common Stock for all of the
outstanding partnership interests of MME. In connection with the MME
acquisition, MedPartners/Mullikin also issued a total of 547,010 shares of its
Common Stock to acquire a controlling interest in three real estate partnerships
that own properties leased to and utilized in connection with the business of
MedPartners/Mullikin. The transaction, which was consummated as a tax-free
reorganization and pooling of interests for accounting purposes, was valued at
approximately $413 million. See the Consolidated Financial Statements of
MedPartners/Mullikin included elsewhere in this Prospectus-Joint Proxy
Statement.
On February 22, 1996, MedPartners/Mullikin acquired PPSI, a publicly traded
physician management company based in Redlands, California, in exchange for
approximately 10,983,346 shares of MedPartners/ Mullikin Common Stock having a
total value of approximately $343.0 million (the "PPSI Merger"). The PPSI Merger
was a tax-free exchange accounted for as a pooling of interests. See the
Consolidated Financial Statements of MedPartners/Mullikin included elsewhere in
this Prospectus-Joint Proxy Statement.
In addition to growth through the acquisition of physician groups, the MME
acquisition and the PPSI Merger, MedPartners/Mullikin has consummated business
combinations with MEDCTR, Inc., a family medicine provider located in Ohio,
Vanguard Healthcare Group, Inc., an obstetrics/gynecology practice management
entity operating in the Philadelphia and New Jersey areas, Texas Back Institute,
Inc. and its affiliated medical practice, a spine care center operating in Texas
and Retina and Vitreous Associates of Alabama, P.C., an ophthalmology practice
in Alabama. MedPartners/Mullikin issued a total of 2,788,263 shares of
MedPartners/Mullikin Common Stock in connection with these additional
acquisitions. See the Consolidated Financial Statements of MedPartners/Mullikin
included elsewhere in this Prospectus-Joint Proxy Statement.
Prior to the 1995 Mergers, MedPartners had affiliated with 190 physicians
through December 31, 1994. At June 30, 1996 MedPartners/Mullikin had affiliated
with 5,777 physicians.
DEVELOPMENT AND OPERATIONS
Prior to affiliation with MME, MedPartners concentrated its development
efforts in the southeastern United States, affiliating primarily with physician
groups who practice on a fee-for-service basis. With the MME and PPSI
organizations, MedPartners/Mullikin acquired additional business models,
specifically designed to operate efficiently in the capitated managed care
environment. These business models, which are replicable and flexible, allow
MedPartners/Mullikin to capitalize on the full range of market opportunities in
the physician practice management industry and enable MedPartners/Mullikin to
build integrated physician
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networks attractive to payors of all types. MedPartners/Mullikin has networks
currently under development in 23 states.
To meet payor demand for price competitive, quality services,
MedPartners/Mullikin utilizes a market-based approach that incorporates primary
care and specialty physicians into a network of providers serving a targeted
geographic area. MedPartners/Mullikin engages in research activities and market
analysis to determine the network configuration for a particular market.
Typically, MedPartners/Mullikin aims to achieve an equal number of primary care
physicians and specialists in each network. Primary care includes family
practice, internal medicine, pediatrics and obstetrics/gynecology. Key
specialties include orthopedics, cardiology, neurosciences, urology, surgery,
ear, nose and throat and ophthalmology. At certain locations, affiliated
physicians and support personnel operate centers for diagnostic imaging, urgent
care, cancer management, mental health treatment and health education. Network
physicians also treat fee-for-service patients on a per-occurrence basis.
After-hours care is available in several of MedPartners/Mullikin's clinics. Each
network is configured to contain, when complete, the physician services
necessary to capture at least 20% of market share and to provide at least 90% of
the physician services required by payors. MedPartners/Mullikin markets its
networks to managed care and third-party payors, referring physicians and
hospitals.
Affiliated Physicians. The relationship between MedPartners/Mullikin and
its affiliated physicians is set forth in asset purchase and practice management
agreements. Through the asset purchase agreement, MedPartners/Mullikin acquires
the assets utilized in the practice and may also assume certain leases and other
contracts of the physician group. The practice management agreements generally
have terms ranging from 20 to 44 years, although certain of the agreements
acquired in the PPSI Merger have terms as short as ten years, and provide the
physicians with access to capital, management expertise, sophisticated
information systems and managed care contracts, while enabling affiliated
physicians to retain their autonomy through their professional corporations,
thereby maintaining governance of physician-specific issues and clinical
control.
Under a practice management agreement, a physician group delegates to
MedPartners/Mullikin administrative, management and support functions required
in connection with its medical practice. MedPartners/Mullikin provides the
physician group with the equipment and facilities used in its medical practice,
manages practice operations and employs substantially all of the practice's
non-physician personnel, except certain allied health professionals, such as
nurses and physical therapists. The physicians are responsible for all decisions
regarding patient health care, including diagnosis, treatment, surgery and
therapy. The agreement also provides that the affiliated professional
corporation will not compete with MedPartners/ Mullikin. See also Notes 1 and 10
to Consolidated Financial Statements of MedPartners/Mullikin included elsewhere
in this Prospectus-Joint Proxy Statement.
Pursuant to the practice management agreement, the affiliated professional
corporation assigns to MedPartners/Mullikin all or substantially all its rights
and interest in the revenue it receives. For providing services pursuant to such
agreement, the physicians receive compensation, as negotiated, either as a fixed
percentage of net revenues, a pre-determined salary and incentive arrangement,
or an arrangement based directly on the profitability of the practice.
Physicians in practice groups acquired by MedPartners/Mullikin typically
sign three-year employment agreements with the affiliated medical group
containing noncompetition covenants. The employment agreements provide for a
physician to be paid either a fixed salary or pursuant to a negotiated formula.
The medical group provides the physician with health, death and disability and
professional liability insurance and other benefits. Physicians are also paid
for any management responsibilities they assume.
MedPartners/Mullikin enhances growth in its practices by expanding managed
care arrangements, assisting in the recruitment of new physicians and expanding
and adding services that have historically been performed outside of the
practices. MedPartners/Mullikin works closely with affiliated physicians in
targeting and recruiting physicians and in merging sole practice or single
specialty groups into the affiliated physician groups. MedPartners/Mullikin
assists in the development of new and expanded ancillary services by providing
the needed capital resources and management services. MedPartners/Mullikin
recognizes and develops opportunities to provide services throughout a market by
positioning its practices so that an entire market is
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covered geographically. This approach provides patients with convenient medical
facilities and services and responds to coverage criteria essential to payors.
IPAs. MedPartners/Mullikin's networks include MIPA, which operates in 16
separate geographic regions in southern and northern California, as well as four
IPAs acquired in the PPSI Merger. Formed in 1989, MIPA currently has
approximately 3,450 primary care and specialist physicians and approximately
139,000 HMO enrollees in its network. The PPSI IPAs, operating in the Inland
Empire region of California, have approximately 75 physicians and approximately
35,000 HMO enrollees. An IPA allows individual practitioners to access patients
in their area through contracts with HMOs without having to join a group
practice or sign exclusive contracts, and also coordinates utilization review
and quality assurance programs for its affiliated physicians. In addition to
providing access to HMO contracts, an IPA offers other benefits to physicians
seeking to remain independent, including economies of scale in the marketplace,
enhanced risk-sharing arrangements and access to other strategic alliances
within MedPartners/Mullikin's network. MedPartners/Mullikin believes that the
expansion of its IPA operations is important to the future growth of
MedPartners/Mullikin, because many of the physicians who contract with
MedPartners/Mullikin's IPAs have a significant number of patients who do not
currently participate in a prepaid health plan and because such physicians may
facilitate the formation of physician group practices which may become
affiliated with, or acquired by, MedPartners/Mullikin. MedPartners/Mullikin
identifies IPAs that need access to capitated HMO contracts, and such IPA
organizations typically agree to assign their existing HMO contracts to
MedPartners/Mullikin. Individual physicians then enter into contracts directly
with the IPA. MedPartners/ Mullikin believes that the expansion of its IPAs will
enable it to increase its market share with relatively low risk because of the
low incremental investment required to recruit additional physicians.
MedPartners/Mullikin has practice management agreements with its affiliated
IPAs pursuant to which it provides management and administrative services
including physician credentialing, contracting, accounting and marketing.
However, since IPA physicians are independent physicians with their own medical
practices, unlike the agreements with affiliated practice groups, the scope of
services provided to an IPA is limited to administrative, accounting,
contractual and marketing services. Pursuant to these agreements, substantially
all of the IPA's revenues are assigned to MedPartners/Mullikin and the
physicians receive payments similar to those provided in the practice management
agreements.
HMOs. MedPartners/Mullikin, through its affiliated physicians, began
contracting with HMOs to provide health care on a capitated reimbursement basis
in 1975. Under these contracts, which typically are automatically renewed on an
annual basis, MedPartners/Mullikin provides virtually all covered medical
services and receives a fixed monthly capitation payment from HMOs for each
member who chooses an affiliated physician as his or her primary care physician.
The capitation amount may be fixed, based upon a percentage of premium, or
adjusted based on the age and/or sex of the HMO enrollee. Contracts for prepaid
health care with HMOs accounted for approximately 50.0% of
MedPartners/Mullikin's pro forma combined net revenue for the second quarter of
1996. MedPartners/Mullikin currently has 45 relationships with HMOs of which the
relationships with PacifiCare, Health Net and CaliforniaCare accounted for
approximately 29% of net revenue of MedPartners/Mullikin for the six months
ended June 30, 1996.
To the extent that enrollees require more care than is anticipated or
require supplemental medical care which is not otherwise reimbursed by the HMOs
or other payors, aggregate capitation payments may be insufficient to cover the
costs associated with the treatment of enrollees. Stop-loss coverage is
maintained, which mitigates the effect of occasional high utilization of health
care services. At June 30, 1996, over 798,000 HMO enrollees were covered
beneficiaries for professional services in MedPartners/Mullikin's network, of
which approximately 622,000 were served by affiliated professionals and
approximately 176,000 were served by IPA professionals. These patients are
covered under either commercial (typically employer-sponsored) or senior
(Medicare-funded) HMOs. Higher capitation rates are typically received for
senior patients because their medical needs are generally greater, and,
consequently, the cost of covered care is higher. As of June 30, 1996,
MedPartners/Mullikin's HMO enrollees comprised approximately 694,093 commercial
enrollees and approximately 66,457 senior (over age 65) enrollees.
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MedPartners/Mullikin seeks to contract with the same HMOs on a capitated or
similar prepaid basis to provide institutional care to substantially all the
enrollees who have selected an affiliated physician as their primary health care
provider. Under its institutional capitation agreements with HMOs, MedPartners/
Mullikin is obligated to pay for, in addition to inpatient hospitalization
costs, costs for ambulance service, emergency room facilities, outpatient
surgeries, home nursing care, skilled nursing care and, in some cases, pharmacy
and out-of-area services. At June 30, 1996, MedPartners/Mullikin was receiving
institutional capitation payments for approximately 366,000 enrollees.
Hospitals. MedPartners/Mullikin operates Pioneer Hospital, a 99-bed acute
care hospital located in Artesia, California, and USFMC, an 102-bed acute care
hospital in Montclair, California. Many of the physicians on professional staff
rosters of these hospitals are either employed by an affiliated professional
corporation or under contract with MedPartners/Mullikin's IPAs. The traditional
hospital-based physicians, such as emergency room physicians, anesthesiologists,
pathologists, radiologists and cardiologists, are all supplied through
contractual arrangements with an affiliated corporation. Several of
MedPartners/Mullikin's medical clinics are located sufficiently close to Pioneer
Hospital to allow the enrollees who utilize these clinics to also utilize
Pioneer Hospital. Under the HMO contracts, MedPartners/Mullikin is obligated to
pay for inpatient hospitalization and related services. Over 85% of Pioneer
Hospital's and approximately 50% of USFMC's daily census is made up of
MedPartners/Mullikin HMO enrollees. MedPartners/Mullikin has entered into
agreements with other hospitals in California for the delivery of hospital
services to the remainder of its enrollees. In each instance, the institutional
capitation payments received from HMOs are placed at risk for the benefit of the
applicable hospital, MedPartners/Mullikin and its affiliated physicians.
MedPartners/ Mullikin and these providers split any savings realized if hospital
utilization declines due to the success of MedPartners/Mullikin's programs for
early intervention, wellness and outpatient treatment.
Hospital-Based Physician Operations. MedPartners/Mullikin's Hospital-Based
Physician ("HBP") operations acquired in the PPSI Merger organizes and manages
physicians and other health care professionals engaged in the delivery of
emergency, radiology and teleradiology services, hospital-based primary care and
temporary staffing and support services to hospitals, clinics, managed care
organizations and physician groups. NorthWest Emergency Physicians ("NEP"), an
affiliate of PPSI, is the largest provider of emergency physician contract
management services to hospital-based emergency departments in the Pacific
Northwest (Washington, Oregon and Alaska). NEP's emergency department contracts
provide physician coverage for 15 hospital emergency departments, 24 hours a day
throughout the year. Team Health, also an affiliate of PPSI, principally
operates in the Southeastern United States and currently serves 57 hospital
emergency departments in Tennessee, Kentucky, Alabama, Arkansas and Virginia,
and 15 hospital radiology departments. Under contracts with hospitals and other
clients, MedPartners/Mullikin's HBP operations identify and recruit physicians
and other health care professionals for admission to a client's medical staff,
monitor the quality of care and proper utilization of services and coordinate
the ongoing scheduling of staff physicians who provide clinical coverage in
designated areas of care. Hospitals have found it increasingly difficult to
recruit, schedule, retain and appropriately compensate hospital-based physician
specialists required to operate hospital emergency, radiology and other
departments. As a consequence, a large number of hospitals have turned to
contract management firms as a more cost-effective and reliable alternative to
the development of in-house physician staffing.
INFORMATION SYSTEMS
MedPartners/Mullikin develops and maintains integrated information systems
to support its growth and acquisition plans. MedPartners/Mullikin's overall
information systems design is open, modular and flexible. MedPartners/Mullikin
is implementing an individual patient electronic medical record ("EMR") to
complement primary practice management and billing functions.
MedPartners/Mullikin has configured its systems to give affiliated physicians
and their staff efficient and rapid access to complex clinical data.
MedPartners/ Mullikin's use of the EMR enhances operational efficiencies through
automation of many routine clinical functions, as well as the capacity to link
"physician-specific" treatment protocols by diagnosis, thus allowing physicians
to have treatments checked against pre-defined protocols at the time of service.
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Effective and efficient access to key clinical patient data is critical in
improving costs and quality outcomes as MedPartners/Mullikin enters into more
capitation contracts. MedPartners/Mullikin utilizes its existing information
systems to improve productivity, manage complex reimbursement procedures,
measure patient care satisfaction and outcomes of care, and integrate
information from multiple facilities throughout the care spectrum. These systems
allow MedPartners/Mullikin to analyze clinical and cost data so that it is able
to determine effectively thresholds of profitability under various capitation
arrangements.
COMPETITION
The PPM industry is highly competitive. The industry is also subject to
continuing changes in the provision of services and the selection and
compensation of providers. In addition, certain companies, including hospitals
and insurers, are expanding their presence in the physician management market.
The provision of physician contract management services for hospitals and other
health care providers is also highly competitive, and MedPartners/Mullikin's
hospital-based operations compete with national, regional and local companies in
providing its services. Certain of MedPartners/Mullikin's competitors are larger
and better capitalized, provide a wider variety of services, may have greater
experience in providing health care management services and may have longer
established relationships with purchasers of such services.
GOVERNMENT REGULATION
As a participant in the health care industry, MedPartners/Mullikin's
operations and relationships are subject to extensive and increasing regulation
by a number of governmental entities at the federal, state, and local levels.
MedPartners/Mullikin believes its operations are in material compliance with
applicable laws. Nevertheless, because of the uniqueness of the structure of the
relationship with the physician groups, many aspects of MedPartners/Mullikin's
business operations have not been the subject of state or federal regulatory
interpretation and there can be no assurance that a review of
MedPartners/Mullikin's or the affiliated physicians' business by courts or
regulatory authorities will not result in a determination that could adversely
affect the operations of MedPartners/Mullikin or the affiliated physicians or
that the health care regulatory environment will not change so as to restrict
MedPartners/Mullikin's or the affiliated physicians' existing operations or
their expansion.
Approximately 10% of the revenues of MedPartners/Mullikin's affiliated
physician groups is derived from payments made by government-sponsored health
care 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
MedPartners/Mullikin. There are also state and federal civil and criminal
statutes imposing substantial penalties, including civil and criminal fines and
imprisonment, on health care providers that fraudulently or wrongfully bill
governmental or other third-party payors for health care services.
MedPartners/Mullikin believes it is in material compliance with such laws, but
there can be no assurance that MedPartners/Mullikin's activities will not be
challenged or scrutinized by governmental authorities.
The laws of many states prohibit business corporations such as
MedPartners/Mullikin from practicing medicine and employing physicians to
practice medicine. MedPartners/Mullikin performs only non-medical administrative
services, does not represent to the public or its clients that it offers medical
services and does not exercise influence or control over the practice of
medicine by the physicians with whom it contracts. Accordingly,
MedPartners/Mullikin believes that it is not in violation of applicable state
laws relating to the practice of medicine. In addition to prohibiting the
practice of medicine, numerous states prohibit entities like
MedPartners/Mullikin from engaging in certain health care-related activities,
such as fee-splitting with physicians.
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
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Medicaid and other third-party payor patients. Although MedPartners/Mullikin
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
United States Congress in the 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 MedPartners/Mullikin believes it is in compliance with such
legislation, future regulations could require MedPartners/Mullikin to modify the
form of its relationships with physician groups. Some states have also enacted
similar self-referral laws and MedPartners/Mullikin believes it is likely that
more states will follow. MedPartners/Mullikin believes that its practices fit
within exemptions contained in such statutes. Nevertheless, expansion of the
operations of MedPartners/Mullikin to certain jurisdictions may require
structural and organizational modifications of MedPartners/Mullikin's
relationships with physician groups to comply with new or revised state
statutes.
On March 5, 1996, the DOC issued the Restricted License to PPN in
accordance with the requirements of the Knox-Keene Act. The Restricted License
authorizes PPN to operate as a health care service plan in the State of
California. MedPartners/Mullikin, through PPN, intends to utilize the Restricted
License for purposes of contracting with HMOs for a broad range of health care
services, including both institutional and professional medical services,
through a consolidated contract with the HMO. The Knox-Keene Act and the
regulations promulgated thereunder subject entities which are licensed as health
care service plans in California to substantial regulation by 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 which
fail to comply with such requirements. PPN is a newly created organization
without an operating history and there is no assurance that the DOC will view
its operations to be fully in compliance with applicable laws and regulations.
The operation of Pioneer Hospital and USFMC is highly regulated. Pioneer
Hospital and USFMC are accredited by the Joint Commission on Accreditation of
Healthcare Organizations. Accreditation from the Joint Commission on
Accreditation of Healthcare Organizations allows Pioneer Hospital to serve
Medicare patients and provides authorization from the California Department of
Health Services and the Los Angeles County Department of Health to operate as a
licensed hospital facility. Each of Pioneer Hospital and USFMC is licensed and
regulated as a general acute care hospital by the State of California Department
of Health Services. Additionally, each of Pioneer Hospital and USFMC has a
clinical laboratory license from the State of California Department of Health
Services, a clinical laboratory license for its cardio-pulmonary laboratory and
a pharmacy license for its inpatient pharmacy.
Because the affiliated practice groups remain separate legal entities, they
may be deemed competitors subject to a range of antitrust laws which prohibit
anti-competitive conduct, including price fixing, concerted refusals to deal and
division of market. MedPartners/Mullikin intends to comply with such state and
federal laws as may affect its development of integrated health care delivery
networks, but there can be no assurance that a review of MedPartners/Mullikin's
business by courts or regulatory authorities will not result in a determination
that could adversely affect the operation of MedPartners/Mullikin and its
affiliated physician groups.
As a result of the continued escalation of health care costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the United States Congress and state
legislatures relating to health care reform. There can be no assurance as to the
ultimate content, timing or effect of any health care reform legislation, nor is
it possible at this time to estimate the impact of potential legislation, which
may be material, on MedPartners/Mullikin.
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LEGAL PROCEEDINGS
MedPartners/Mullikin is named as a defendant in various legal actions
arising primarily out of services rendered by physicians employed by its
affiliated physician entities and Pioneer Hospital and USFMC, personal injury
and employment disputes. In addition, certain of its affiliated medical groups
are named as defendants in numerous actions alleging medical negligence on the
part of their physicians. In certain of these actions, MedPartners/Mullikin's
and the medical group's insurance carrier has either declined to provide
coverage or has provided a defense subject to a reservation of rights.
MedPartners/Mullikin's management does not view any of these actions as likely
to result in an uninsured award which would have a material adverse effect on
MedPartners/Mullikin's financial condition, results of operations or liquidity.
EMPLOYEES
As of June 30, 1996, MedPartners/Mullikin, including its affiliated
professional entities, employed 9,433 people on a full-time equivalent basis.
CORPORATE LIABILITY AND INSURANCE
MedPartners/Mullikin's business entails an inherent risk of claims of
physician professional liability. To protect its overall operations from such
potential liabilities, MedPartners/Mullikin has a multi-tiered corporate
structure and preserves the operational integrity of each of its operating
subsidiaries. In addition, MedPartners/Mullikin maintains professional liability
insurance, general liability and other customary insurance on a claims-made and
modified occurrence basis, in amounts deemed appropriate by management based
upon historical claims and the nature and risks of the business, for all of the
affiliated physicians, practices and operations. This insurance includes "tail"
coverage for claims against MedPartners/Mullikin's affiliated medical
organizations, including those acquired from Caremark, to cover incidents which
were or are incurred but not reported during the periods for which the related
risk was covered by "claims made" insurance. There can be no assurance that a
future claim will not exceed the limits of available insurance coverage or that
such coverage will continue to be available.
Moreover, MedPartners/Mullikin requires each physician group with which it
affiliates to obtain and maintain professional liability insurance coverage.
Such insurance would provide coverage, subject to policy limits, in the event
MedPartners/Mullikin were held liable as a co-defendant in a lawsuit for
professional malpractice against a physician. In addition, generally,
MedPartners/Mullikin is indemnified under the practice management agreements by
the affiliated physician groups for liabilities resulting from the performance
of medical services.
PROPERTIES
MedPartners/Mullikin leases approximately 48,000 square feet at 3000
Galleria Tower in Birmingham, Alabama, for its corporate headquarters.
In its western operations, MedPartners/Mullikin and its affiliated entities
own certain real estate assets in California, and lease their other facilities
from third parties. MedPartners/Mullikin leases, directly or through affiliated
real estate partnerships, real estate for its clinics in 79 locations in
southern California, 52 in northern California and six in the Portland, Oregon
area. MedPartners/Mullikin leases an approximately 60,000 square foot building
in Artesia which is occupied by Pioneer Hospital and owns the USFMC hospital
building. In addition, MedPartners/Mullikin leases approximately 22 properties
used for general administrative offices and storage.
MedPartners/Mullikin also leases, subleases or occupies, pursuant to the
asset purchase agreements, the clinic facilities for the affiliated physician
groups. The leases have varying terms ranging from one to 22 years and monthly
rents ranging from $250 to $97,170. MedPartners/Mullikin anticipates that, as
the affiliated practices continue to grow and add new services, expanded
facilities will be required.
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<PAGE> 88
MEDPARTNERS/MULLIKIN'S MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the executive
officers and directors of MedPartners/Mullikin as of the date of this
Prospectus-Joint Proxy Statement:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MEDPARTNERS/MULLIKIN
-------------------------------------------- --- --------------------------------------------
<S> <C> <C>
Larry R. House(1)........................... 53 Chairman of Board, President and Chief
Executive Officer
Mark L. Wagar............................... 45 President -- Western Operations
John J. Gannon.............................. 58 President -- Eastern Operations
Harold O. Knight, Jr........................ 38 Executive Vice President and Chief Financial
Officer
Tracy P. Thrasher........................... 33 Executive Vice President of Administration
and Secretary
William R. Dexheimer........................ 39 Executive Vice President and Chief Operating
Officer -- East
J. Rodney Seay.............................. 49 Executive Vice President of Mergers and
Acquisitions
J. Brooke Johnston, Jr...................... 56 Senior Vice President and General Counsel
Peter J. Clemens, IV........................ 31 Vice President of Finance and Treasurer
Richard M. Scrushy.......................... 43 Director
Larry D. Striplin, Jr.(2)................... 66 Director
Charles W. Newhall III(1)................... 51 Director
Scott F. Meadow(2).......................... 42 Director
Ted H. McCourtney, Jr.(1)................... 57 Director
Walter T. Mullikin, M.D..................... 78 Director
John S. McDonald, J.D.(1)................... 63 Director
Rosalio J. Lopez, M.D.(2)................... 43 Director
Richard J. Kramer........................... 53 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Larry R. House has been President and Chief Executive Officer of
MedPartners/Mullikin since August 27, 1993, and has been Chairman of the Board
since January 8, 1993. From 1985 to 1992, he was Chief Operating Officer of
HEALTHSOUTH Rehabilitation Corporation, now HEALTHSOUTH Corporation, a publicly
traded provider of rehabilitative health care services ("HEALTHSOUTH"). From
1992 to 1993, Mr. House was President of HEALTHSOUTH International, Inc. Mr.
House is a member of the Board of Directors of each of HEALTHSOUTH, Capstone
Capital Corporation, a publicly traded real estate investment trust, and the
American Sports Medicine Institute.
Mark L. Wagar has been President-Western Operations of MedPartners/Mullikin
since January 1995. From March 1994 to December 1994, he was the President of
CIGNA HealthCare of California, a health care plan serving enrollees in
California, Oregon and Washington and, from January 1993 through February 1994,
was a Vice President of CIGNA HealthCare of California, an HMO. From November
1989 to December 1992, he was the President of Managed Care Partners, Inc., a
private consulting management company specializing in managed care services. He
has been involved in health care management for over 20 years, including 10
years in managed care companies.
John J. Gannon has been President-Eastern Operations of
MedPartners/Mullikin since July 27, 1996. For 23 years, Mr. Gannon was a Partner
with KPMG Peat Marwick. His most recent position with KPMG was that of National
Partner-in-Charge of Strategy and Marketing, Healthcare and Life Sciences. He
served as one of the firm's designated industry review specialists for health
care financial feasibility studies. Mr. Gannon is a certified public accountant
and is a member of the American Institute of Certified Public Accountants.
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<PAGE> 89
Harold O. Knight, Jr. has been Executive Vice President and Chief Financial
Officer of MedPartners/ Mullikin since November 10, 1994. Mr. Knight was Senior
Vice President of Finance and Treasurer of MedPartners/Mullikin from August 27,
1993 to November 10, 1994 and, from March 1, 1993 to August 27, 1993, Mr. Knight
served as Vice President of Finance of MedPartners/Mullikin. From 1980 to 1993,
Mr. Knight was with Ernst & Young LLP, most recently as Senior Manager. Mr.
Knight is a member of the Alabama Society of Certified Public Accountants and
the American Institute of Certified Public Accountants.
Tracy P. Thrasher has been Executive Vice President of Administration of
MedPartners/Mullikin since November 10, 1994 and has been Secretary since March
10, 1994. Ms. Thrasher was Senior Vice President of Administration from March
10, 1994 to November 10, 1994 and, from January 8, 1993 to March 10, 1994, she
served as Corporate Comptroller and Vice President of Development. From 1990 to
1993, Ms. Thrasher was the Audit and Health Care Management Advisory Service
Manager with Burton, Canady, Moore & Carr, P.C., independent public accountants.
Ms. Thrasher began her career with Ernst & Young LLP in 1985, and became a
certified public accountant in 1986.
William R. Dexheimer has been Executive Vice President and Chief Operating
Officer -- East of MedPartners/Mullikin since August 27, 1993. From 1989 to
1993, Mr. Dexheimer was a principal stockholder and Chief Executive Officer of
Strategic Health Resources of the South, Inc., a health care development and
consulting firm. From 1986 to 1989, Mr. Dexheimer was employed by AMI Brookwood
Medical Center as Senior Vice President of Development and Chief Executive
Officer of AMI Brookwood Primary Care Centers, Inc.
J. Rodney Seay has been Executive Vice President of Mergers and
Acquisitions of MedPartners/ Mullikin since April 20, 1995. From August 27, 1993
to April 20, 1995, he served as Executive Vice President of Development of
MedPartners/Mullikin. Mr. Seay was also Secretary of MedPartners/Mullikin from
August 27, 1993 to March 10, 1994. From 1992 to 1993, he was Vice President of
Finance of HEALTHSOUTH. From 1988 to 1992, Mr. Seay was a Senior Manager with
KPMG Peat Marwick. From 1982 to 1988, he served as Chief Executive Officer of
Medical Data Services, a physician practice management company with over 650
employees and over 1,500 physician clients.
J. Brooke Johnston, Jr. has been Senior Vice President and General Counsel
of MedPartners/Mullikin since April 25, 1996. Prior to that, Mr. Johnston was a
senior principal of the law firm of Haskell Slaughter Young & Johnston,
Professional Association, Birmingham, Alabama where he practiced corporate and
securities law for over seventeen years. Prior to that Mr. Johnston was engaged
in the practice of law in New York, New York and at another firm in Birmingham.
Mr. Johnston is a member of the Alabama State Bar and the New York and American
Bar Associations. Mr. Johnston is a member of the Board of Directors of United
Leisure Corporation, a publicly traded leisure time company.
Peter J. Clemens IV has been Vice President of Finance and Treasurer of
MedPartners/Mullikin since April 20, 1995. From 1991 to 1995 Mr. Clemens worked
in Corporate Banking with Wachovia Bank of Georgia, N.A. Mr. Clemens began his
career with AmSouth Bank, N.A. in 1987, and received an M.B.A. from Vanderbilt
University in 1991.
Richard M. Scrushy has been a member of the MedPartners/Mullikin Board of
Directors since January 1993. Since 1984, Mr. Scrushy has been Chairman of the
Board and Chief Executive Officer of HEALTHSOUTH. Mr. Scrushy is also a member
of the Board of Directors of Capstone Capital Corporation, a publicly traded
real estate investment trust.
Larry D. Striplin, Jr. has been a member of the MedPartners/Mullikin Board
of Directors since January 1993. Since December 1995, Mr. Striplin has been the
Chairman and Chief Executive Officer of Nelson-Brantley Glass Contractors, Inc.
and Chairman and Chief Executive Officer of Clearview Properties, Inc. Until
December 1995, Mr. Striplin had been Chairman of the Board and Chief Executive
Officer of Circle "S" Industries, Inc., a privately owned bonding wire
manufacturer. Mr. Striplin is a member of the Board of Directors of Kulicke &
Suffa, Inc. a publicly traded manufacturer of electronic equipment, and of
Capstone Capital Corporation, a publicly traded real estate investment trust.
Charles W. Newhall III has been a member of the MedPartners/Mullikin Board
of Directors since September 1993. He has been a general partner of New
Enterprise Associates, a venture capital firm, since 1978. Mr. Newhall is a
member of the Board of Directors of HEALTHSOUTH, Integrated Health Services,
Inc. and OPTA Food Ingredients, Inc., all publicly traded companies. He is
founder and Chairman of the Mid-Atlantic Venture Association, which was
organized in 1988.
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<PAGE> 90
Scott F. Meadow has been a member of the MedPartners/Mullikin Board of
Directors since September 1993. Since February 5, 1996, Mr. Meadow has been a
general partner of Sprout Group, a venture capital firm. He was a general
partner of the Frontenac Company, a venture capital firm, from August 1992 to
September 1995. Mr. Meadow was a general partner of William Blair Venture
Partners from 1982 to 1992 and a partner of William Blair and Company, an
investment banking firm, from 1985 to 1992.
Ted H. McCourtney, Jr. has been a member of the MedPartners/Mullikin Board
of Directors since September 1993. He has been a general partner of Venrock
Associates, a venture capital firm, since 1970. Mr. McCourtney is a member of
the Board of Directors of Cellular Communications, Inc., Cellular Communications
of Puerto Rico, Inc., Cellular Communications International, Inc., International
CabelTel Incorporated, SBSF, Inc. and Structural Dynamics Research Corporation,
all publicly traded companies.
Walter T. Mullikin, M.D., a surgeon, has been a member of the
MedPartners/Mullikin Board of Directors since November 29, 1995. Dr. Mullikin
had been Chairman of the Board of the general partner of MME since 1989. He
founded Pioneer Hospital and the predecessors to MME's principal professional
corporation in 1957. He was also the Chairman of the Board, President and a
shareholder of MME's IPA, MIPA, until November 1995. Dr. Mullikin is a member of
the Board of Directors of Health Net, a publicly traded HMO, and was one of the
founders and a past chairman of the Unified Medical Group Association.
John S. McDonald, J.D., has been a member of the MedPartners/Mullikin Board
of Directors since November 29, 1995. Mr. McDonald had been the Chief Executive
Officer of the general partner of MME since March 1, 1994, and he has been an
executive of MME's principal professional corporation, Pioneer Hospital, and
their related entities since 1967. Mr. McDonald was also a director, the
Secretary and a shareholder of MME's general partner. Mr. McDonald is on the
Board of Directors of the Truck Insurance Exchange and is a past president of
the Unified Medical Group Association.
Rosalio J. Lopez, M.D. has been a member of the MedPartners/Mullikin Board
of Directors since November 29, 1995. Mr. Lopez had been a director of the
general partner of MME since 1989. Dr. Lopez joined MME's principal professional
corporation in 1984 and serves as the Chairman of its Medical Council and Family
Practice and Managed Care committees. He also acted as a director and a Vice
President of MME's principal professional corporation. He is also a director and
shareholder of MIPA.
Richard J. Kramer has been a member of the MedPartners/Mullikin Board of
Directors since November 29, 1995. Mr. Kramer is President/Chief Executive
Officer and a director of Catholic Healthcare West ("CHW"). Before joining CHW
in September 1989, Mr. Kramer served as the Executive Vice President of
LifeSpan, Inc., a multi-hospital/health care system headquartered in
Minneapolis, which he joined in 1971, serving in a variety of capacities,
including Vice President of Planning and Marketing and administrator for
Abbott-Northwestern Hospital. Mr. Kramer is currently a member of the Board of
Directors of the California Association of Hospitals and Health Systems and the
Hospital Council of Northern and Central California, the Board of Directors of
the California Chamber of Commerce, the Governing Council of the American
Hospital Association Section on Health Systems and the House of Delegates of the
American Hospital Association, the Advisory Council for the Center for Clinical
Integration and the Board of Directors of the Alumni Association of the
University of Minnesota Program in Health Care Administration.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to the terms of the MedPartners/Mullikin Certificate and the
MedPartners/Mullikin By-laws, the MedPartners/Mullikin Board of Directors is
divided into three classes, with each class being as nearly equal in number as
reasonably possible. One class holds office for a term that will expire at the
Annual Meeting of Stockholders to be held in 1997, a second class holds office
for a term that will expire at the Annual Meeting of Stockholders to be held in
1998 and a third class holds office for a term that will expire at the Annual
Meeting of Stockholders to be held in 1999. Each director holds office for the
term to which he is elected and until his successor is duly elected and
qualified. At each annual meeting of stockholders of MedPartners/Mullikin, the
successors to the class of directors whose terms expire at such meeting are
elected to hold office for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election. Messrs. Scrushy and
McCourtney and Dr. Lopez have terms expiring in 1997, Messrs. House, McDonald,
Kramer and Newhall have terms expiring in 1998, and Messrs. Meadow and Striplin
and Dr. Mullikin have terms expiring in 1999. The MedPartners/Mullikin Board of
Directors elects officers annually and such officers serve at the discretion of
the MedPartners/Mullikin Board of Directors.
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<PAGE> 91
COMMITTEES OF THE BOARD OF DIRECTORS
The MedPartners/Mullikin Board of Directors currently has two committees:
the Audit Committee and the Compensation Committee.
The Audit Committee has the responsibility for reviewing and supervising
the financial controls of MedPartners/Mullikin. The Audit Committee makes
recommendations to the MedPartners/Mullikin Board of Directors with respect to
MedPartners/Mullikin's financial statements and the appointment of independent
auditors, reviews significant audit and accounting policies and practices, meets
with MedPartners/Mullikin's independent public accountants concerning, among
other things, the scope of audits and reports, and reviews the performance of
overall accounting and financial controls of MedPartners/Mullikin. The Audit
Committee consists of Messrs. Striplin and Meadow and Dr. Lopez.
The Compensation Committee has the responsibility for reviewing the
performance of the officers of MedPartners/Mullikin and recommending to the
MedPartners/Mullikin Board of Directors annual salary and bonus amounts for all
officers of MedPartners/Mullikin. The Compensation Committee consists of Messrs.
House, Newhall, McCourtney and McDonald.
EXECUTIVE OFFICER COMPENSATION
Executive Officer Compensation. The following table presents certain
information concerning compensation paid or accrued for services rendered to
MedPartners/Mullikin in all capacities during the years ended December 31, 1995
and 1994, for the chief executive officer and the four other most highly
compensated executive officers of MedPartners/Mullikin whose total annual salary
and bonus in the last fiscal year exceeded $100,000 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION(1) SECURITIES ALL OTHER
---------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION HELD YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)
- ------------------------------------------- ----- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Larry R. House(2).......................... 1995 $ 349,908 $ 600,000 828,000 $ 28,335(3)
Chairman of the Board, President and 1994 335,000 -- 457,000 25,474(4)
Chief Executive Officer
Harold O. Knight, Jr....................... 1995 132,920 102,230 200,000 12,227(5)
Executive Vice President and Chief 1994 90,000 -- 30,000 3,541(6)
Financial Officer
William R. Dexheimer....................... 1995 172,996 2,196 55,000 12,254(7)
Executive Vice President and Chief 1994 162,940 -- 15,000 6,596(8)
Operating Officer -- East
Mark L. Wagar(9)........................... 1995 346,601 -- 250,000 30,485(10)
President -- Western Operations
Tracy P. Thrasher.......................... 1995 115,250 42,240 185,000 12,145(11)
Executive Vice President of 1994 83,000 -- 50,000 3,510(12)
Administration and Secretary
</TABLE>
- ---------------
(1) Dollar value of perquisites and other benefits were less than the lesser of
$50,000 or 10% of total salary and bonus for each Named Executive Officer.
(2) Pursuant to a reimbursement agreement, MedPartners/Mullikin paid
HEALTHSOUTH the sum of $150,195 as reimbursement for services rendered by
Mr. House from January 1, 1994 to August 31, 1994, when the agreement
terminated. See "-- Compensation Committee Interlocks and Insider
Participation".
(3) Represents $585 paid for life, long-term disability, health, dental and
accidental death insurance; $2,750 paid for automobile allowance; and
$25,000 paid for split premium life insurance for Mr. House for 1995.
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<PAGE> 92
(4) Represents $434 paid for life, long-term disability, health, dental and
accidental death insurance; $2,200 paid for automobile allowance; and
$22,840 paid for split premium life insurance for Mr. House for 1994.
(5) Represents $477 paid for life, long-term disability, health, dental and
accidental death insurance; $1,750 paid for automobile allowance; and
$10,000 paid for split premium life insurance for Mr. Knight for 1995.
(6) Represents $391 paid for life, long-term disability, health, dental and
accidental death insurance; and $3,150 paid for automobile allowance for
Mr. Knight for 1994.
(7) Represents $504 paid for life, long-term disability, health, dental and
accidental death insurance; $1,750 paid for automobile allowance; and
$10,000 paid for split premium life insurance for Mr. Dexheimer for 1995.
(8) Represents $2,396 paid for life, long-term disability, health, dental and
accidental death insurance; and $4,200 paid for automobile allowance for
Mr. Dexheimer for 1994.
(9) Mr. Wagar commenced employment on January 1, 1995.
(10) Represents $5,084 paid for life, long-term disability, health, dental and
accidental death insurance; $1,548 paid as a flex allowance; and $23,853
paid as an executive life insurance benefit for Mr. Wagar for 1995.
(11) Represents $395 paid for life, long-term disability, health, dental and
accidental death insurance; $1,750 paid for automobile allowance; and
$10,000 paid for split premium life insurance for Ms. Thrasher for 1995.
(12) Represents $360 paid for life, long-term disability, health, dental and
accidental death insurance; and $3,150 paid for automobile allowance for
Ms. Thrasher for 1994.
Option Grants in 1995. The following table contains information concerning
the grant of stock options under the MedPartners/Mullikin Option Plans (as
defined herein) to the Named Executive Officers in 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUALS GRANTS(1) POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#)(2) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- -------------------------- ------------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Larry R. House............ 328,000(3) 11.9% $ 12.00 2005 $2,475,329 $6,272,970
500,000(3) 18.1 27.25 2005 8,568,689 21,714,741
Harold O. Knight, Jr. .... 50,000 1.8 12.00 2005 377,337 956,245
150,000 5.4 27.25 2005 2,570,607 6,514,422
William R. Dexheimer...... 15,000 0.5 12.00 2005 113,201 286,874
40,000 1.4 27.25 2005 685,495 1,737,179
Mark L. Wagar............. 150,000 5.4 28.25 2005 2,664,941 6,753,484
100,000(3) 3.6 28.25 2005 1,776,627 4,502,322
Tracy P. Thrasher......... 85,000 3.1 12.00 2005 641,473 1,625,617
100,000 3.6 27.25 2005 1,713,738 4,342,948
</TABLE>
- ---------------
(1) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years). It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option and that the option
is exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term, which will benefit all stockholders.
(2) The vesting of each option is cumulative and no vested portion expires until
the expiration of the option. Unless otherwise noted, options vest at the
rate of 20% per year over a five-year period beginning on the date of
grant.
(3) These options are 100% vested.
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<PAGE> 93
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table provides information with respect to options
exercised by the Named Executive Officers during 1995 and the number and value
of securities underlying unexercised options held by the Named Executive
Officers at December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS AT FY-END(#) AT FY-END($)(1)
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------- --------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Larry House............... 402,000 $ 5,226,000 883,000/0 $11,567,000/$0
Harold O. Knight, Jr. .... 72,000 1,417,000 40,000/218,000 382,500/3,432,400
William R. Dexheimer...... 3,000 39,000 14,000/53,000 207,400/731,200
Mark L. Wagar............. -- -- 130,000/120,000 747,528/570,000
Tracy P. Thrasher......... 32,000 567,500 37,000/186,000 472,000/3,134,400
</TABLE>
- ---------------
(1) Based on the closing sale price of MedPartners/Mullikin Common Stock on
December 29, 1995, of $33.00 per share.
DIRECTOR COMPENSATION
Directors of MedPartners/Mullikin who are not also employed by
MedPartners/Mullikin are paid directors' fees of $2,500 for each meeting of the
MedPartners/Mullikin Board of Directors attended in person, $500 for each
meeting of the MedPartners/Mullikin Board of Directors attended by phone, and
$1,000 for each meeting of the Audit Committee or the Compensation Committee
attended in person. In addition, directors are reimbursed for travel costs and
other out-of-pocket expenses incurred in attending each directors' meeting and
committee meeting. Outside directors are eligible to receive the grant of stock
options under the MedPartners/Mullikin Option Plans. In November 1995, each of
Messrs. Scrushy, Striplin, Newhall, Meadow, McCourtney, McDonald and Kramer and
Dr. Mullikin were granted ten-year options to purchase 10,000 shares of
MedPartners/Mullikin Common Stock and Dr. Lopez was granted a ten-year option to
purchase 20,000 shares, all at an exercise price of $28.25 per share, the market
price on the date of grant. See " -- Executive Officer Compensation -- Option
Grants in 1995" and "Principal Stockholders of MedPartners/Mullikin".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. House, Newhall and McCourtney served on the Compensation Committee
of the MedPartners/ Mullikin Board of Directors during 1995, joined by Mr.
McDonald in November 1995. Mr. House also served as Chairman of the Board,
President and Chief Executive Officer of MedPartners/Mullikin while serving on
the Compensation Committee.
On August 31, 1993, MedPartners entered into a Reimbursement Agreement with
HEALTHSOUTH to allow Mr. House to serve as President of HEALTHSOUTH
International, Inc (the "Reimbursement Agreement"). The Reimbursement Agreement
provided for the reimbursement by MedPartners to HEALTHSOUTH of one-half of Mr.
House's compensation and benefits. Under the Reimbursement Agreement,
MedPartners paid HEALTHSOUTH the sum of $150,195 for the period from January 1,
1994 to August 31, 1994, when the Reimbursement Agreement terminated. On
September 1, 1994, MedPartners entered into a consulting agreement, terminated
in February 1995, with HEALTHSOUTH, under which MedPartners agreed to make
available to HEALTHSOUTH from time to time at reasonable times and upon
reasonable requests the services of Mr. House as a consultant in connection with
the activities of HEALTHSOUTH International, Inc. In exchange for such services,
HEALTHSOUTH paid MedPartners/ Mullikin a consulting fee equal to one-half of Mr.
House's compensation and benefits.
In connection with the sale of the Convertible Preferred Stock described
below, MedPartners/Mullikin entered into a non-competition and severance
agreement with Mr. House. The agreement provides, subject to certain
limitations, for severance payments equal to 12 months' salary if Mr. House's
employment is terminated without cause. Moreover, pursuant to this agreement,
Mr. House agreed that during the term of his employment with
MedPartners/Mullikin and for 18 months thereafter, he will not compete with
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MedPartners/Mullikin, without the prior written consent of MedPartners/Mullikin,
by engaging in any capacity in any business which is competitive with the
business of MedPartners/Mullikin.
In September 1993 and March 1994, MedPartners issued shares of Series A and
Series B Convertible Preferred Stock in private transactions. Entities
affiliated with Messrs. House, Newhall and McCourtney purchased shares in each
transaction as follows: HEALTHSOUTH -- 157,500 shares of Series A Convertible
Preferred Stock and 250,000 shares of Series B Convertible Preferred Stock; New
Enterprise Associates VI, L.P. -- 875,000 shares of Series A Convertible
Preferred Stock and 625,000 shares of Series B Convertible Preferred Stock; New
Venture Partners III, L.P. -- 125,000 shares of Series A Convertible Preferred
Stock and 37,500 shares of Series B Convertible Preferred Stock; and Venrock
Associates -- 750,000 shares of Series A Convertible Preferred Stock and 500,000
shares of Series B Convertible Preferred Stock. All of such shares of Preferred
Stock were automatically converted into shares of Common Stock upon the
consummation of the Convertible MedPartners initial public offering in February
1995. See "Principal Stockholders of MedPartners/Mullikin".
In connection with the acquisition of MME described under "Business of
MedPartners/Mullikin -- Recent Major Acquisitions", MedPartners/Mullikin entered
into Termination and Consulting Agreements with Mr. McDonald. Under the
Termination Agreement, Mr. McDonald's employment agreement with MME was
terminated in consideration of which Mr. McDonald received a lump sum payment of
$796,000, continuation of certain fringe benefits and perquisites under the
former employment agreement for 36 months, access to an office and support staff
until death or disability, payments from MedPartners/Mullikin and a trust set up
by MedPartners/Mullikin to fund the remainder of MME's pension obligations to
Mr. McDonald, and payment of all health and medical care (including
prescriptions) for Mr. McDonald for the remainder of his life through a
Company-sponsored health insurance plan. MedPartners/Mullikin and Mr. McDonald
entered into a five-year Consulting Agreement whereby Mr. McDonald will receive
in consideration for his services a consulting fee of $2,230,000, to be paid
over five years with an initial payment of $669,000 on November 29, 1995 and
equal payments of $390,250 on each anniversary of such date, access to an office
and support staff and certain other benefits. See "Certain
Transactions -- MedPartners/Mullikin -- MME Acquisition Agreements".
See also "Certain Transactions -- MedPartners/Mullikin".
NON-COMPETITION AND SEVERANCE AGREEMENTS
In September 1993, MedPartners/Mullikin entered into non-competition and
severance agreements with Mr. House and Mr. Dexheimer, each of which contains
the terms described above under "-- Compensation Committee Interlocks and
Insider Participation" related to the agreement with Mr. House. MedPartners/
Mullikin also entered into non-competition, nondisclosure and development
agreements with each of Messrs. Knight, Seay and Dexheimer and Ms. Thrasher
pursuant to which each has agreed not to disclose any of MedPartners/Mullikin's
confidential information or assist or work for any of MedPartners/Mullikin's
competitors for a period of one year after termination of employment. In
addition, each of such executive officers agreed to assign any rights in any
design, invention, software, process, trade secret or intellectual property that
relates to or resulted from work performed at MedPartners/Mullikin.
STOCK OPTION PLANS
MedPartners/Mullikin has a 1993 Stock Option Plan (the "1993 Option Plan")
and a 1995 Stock Option Plan (the "1995 Option Plan", together with the 1993
Option Plan, the "MedPartners/Mullikin Option Plans"). The objectives of the
MedPartners/Mullikin Option Plans are to attract and retain qualified personnel,
to provide incentives to employees, officers, and directors of
MedPartners/Mullikin and to promote the success of MedPartners/Mullikin. A total
of 1,555,000 shares of MedPartners/Mullikin Common Stock, including 1,055,000
shares of MedPartners/Mullikin Common Stock for issuance upon the exercise of
options granted to officers, directors, consultants and employees of
MedPartners/Mullikin and 500,000 shares of MedPartners/Mullikin Common Stock for
issuance upon the exercise of options issued in connection with the acquisition
of the assets of physician practices, are covered by the 1993 Option Plan. A
total of 7,099,150 shares of MedPartners/Mullikin Common Stock are covered by
the 1995 Option Plan. Additionally, the 1995 Option Plan contains a provision
whereby the number of shares of MedPartners/Mullikin Common Stock for which
options may be granted under the 1995 Option Plan shall automatically increase
on the first trading day of each calendar year during the term of the 1995
Option Plan by an amount equal to 1% of the shares of
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MedPartners/Mullikin's Common Stock outstanding on December 31 of the
immediately preceding year. However, such additional shares shall be available
only for the grant of non-qualified stock options and not for the grant of
incentive options. The MedPartners/Mullikin Option Plans authorize the grant of
options to purchase MedPartners/Mullikin Common Stock intended to qualify as
incentive stock options ("Incentive Options") under Section 422 of the Code and
the grant of options that do not qualify as Incentive Options ("Non-Qualified
Options") under Section 422 of the Code.
The MedPartners/Mullikin Option Plans are administered by the Compensation
Committee of the MedPartners/Mullikin Board of Directors (the "Compensation
Committee"). The Compensation Committee, subject to the approval of the
MedPartners/Mullikin Board of Directors and the provisions of the
MedPartners/Mullikin Option Plans, has full power to select the individuals to
whom awards will be granted, to fix the number of shares that each optionee may
purchase, to set the terms and conditions of each option, and to determine all
other matters relating to the MedPartners/Mullikin Option Plans. The
MedPartners/ Mullikin Option Plans provide that the Compensation Committee will
select grantees from among full-time employees, officers, directors and
consultants of MedPartners/Mullikin or its subsidiaries, and individuals or
entities subject to an acquisition or management agreement with
MedPartners/Mullikin.
The option exercise price of each option shall be determined by the
Compensation Committee, but shall not be less than 100% of the fair market value
of the shares on the date of grant in the case of Incentive Options and not less
than 85% of the fair market value of the shares on the date of grant in the case
of Non-Qualified Options granted to employees. No Incentive Option may be
granted to any employee who owns at the date of grant stock representing in
excess of 10% of the combined voting power of all classes of stock of
MedPartners/Mullikin or a parent or a subsidiary unless the exercise price for
stock subject to such options is at least 110% of the fair market value of such
stock at the time of grant and the option term does not exceed five years. The
aggregate fair market value of stock with regard to which Incentive Options are
exercisable by an individual for the first time during any calendar year may not
exceed $100,000.
The term of each option shall be fixed by the Committee and may not exceed
ten years from the date of grant. If a participant who holds options ceases to
be an employee, consultant or director or otherwise affiliated with
MedPartners/Mullikin (the "Termination"), for cause (as defined), and such
person shall not have fully exercised any option granted under the
MedPartners/Mullikin Option Plans, the option or the remaining portion thereof
will expire on the date of Termination. Any option or portion thereof which has
not expired or been exercised on or before the date of Termination, without
cause, expires 90 days after the date of Termination. Notwithstanding the
foregoing, in the event of Termination due to the optionee's death or
incapacity, the option will terminate 12 months following the date of such
optionee's death or incapacity. Options granted under the MedPartners/Mullikin
Option Plans may be exercisable in installments.
Upon the exercise of options, the option exercise price must be paid in
full, either in cash or other form acceptable to the Committee, including
delivery of a full recourse promissory note, delivery of shares of Common Stock
already owned by the optionee or delivery of other property. Unless terminated
earlier, the 1993 Option Plan will terminate in 2003 and the 1995 Option Plan
will terminate in 2005.
As of June 30, 1996, MedPartners/Mullikin had outstanding options at
exercise prices ranging from $0.20 to $19.25 to acquire 647,170 shares of
MedPartners/Mullikin Common Stock under the 1993 Option Plan. At the same date,
there were outstanding options under the 1995 Option Plan to acquire 5,172,440
shares of Common Stock at exercise prices ranging from $12.00 to $33.00 per
share.
401(K) PLANS
MedPartners/Mullikin has the MedPartners, Inc. and Subsidiaries Employee
Retirement Savings Plan (the "MedPartners Plan"). The MedPartners Plan is a Code
Section 401(k) plan which requires, subject to certain limited exceptions, 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. MedPartners/Mullikin, in its sole
discretion, may contribute an amount which it designates as a discretionary
employer contribution to all non-highly compensated and all non-key employees.
In years for which the MedPartners Plan is "top-heavy" (as defined in the Code),
a participant is entitled to the top heavy minimum allocation if the participant
was employed by MedPartners on the last day of the MedPartners Plan year, unless
the employee is a key employee. Participants in the MedPartners Plan may elect
to contribute from 2% to 15% of their gross compensation subject to annual Code
limitations.
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Effective November 28, 1989, MME's principal professional corporation and
Pioneer Hospital adopted the Savings and Salary Deferral Plan (the "Mullikin
Plan"), which MedPartners/Mullikin has assumed. MME adopted the Mullikin Plan
retroactively to January 1, 1994, and assumed the administration responsibility
of the Mullikin Plan. The Mullikin Plan is also a Code Section 401(k) plan which
requires, subject to certain limited exceptions, the attainment of age 21 and
one year of service, with a minimum of 1,000 hours worked to become a
participant in the Mullikin Plan. Participants in the Mullikin Plan may elect to
contribute from 1% to 20% of their gross compensation, subject to annual Code
limitations. MedPartners/ Mullikin will make a minimum matching contribution of
50% of the first 3% of salary deferred into the Mullikin Plan, up to a maximum
of $750 for any Mullikin Plan year.
In addition to these plans, certain of the employee retirement plans of
various of the entities acquired during 1995 have been or will be merged into
the MedPartners Plan or the Mullikin Plan, while others may continue as prior to
the acquisition. MedPartners/Mullikin continues to investigate the feasibility
of the combination of the MedPartners Plan and the Mullikin Plan consistent with
applicable law and regulations and its desire to provide a comprehensive benefit
package for all employees.
CERTAIN TRANSACTIONS -- MEDPARTNERS/MULLIKIN
MME ACQUISITION AGREEMENTS
In connection with the acquisition of MME described under "Business of
MedPartners/Mullikin -- Recent Major Acquisitions", MedPartners/Mullikin entered
into certain termination and consulting agreements with Walter T. Mullikin, M.D.
and John S. McDonald, J.D., now directors of MedPartners/Mullikin, and an
employment agreement with Mark L. Wagar, Executive Vice President and Chief
Operating Officer -- West of MedPartners/Mullikin.
Termination Agreements. On November 29, 1995, MedPartners/Mullikin and
each of Dr. Walter T. Mullikin, M.D. and John S. McDonald, J.D., entered into a
Termination Agreement that terminated their previous employment agreements with
MME, in consideration of which they received, or shall receive, a lump sum
payment of $1,064,000, in the case of Dr. Mullikin, and $796,000 in the case of
Mr. McDonald, continuation of certain fringe benefits and perquisites for 36
months, payments from MedPartners/Mullikin and a trust set up by
MedPartners/Mullikin to fund the remainder of MME's pension obligations to Dr.
Mullikin or to Dr. Mullikin's spouse, should she survive him, and Mr. McDonald,
payment of all health and medical care (including prescriptions) for Dr.
Mullikin and his spouse and Mr. McDonald for the remainder of their lives
through a MedPartners/Mullikin sponsored health insurance plan, a death payment
benefit to be paid to Dr. Mullikin's designated beneficiary or estate of
$2,700,000, and certain other benefits. See "MedPartners/Mullikin's
Management -- Compensation Committee Interlocks and Insider Participation".
Consulting Agreements. On November 29, 1995, MedPartners/Mullikin and each
of Dr. Mullikin and Mr. McDonald entered into five-year Consulting Agreements
whereby they will receive in consideration for their services: consulting fees
of $2,480,000 to Dr. Mullikin, to be paid over five years with an initial
payment of $744,000 on November 29, 1995, and equal payments of $434,000 on each
anniversary of such date, and $2,230,000 to Mr. McDonald, to be paid over five
years with an initial payment of $669,000 on November 29, 1995, and equal
payments of $390,250 on each anniversary thereof, access to an office and
support staff and certain other benefits.
Wagar Employment Agreement. On November 29, 1995, MedPartners/Mullikin and
Mark L. Wagar, President -- Western Operations of MedPartners/Mullikin entered
into an amended employment agreement for the remainder of the term of Mr.
Wagar's employment agreement with MME which terminates on January 18, 1998,
subject to certain renewal provisions (the "Wagar Employment Agreement"),
pursuant to which Mr. Wagar will receive a base annual salary of $350,000,
participation in any long-term incentive plan designed specifically for Mr.
Wagar or provided to the Senior Executive Group (as defined in the Wagar
Employment Agreement), participation in any benefits and perquisites provided to
the Senior Executive Group, reasonable vacation and eligibility to participate
in a cash bonus plan. The Wagar Employment Agreement provides that if Mr. Wagar
voluntarily resigns such that such resignation constitutes constructive
termination or should his services be terminated by MedPartners/Mullikin without
"cause" (as defined in the Wagar Employment Agreement), Mr. Wagar (or his
beneficiaries should Mr. Wagar thereafter die) shall be entitled to receive (i)
the full amount of any previously unpaid base salary through the date of Mr.
Wagar's
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termination of service, (ii) payment of Mr. Wagar's annual base salary in effect
as of the date of Mr. Wagar's termination of service payable in 12 equal monthly
installments, (iii) continuation of fringe benefits and perquisites under the
Wagar Employment Agreement, (iv) immediate vesting of any stock options or other
rights provided under MedPartners/Mullikin's long term incentive plan, and (v)
payment of any life insurance, disability or other benefits provided to Mr.
Wagar by MedPartners/Mullikin in accordance with the terms and conditions of the
Wagar Employment Agreement. The Wagar Employment Agreement contains other
severance arrangements relating to termination of Mr. Wagar's services due to
death, disability or resignation.
FINANCINGS
In September 1993 and February 1994, MedPartners, the predecessor of
MedPartners/Mullikin, issued an aggregate of 4,000,562 shares of Series A
Convertible Preferred Stock in a private placement transaction for aggregate
consideration of $8,001,124. Certain directors and officers of
MedPartners/Mullikin, or entities affiliated with such individuals, purchased
shares of Series A Convertible Preferred Stock as follows: New Enterprise
Associates VI, L.P. -- 875,000 shares; New Venture Partners III, L.P.
-- 125,000 shares; Venrock Associates -- 750,000 shares; Frontenac Venture VI,
L.P. -- 1,000,000 shares; HEALTHSOUTH -- 157,500 shares; and Ms.
Thrasher -- 11,250 shares.
In March 1994 and May 1994, MedPartners issued an aggregate of 3,000,000
shares of Series B Convertible Preferred Stock in a private placement
transaction for aggregate consideration of $12,000,000. Certain directors and
officers of MedPartners, or entities affiliated with such individuals, purchased
shares of Series B Convertible Preferred Stock as follows: New Enterprise
Associates, VI, L.P. -- 625,000 shares; New Venture Partners III, L.P. -- 37,500
shares; Venrock Associates -- 500,000 shares; Frontenac Venture VI,
L.P. -- 625,000 shares; HEALTHSOUTH -- 250,000 shares; Mr. Scrushy -- 100,000
shares; Mr. Striplin -- 25,000 shares; and Ms. Thrasher -- 10,000 shares. See
"MedPartners/Mullikin's Management -- Compensation Committee Interlocks and
Insider Participation".
All of the shares of Convertible Preferred Stock were automatically
converted into shares of MedPartners common stock upon the consummation of
MedPartners' initial public offering in February 1995. See "Principal
Stockholders of MedPartners/Mullikin" for information about affiliations between
directors and executive officers of MedPartners/Mullikin and certain of the
entities who purchased shares of MedPartners Preferred Stock.
The Mullikin Family Trust, a trust formed for the benefit of Dr. Mullikin
and his spouse, was the holder of two notes issued in November 1992 by 5000
Airport Plaza, a California limited partnership which is controlled by
MedPartners/Mullikin, one in the principal amount of $2,975,000, having a
20-year term and bearing an interest rate of 10% per annum, and the other in the
principal amount of $850,000, having a 10-year term and bearing an interest rate
of 10% per annum, each secured by the 5000 Airport Plaza building, where
MedPartners/Mullikin's western executive offices are located.
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PRINCIPAL STOCKHOLDERS OF MEDPARTNERS/MULLIKIN
The following table sets forth certain information regarding beneficial
stock ownership of MedPartners/ Mullikin as of June 30, 1996: (i) each director
and Named Executive Officer of MedPartners/Mullikin. (ii) all directors and
executive officers as a group, and (iii) each stockholder known by
MedPartners/Mullikin to be the beneficial owner of more than 5% of the
outstanding MedPartners/Mullikin Common Stock. Except as otherwise indicated,
each person or entity listed below has sole voting and investment power with
respect to all shares shown to be beneficially owned by him or it except to the
extent such power is shared by a spouse under applicable law. Shares of Common
Stock subject to options held by directors and executive officers that are
exercisable within 60 days of June 30, 1996, are deemed outstanding for the
purpose of computing such director's or executive officer's beneficial ownership
and the beneficial ownership of all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE
MEDPARTNERS/MULLIKIN OF COMMON
NAME POSITION HELD COMMON STOCK STOCK OWNED
- ------------------------------- ------------------------------- -------------------- -----------
<S> <C> <C> <C>
Larry R. House................. Chairman, President and Chief 2,605,000(1) 4.85%
Executive Officer and
Director
William R. Dexheimer........... Executive Vice President and 254,000(2) *
Chief Operating
Officer -- East
Harold O. Knight, Jr........... Executive Vice President and 148,000(3) *
Chief Financial Officer
Tracy P. Thrasher.............. Executive Vice President of 139,800(4) *
Administration and Secretary
Mark L. Wagar.................. President -- Western Operations 163,005(5) *
Larry D. Striplin, Jr.......... Director 99,100(6) *
Richard M. Scrushy............. Director 1,915,500(7) 3.66
Charles W. Newhall III......... Director 1,502,000(8) 2.87
Scott F. Meadow................ Director 2,000(9) *
Ted H. McCourtney, Jr.......... Director 56,901(10) 1.05
Walter T. Mullikin, M.D........ Director 432,424(11) *
John S. McDonald............... Director 303,281(12) *
Richard J. Kramer.............. Director 1,869,674(13) 3.57
Rosalio J. Lopez, M.D.......... Director 93,069(14) *
All executive officers and 9,720,254(15) 17.91
directors as a group (17
persons).....................
</TABLE>
- ---------------
* Less than 1%.
(1) Includes options to purchase 1,428,000 shares.
(2) Includes options to purchase 40,000 shares and 1,000 shares held in trust.
(3) Includes options to purchase 86,000 shares.
(4) Includes options to purchase 84,000 shares and 2,000 shares held in trust
for a minor child.
(5) Includes options to purchase 160,000 shares.
(6) Includes options to purchase 2,000 shares.
(7) Includes options to purchase 17,000 shares, 250,000 shares held in trust
for minor children, and 1,098,500 shares owned of record by HEALTHSOUTH.
Mr. Scrushy is Chairman of the Board, President and Chief Executive Officer
of HEALTHSOUTH and disclaims beneficial ownership of the shares owned by
HEALTHSOUTH.
(8) Includes options to purchase 2,000 shares, and 1,500,000 shares owned of
record by New Enterprise Associates VI, Limited Partnership ("NEA"), of
which Mr. Newhall is the general partner. Mr. Newhall shares voting and
investment power with respect to such shares owned by NEA.
(9) Includes options to purchase 2,000 shares.
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(10) Includes options to purchase 2,000 shares, 45 shares owned of record by
Venrock Associates and 15 shares owned of record by Venrock Associates II,
L.P. Mr. McCourtney is a general partner of Venrock Associates and Venrock
Associates II, L.P., and shares voting and investment power with respect to
such shares. Mr. McCourtney disclaims beneficial ownership of the shares
owned by Venrock Associates and Venrock Associates, II, L.P., except to the
extent of his pro rata interest.
(11) Includes options to purchase 2,000 shares and 430,424 shares held by the
Mullikin Family Trust U/D/T, dated February 10, 1976.
(12) Includes options to purchase 2,000 shares and 301,281 shares held by
certain trusts for the benefit of Mr. McDonald.
(13) Includes options to purchase 2,000 shares and 1,867,674 shares owned of
record by DCNHS-West Partnership, L.P. ("DCNHS") Mr. Kramer is the
President and Chief Executive Officer of CHW, which is the sole general
partner of DCNHS. Mr. Kramer disclaims beneficial ownership of the shares
owned by DCNHS.
(14) Includes options to purchase 4,000 shares and 89,069 shares held of record
by certain trusts for the benefit of Dr. Lopez and members of his family.
(15) Includes options to purchase a total of 1,921,000 shares.
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SELECTED FINANCIAL DATA -- CAREMARK
The following table sets forth a summary of consolidated financial data of
Caremark for each of the five years in the period ended December 31, 1995 and
the six months ended June 30, 1995 and 1996. The financial data in the following
table is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Caremark's Consolidated Financial Statements and Notes and other
financial information appearing in this Prospectus-Joint Proxy Statement. Except
for the data presented for the six months ended June 30, 1995 and 1996, the
income statement data and balance sheet data have been derived from audited
financial statements of Caremark. The financial statements of Caremark for the
years ended December 31, 1991, 1992, 1993, 1994 and 1995, have been audited by
Price Waterhouse LLP, independent certified public accountants.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- -------------------
1991 1992(2) 1993 1994 1995(1) 1995 1996
------ ------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues:
Physician Practice
Management............... $ -- $ -- $ 135.6 $ 190.1 $ 454.6 $ 180.1 $ 469.5
Pharmaceutical Services..... 371.7 522.1 631.2 1,097.3 1,432.3 693.0 865.2
Disease Management.......... 299.1 336.8 389.8 422.3 408.0 208.9 188.7
International............... 24.4 33.8 47.4 65.5 79.4 38.1 46.2
------ ------ -------- -------- -------- ------- -------
Total from
continuing
operations........ $695.2 $892.7 $1,204.0 $1,775.2 $2,374.3 $1,120.1 $1,569.6
====== ====== ======== ======== ======== ======= =======
Operating income from
continuing operations:
Physician Practice
Management............... $ -- $ (2.0) $ (1.4) $ 4.1 $ 16.1 $ 7.0 $ 17.7
Pharmaceutical Services..... 16.6 11.5 31.6 46.2 56.0 22.3 33.5
Disease Management.......... 59.5 65.0 76.0 76.6 69.5 36.2 31.1
International............... 2.4 1.4 (2.4) (1.5) 1.3 (0.7) (1.6)
General Corporate........... (4.4) (38.9) (21.8) (25.7) (16.3) (9.5) (7.4)
------ ------ -------- -------- -------- ------- -------
Total operating
income from
continuing
operations........ $ 74.1 $ 37.0 $ 82.0 $ 99.7 $ 126.6 $ 55.3 $ 73.3
====== ====== ======== ======== ======== ======= =======
Income from continuing
operations.................. $ 43.8 $ 20.7 $ 46.9 $ 54.5 $ 20.2 $ 30.5 $ 41.5
Primary earnings per common
and common equivalent share
from continuing
operations(3)............... N/A $ 0.30 $ 0.64 $ 0.73 $ 0.27 $ 0.41 $ 0.54
BALANCE SHEET DATA:
Total assets.................. $369.8 $596.6 $ 805.5 $1,194.2 $1,264.2 $1,403.6
Working capital............... 140.6 143.0 227.0 82.2 91.3 (186.6)
Long-term debt................ 0.5 33.7 115.7 233.5 325.4 130.2
Stockholders' equity.......... 285.2 332.2 409.6 486.7 393.4 388.0
Cash dividends declared per
share....................... N/A -- $ 0.04 $ 0.04 $ 0.04 $ --
</TABLE>
- ---------------
(1) Income from continuing operations in 1995 includes a special after tax
charge of $52.0 million ($0.69 per share) to reflect a decline in the value
of investments.
(2) Income from continuing operations in 1992 include pre-tax charges for costs
primarily related to distribution and restructuring totaling $34.7 million
($0.50 per share).
(3) Earnings per common and common equivalent share data is not presented for
periods prior to 1992, as Caremark's capital structure in these periods is
not comparable with the capital structure existing after the distribution
of Caremark Common Stock on November 30, 1992.
N/A means not applicable.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION -- CAREMARK
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 1996
Overview
Many of the comparisons reflected in the company's Unaudited Consolidated
Statements of Operations are impacted by growth through new affiliations in the
Physician Practice Management segment. Since May 1995, this segment has
affiliated with four new physician practices, which contributed in excess of
$200 million of incremental revenue to the company in the first half of 1996. As
a result of this incremental growth and growth from existing clinics, 29.9% of
the company's revenues were generated from the Physician Practice Management
segment in the first half of 1996 versus 16.1% in the first half of 1995.
These incremental revenues, along with revenue growth in the Pharmaceutical
Services and International segments, has resulted in growth in cost of goods and
services sold and marketing and administrative expenses versus the first half
and second quarter of 1995.
Excluding the impact of new affiliations, the gross margin rate has
declined to 12.1% and 11.9% of revenues in the second quarter and first half of
1996, respectively, due to lower revenues in the higher-margin Disease
Management segment. At the same time, marketing and administrative expenses
excluding the incremental impact of these new affiliations have declined to 6.7%
and 6.6% of revenues in the second quarter and first half of 1996, respectively,
as a result of cost controls in place throughout the company, and reduced
general corporate spending subsequent to the divestitures in 1995.
Operating income from continuing operations increased 30.7% over the second
quarter and 32.6% over the first half of the prior year as a result of growth in
all segments except Disease Management. Overall operating margin rates declined
in the second quarter and first half of 1996 as compared to the prior year due
primarily to the lower percentage of sales generated from the higher-margin
Disease Management segment.
Net interest expense in the second quarter and first half of 1996 increased
over the same periods of 1995 due to higher average borrowings and lower
interest income from securities received upon divestitures. Income tax expense
as a percent of revenues had declined between periods due primarily to lower
state income taxes and adjustments to tax reserves related to completed audits.
Income from continuing operations and net income for the second quarter of 1996
generated primary earnings per share of $0.30, up 30.4% from $0.23 in the
prior-year period. Net income in the first half of 1996 reflected a loss of
$0.33 per share as a result of the private payor settlements discussed further
below.
Caremark operates in four industry segments: PPM, PBM, Disease Management
and International.
Physician Practice Management
This segment's revenues increased 116.2% and 160.7% over the second quarter
and first half of 1995, respectively, as a result of same clinic revenue growth
and new affiliations in 1995 and early 1996 with Friendly Hills Healthcare
Network, Diagnostic Clinic, Glen Ellyn Clinic and CIGNA. Revenues for the
remainder of 1996 in this segment are expected to grow as compared to 1995, but
at a slower rate given the timing of new affiliations in 1995.
Second quarter and first half operating income in this segment grew 90.2%
and 152.9%, respectively, over the same periods of the prior year due to profits
from new affiliations, lower headquarters staff spending and efficiencies
implemented at existing clinics. These benefits were offset partially by
expenses related to cost reduction efforts undertaken in the second quarter of
1996 at Atlanta Medical. Operating margin rates for this segment were 4.0% in
the second quarter as compared to 4.6% in the second quarter of 1995 as a result
of higher margins being generated from new affiliations, operating efficiencies
being implemented at the clinics, and spreading fixed overhead expenses over a
larger revenue base, offset by the expenses from cost reduction
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efforts noted above. First half 1996 operating margin rates were consistent with
the same period of the prior year.
Pharmaceutical Services
This segment's revenues grew 26.7% and 24.9% over the second quarter and
first half, respectively, of the prior year. This growth is attributable to
pharmaceutical price increases, the addition of customers, further penetration
of existing customers and the sale of new products.
Operating income grew 43.7% in the second quarter of 1996 and 50.2% for the
first half of 1996 as compared to the same periods of 1995. This growth is the
result of the higher revenues noted above, a reduction in outsourcing costs and
better materials management. As a percentage of revenues, operating income grew
to 3.9% for the second quarter and first half of 1996 due to these factors,
greater mail service revenues which carry a higher margin and the spreading of
fixed overhead expenses over a higher revenue base.
Disease Management
Disease Management revenues declined in the second quarter and first half
of 1996 as compared to the same periods of 1995 as a result of lower volumes in
the hemophilia business resulting from new competition and continued government
and managed care pricing pressures for its growth hormone products. Hemophilia
revenues declined 7.0% versus the first half of 1995 and growth hormone sales
declined 12.1%. In April 1996, Caremark extended its contract with Genentech
through 1999 to remain the preferred provider of its growth hormone products in
the United States.
Operating income in this segment declined 10.6% in the second quarter and
14.1% for the first half as compared to the same periods of 1995, as a result of
the lower pricing and volume noted above. These factors have also caused a
decline in the operating margins of this business versus the same periods of
1995. Continuation of these trends could continue to have a negative impact on
this segments revenues and operating profits.
International
International revenues increased 33.0% in the second quarter and 21.3% for
the first half of 1996 as compared to the same periods of 1995 due to increased
market penetration and patient gains in most of the countries in which the
company operates. Expansion efforts continue in several countries where reform
initiatives are transforming health care delivery systems. Caremark has signed a
contract to provide prescription benefit management services in the Netherlands.
First half operating results for this segment declined $1.1 million over the
first half of 1995 due to investment and start-up spending necessary to
establish and grow these businesses. Foreign exchange rates did not have a
substantial impact on revenues or operating profits.
General Corporate
General corporate spending declined $1.1 million in the second quarter of
1996 and $2.1 million for the first half as compared to the same periods of
1995. These decreases are the result of the divestiture of businesses during
1995 and early 1996 which has allowed the company to reduce its overhead
spending.
DISCONTINUED OPERATIONS
During 1995 Caremark divested its Clozaril Patient Management System, Home
Infusion business, Oncology Management Services business and Caremark Orthopedic
Services, Inc. subsidiary. Effective February 29, 1996, the company sold its
Nephrology Services business to Total Renal Care, Inc. for $49.0 million in
cash, subject to certain post-closing adjustments. In accordance with APB 30,
which addresses the reporting for disposition of business segments, the
company's consolidated financial statements present the
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operating income and net assets of these discontinued operations separately from
continuing operations. Prior periods have been restated to conform with this
presentation.
The after-tax gain reflected in the first half of 1996 on disposition of
the Nephrology Services business, net of disposal costs, was $2.1 million. First
half 1996 discontinued operations also reflects a $65.6 million after-tax charge
related to the settlements with private payors and a $3.3 million charge for a
reduction in the amount expected to be realized for deferred state net operating
loss benefits related to discontinued operations. Discontinued operations for
the first half of 1995 reflects the net after-tax gain on the disposal of the
Clorazil Patient Management System (which was disposed of effective March 31,
1995) and the Home Infusion business (which was disposed of effective April 1,
1995). Second quarter 1995 discontinued operations also reflects a $145.0
million after-tax charge for the settlement related to the OIG investigation.
RESULTS OF OPERATIONS FOR THE YEARS 1995, 1994 AND 1993
Net Revenues.
In 1995, net revenues grew 34% over the prior year, partially as a result
of net revenues derived from new physician practice affiliations. Excluding the
impact of these affiliations, 1995 net revenues increased 21% versus 1994 as a
result of growth in the PPM, pharmaceutical services and international segments.
In 1994 and 1993, net revenues grew 47% and 35%, respectively, as a result
of growth across all of Caremark's industry segments.
Physician Practice Management. PPM business net revenues grew 139% in 1995
versus the prior year. This growth was partially due to several new physician
practice affiliations during 1995 and late 1994. In addition, 1995 same-clinic
revenues in this segment increased 17%, reflecting the benefit of additional
payor contracts as well as membership growth within existing contracts. Compared
to 1995, revenue growth is expected to continue in this segment in 1996 from
affiliations completed in 1995 and early 1996, including the CIGNA transaction,
effective January 1, 1996. This segment's revenues represented 19% of Caremark's
total revenues in 1995 compared to 11% in both 1994 and 1993.
Net revenues in the PPM segment in 1994 grew 40% over 1993 due to 20%
same-clinic growth and the impact of new affiliations. All of 1993's net
revenues in this segment were from new affiliations.
Pharmaceutical Services. PBM net revenues in 1995 increased 31% over 1994.
The growth resulted from increases in covered lives due to new payor contracts
and greater penetration from existing contracts. Management expects 1996 revenue
growth in this segment from increased covered lives of new customers and
additional penetration within existing customers. This segment's revenues
represented 60% of Caremark's total revenues in 1995 compared to 62% in 1994 and
52% in 1993.
In 1994 net revenues in the pharmaceutical services segment grew 74% 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. Net revenues in 1993 grew 21% due to
expanded covered lives.
Disease Management. Revenues from the disease management business declined
3% in 1995 as compared to 1994. This decline was primarily due to managed care
pricing pressures in the growth hormone distribution business whose revenues
declined 11% compared to 1994. Revenues in the hemophilia business increased 7%
in 1995 as a result of greater sales of the higher-priced recombinant factor
therapies. The orphan drug status for synthetic human growth hormone expired in
1994, allowing the introduction of potentially lower-priced generic equivalents
into the marketplace. While there has not yet been any significant impact from
generic equivalents, the successful introduction of generics or continued
managed care pricing pressures could continue to have a negative impact on this
segment's revenues and operating profits. Disease management revenues as a
percent of Caremark's total revenues have declined to 17% in 1995 versus 24% in
1994 and 32% in 1993.
Net revenues in the disease management segment grew 8% in 1994 over 1993
entirely due to growth in the hemophilia services business, which had new
patient gains, greater utilization per patient and greater sales
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of the higher-priced recombinant factor therapies. Net revenues in 1993 grew 16%
over 1992 for these reasons in addition to an 8% increase in growth hormone
sales.
International. Revenues from the international business grew 21% in 1995,
38% in 1994 and 40% in 1993 over the respective prior years as a result of
increased demand, greater penetration and new product offerings in the countries
in which Caremark provides services.
Cost of Goods and Services Sold.
Cost of goods and services sold increased 33% in 1995, 52% in 1994 and 33%
in 1993 over the respective prior years due to higher sales, including the
incremental impact of new physician practice management affiliations. As a
percentage of revenues, cost of goods and services sold was 85% in 1995, 86% in
1994 and 83% in 1993. The decrease as a percentage of revenues in 1995 compared
to 1994 reflects a greater revenue contribution by the physician practice
management segment, which has higher gross margins than the pharmaceutical
services segment. The increase as a percentage of revenues in 1994 versus 1993
reflects the shift in Caremark's revenues toward the lower-margin pharmaceutical
services segment from the disease management segment.
Marketing and Administrative Expenses.
Marketing and administrative expenses rose 50% in 1995, 28% in 1994 and 86%
in 1993 over the respective prior years. The 1995 increase is from the impact of
new physician practice management affiliations. Excluding these, marketing and
administrative expenses grew only 2% in 1995, reflecting the benefit of cost
controls in place throughout Caremark, lower costs related to benefit plans and
reduced corporate overhead discussed below.
The growth in 1994's marketing and administrative expenses includes
incremental spending related to new physician practice affiliations and the
rapid expansion in the pharmaceutical services segment. Marketing and
administrative spending for 1993 includes approximately $13.5 million of
incremental expenses incurred to operate as an independent company subsequent to
the November 1992 spin-off.
Provision for Doubtful Accounts.
Provision for doubtful accounts increased in 1995, 1994 and 1993 as a
result of higher net revenues. As a percentage of net revenues, the provision
has remained constant, representing 1% in 1995 and 1994 and 1.1% in 1993.
Operating Income from Continuing Operations.
Operating income from continuing operations grew 27% in 1995, 22% in 1994
and 122% in 1993 (14% excluding the impact of spin-off and restructuring charges
incurred in 1992) over the respective prior years. As a percentage of revenues,
operating income was 5.3% in 1995, 5.6% in 1994 and 6.8% in 1993. The decline in
these operating margins reflects the shift in Caremark's revenue mix toward the
PBM and PPM segments, which have lower operating margins than the disease
management segment.
Physician Practice Management. Operating income in this segment was $16.1
million in 1995, $4.1 million in 1994 and a loss of $1.4 million in 1993. The
growth in 1995 stems in large part from additional profits from new affiliations
in 1995 and late 1994. As a percentage of net revenues, operating profits in
this segment increased to 3.5% in 1995 from 2.2% in 1994 and (1.0%) in 1993.
This continued improvement is the result of operating efficiencies in existing
clinics and spreading fixed overhead charges over a larger revenue base. This
operating margin is expected to increase in the long term provided additional
efficiencies are generated at the clinics. However, short-term and quarterly
operating margins may increase or decrease depending on investment costs and
timing of cost reduction efforts in the clinics.
Pharmaceutical Services. Operating income in this segment increased 21% in
1995, 46% in 1994 and 57% in 1993 (excluding the impact of restructuring charges
incurred in 1992) over the respective prior-year periods due to its overall
revenue growth in those years. As a percentage of revenues, operating profits
were
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3.9%, 4.2% and 5.0% in 1995, 1994 and 1993, respectively. The decline in
operating margins since 1993 reflects a higher amount of lower-margin retail
sales in 1994 and 1995. Future operating margin improvement in this segment will
be dependent on purchasing leverage, cost reduction efforts and sales of
additional information-based services that have higher margins.
Disease Management. Operating income in this segment decreased 9% in 1995
and increased 1% in 1994 and 17% in 1993 versus the respective prior years.
Operating income from the growth hormone business declined 19% in 1995, 24% in
1994 and 6% in 1993, reflecting its declining sales along with pricing pressures
from managed care payors. Partially offsetting these declines were results from
the hemophilia business, which were flat in 1995 compared to 1994 and grew 27%
and 55% in 1994 and 1993, respectively. Additional managed care pricing
pressures or successful introduction of generic growth hormone products could
have a negative impact on future profits in this segment.
International. This segment contributed $1.3 million of profits in 1995
after losing $1.5 million in 1994 and $2.4 million in 1993. This improvement is
the result of continued market penetration and operating efficiencies in the
countries in which Caremark provides services.
General Corporate. General corporate spending was $16.3 million in 1995,
$25.7 million in 1994 and $21.8 million in 1993. The decrease in 1995 versus the
prior years is the result of the divestitures of businesses during 1995, which
allowed Caremark to reduce its overhead spending in areas such as business
development, tax administration, communications, regulatory services and human
resources.
Losses on Investments.
Losses on investments resulted from a decline in the value of securities
received from the Home Infusion divestiture. Caremark recorded an $86.6 million
charge in 1995 to reflect the decline in value of these securities as other than
temporary. The after-tax impact of this charge was $52.0 million, which reduced
earnings per share for the year by $0.69.
Net Interest Expense.
Interest expense, net of $8.7 million in 1995 is net of interest income of
$8.0 million and reflected the cost of higher borrowings to fund acquisitions,
offset by the benefits of proceeds from divestitures. The increase in this
expense in 1994 over 1993 reflected the impact of higher borrowings to fund
acquisitions. Interest expense in 1996 is expected to increase as a result of
higher borrowings related to acquisitions completed in 1995 and early 1996.
Income Tax Expense. Income tax expense as a percentage of pre-tax income
was 35.9% in 1995, 40.2% in 1994 and 41.6% in 1993. The 1995 expense reflects
the deferred benefit of the losses on investments. Excluding this benefit, the
1995 tax rate would have been 38.9%. The decline in the tax rate in each of
these years reflects lower effective state tax rates, higher utilization of
certain tax credits and the benefits of foreign net operating losses.
Income from Continuing Operations. Income from continuing operations in
1995 was $20.2 million ($0.27 per share) versus $54.5 million ($0.73 per share)
in 1994 and $46.9 million ($0.64 per share) in 1993. As noted above, 1995's
income from continuing operations includes a $52.0 million ($0.69 per share)
negative impact from losses on investments. Excluding this item, income from
continuing operations would have been $72.2 million ($0.96 per share), an
increase of 32% over 1994.
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Discontinued Operations
Discontinued operations reflect the after-tax results of the businesses
Caremark divested or decided to dispose of during 1995 as part of its
reorganization to focus on its four business segments. Results of these
discontinued businesses for 1995 (up to the respective dates of disposition),
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
NET REVENUES OF DISCONTINUED OPERATIONS
Home Infusion.............................................. $ 420.5 $441.9 $ 96.1
Clozaril(R) Patient Management System...................... 78.5 84.0 12.3
Oncology Management Services............................... 30.6 29.4 8.9
Caremark Orthopedic Services Inc........................... 47.0 55.8 69.1
Nephrology Services........................................ 2.7 39.7 46.6
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAXES
Home Infusion.............................................. $ 6.6 $ (2.9) $(165.4)
Clozaril(R) Patient Management System...................... 22.0 25.4 1.3
Oncology Management Services............................... 1.0 0.1 (4.1)
Caremark Orthopedic Services Inc........................... 1.3 3.3 1.6
Nephrology Services........................................ (0.1) -- (1.7)
AFTER-TAX GAIN (LOSS) ON DISPOSITIONS
Home Infusion.............................................. $ (4.0)
Clozaril Patient Management System......................... 11.1
Oncology Management Services............................... --
Caremark Orthopedic Services Inc........................... 24.7
Nephrology Services........................................ N/A
</TABLE>
Included in the 1995 after-tax loss from operations of the Home Infusion
business is a $154.8 million charge related to the June 1995 legal settlement
discussed in Note 14 to the Consolidated Financial Statements. In March 1996,
the company 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
relate to businesses that were covered by Caremark's settlement with federal and
state agencies in June 1995. In addition, Caremark 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 has been recorded in first
quarter 1996 discontinued operations. Caremark may pay the settlement amounts in
1996 and 1997 or, under certain circumstances, in semi-annual installments,
including interest, through 1999. No agreement, contract or other business
relationship in existence at the time of the settlements will be terminated or
negatively affected by the settlement agreements. The parties have also agreed
to negotiate in good faith to maintain or enhance ongoing business
relationships. Caremark's lenders have waived the impact of these settlements on
the financial covenants under its existing credit facility through September 15,
1996. The company does not believe that the above-referenced settlements will
materially affect its ability to pursue its long-term business strategy.
Management is unable to predict whether additional costs, claims or damages may
occur. Such claims, if made, could have a material negative impact on Caremark's
future results.
In 1994, the Home Infusion results include an after-tax charge of $15.0
million related to costs incurred to complete the acquisition of Critical Care
America.
Net Income.
Net income (loss) was a loss of $116.3 million in 1995 compared to income
of $80.4 million in 1994 and $77.7 million in 1993 as a result of all of the
factors noted above.
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FINANCIAL CONDITION
Assets. Caremark's total assets as of June 30, 1996 increased 11.0% over
December 31, 1995 primarily as a result of the acquisition of the assets of
CIGNA Medical Group and capital expenditures. Net working capital declined
$277.9 million since December 31, 1995 due primarily to the impact of the
private payor settlements discussed in Note 14 to Caremark's Consolidated
Financial Reports and the classification of $215.0 million of debt borrowed
under Caremark's long-term credit facility as current as of June 30, 1996 as
discussed further below. Cash balances increased as a result of the timing of
cash disbursements and borrowings. Restricted cash relates to $14.0 million
placed in escrow and required to be applied to fund a portion of the private
payor settlements. Accounts receivable increased since December 31, 1995 as a
result of the growth in revenues. Short-term deferred tax assets increased due
to the deferred tax benefits related to the private payor settlements discussed
in Note 14 to Caremark's Consolidated Financial Statements. Property and
equipment increased since December 31, 1995 as a result of capital expenditures
and assets acquired in acquisitions. Goodwill and other intangibles increased
due to the acquisition of CIGNA Medical Group. Long-term deferred tax assets
declined as this amount is expected to be realized within one year of June 30,
1996.
Assets of $1,264.2 million at December 31, 1995 increased 6% over 1994.
Excluding the net assets related to discontinued operations, total assets
increased 55% in 1995. This increase is primarily attributable to acquisitions,
which increased total assets by $248.9 million, and base business growth.
Accounts receivable, net increased $53.8 million over 1994, $30.0 million of
which relates to businesses acquired during 1995. The remaining 8% increase
resulted from the growth in sales offset by faster collections. Inventories
increased $19.8 million over 1994, primarily related to year-end purchases of
approximately $15 million to take advantage of favorable pricing. The $7.8
million increase in short-term deferred income taxes during 1995 relate
primarily to the tax impact of the legal settlement discussed in Note 14 to the
Consolidated Financial Statements. The long-term deferred tax asset relates to
the $86.6 million pre-tax charge for losses on investments. Future profits are
expected to be sufficient to realize these assets. Property and equipment, net
increased $130.9 million in 1995 due to acquisitions, which added $71.0 million
of property and equipment, and capital expenditures, primarily in the physician
practice management and pharmaceutical services segments. The $154.0 million
increase in goodwill and other intangible assets relates almost entirely to the
impact of new affiliations in the physician practice management segment.
Goodwill and other intangibles are expected to increase further in 1996 as a
result of the CIGNA Medical Group acquisition.
Investments and other noncurrent assets include $35 million of securities,
recorded at estimated fair value, received from Coram in conjunction with the
Home Infusion divestiture. They are made up of $87.3 million face value ten
year, convertible notes that bear interest at 7% and $25.0 million face value
ten year, non-convertible notes bearing interest at 12%. The recorded value
represents 25% of the face value of these securities plus accrued interest. The
future value of these securities, which are subordinated to Coram's senior debt,
will be tied to the financial performance, stock price and creditworthiness of
Coram, which Caremark's management is unable to predict.
Liabilities and Stockholders' Equity. Short-term debt increased since
December 31, 1995 due to higher borrowings under Caremark's short-term credit
facility and the inclusion as short-term, at June 30, 1996, of $215.0 million
borrowed under Caremark's long-term credit facility. This amount has been
classified as current since the waiver granted by the company's lenders in
connection with the private payor settlements does not extend beyond one year.
The increase in accounts payable is due to the pre-tax liability recorded in the
first quarter of 1996 for the private payor settlements and the timing of cash
disbursements. Accrued liabilities increased primarily due to the acquisition of
CIGNA. Long-term debt decreased since December 31, 1995 due to the short-term
classification of the credit facility borrowings. In total, debt increased $8.6
million since December 31, 1995 due to higher borrowings. Total equity declined
since December 31, 1995 primarily as a result of the private payor settlements,
partially offset by net income from continuing operations.
Liabilities as of December 31, 1995 total $870.8 million as compared to
$707.5 million at December 31, 1994. Accounts payable and accrued liabilities
increased $100.9 million in the aggregate over 1994 due to $39.5 million of
liabilities assumed in acquisitions, overall business growth and timing of
disbursements.
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Aggregate short- and long-term debt increased $65.8 million during 1995,
reflecting higher borrowings to fund acquisitions and the legal settlement
discussed in Note 14 to the Consolidated Financial Statements of Caremark,
partially offset by the application of cash proceeds from divestitures.
During 1995, Caremark entered into revised credit facilities aggregating
$380 million as of December 31, 1995; $135 million expiring September 28, 1996;
$225 million expiring September 29, 1998; and a $20 million letter-of-credit
agreement. The revised credit facilities contain maximum debt-to-operating cash
earnings (defined as earnings before interest, taxes, depreciation and
amortization), minimum interest coverage and debt-to-total-capital ratio
requirements, as well as certain restrictions regarding compliance with
Caremark's integrity program and litigation discussed in Note 14 to Caremark's
Consolidated Financial Statements. Caremark was in compliance with these
covenants at December 31, 1995. The Company's lenders have waived the impact of
the March 1996 settlements with private payors, discussed in Note 14 to the
Consolidated Financial Statements, on the financial covenants under the credit
facility through September 15, 1996. Simultaneously with or shortly after the
completion of the Merger, it is anticipated that Caremark's present credit
facility will be refinanced with a new revolving credit facility, with
MedPartners/Mullikin as the borrower, syndicated with a number of the same
lenders that are presently lenders under the Caremark credit facility. In the
event that the Merger is not consummated prior to the expiration of the waivers
under the Caremark credit facility, it is anticipated that Caremark's lenders
will either extend the waivers or enter into a revised credit facility with
Caremark. Borrowings under Caremark credit facility at December 31, 1995 totaled
$200.0 million, all of which was classified as long term. Long term debt at
December 31, 1995 and 1994 also includes the 6 7/8% $100 million senior notes
issued to the public in 1993 and maturing in August 2003.
Caremark's current ratio (current assets divided by current liabilities) as
of June 30, 1996 has declined to .77 versus 1.19 at December 31, 1995. This
decline is the result of the private payor settlement amount included as
accounts payable along with the classification as short-term debt of $215.0
million of borrowings under Caremark's long-term credit facility.
Stockholders' equity decreased to $393.4 million in 1995 as compared to
1994, reflecting the net loss for the year. This net loss was generated in large
part by the June 1995 legal settlement discussed in Note 14 to Caremark's
Consolidated Financial Statements and losses on investments, offset partially by
income from continuing operations and net gains from divestitures of businesses.
As of December 31, 1995, Caremark's ratio of debt to total capital was
51.1% as compared to 41.5% at December 31, 1994. This increase is attributable
to the impact of the June 1995 legal settlement and losses on investments noted
above and to the growth in debt related to acquisitions.
The increase in Caremark Common Stock and additional contributed capital in
1995 relates primarily to the issuance of 7.7 million common shares (at $19.50
per share) into a trust established to fund employee benefits over the next 10
years. This issuance increased common stock and additional contributed capital
by $7.7 million and $142.5 million, respectively, with an offsetting decrease
reflected in shares held in trust.
Caremark may purchase an additional 1.4 million shares of Caremark's Common
Stock in the open market under the Caremark Board's current authorization to
support issuances of Caremark Common Stock in connection with employee benefit
plans and acquisitions.
Cash Flows
Management assesses Caremark's liquidity in terms of its overall ability to
mobilize cash to support ongoing operating needs, including capital
expenditures, and to fund future acquisitions. The PBM and disease management
segments have historically generated excess cash from operations. This cash has
been used to fund these businesses' internal capital expenditure needs as well
as partially to fund the acquisitions in the PPM segment. The remaining growth
in the PPM segment has generally been funded through external debt or deferred
payments to the clinics. While they were not considered part of its ongoing
operating needs, Caremark was also able to fund the legal settlement payments
made in 1995 through its existing credit facilities and divestiture proceeds.
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Management believes that Caremark's cash flows from operations and amounts
available under Caremark's existing credit facilities are sufficient to meet its
short-term and long-term (i.e., for a period in excess of 12 months) operating
and capital expenditure requirements. The settlements with private payors
discussed in Note 14 to Caremark's Consolidated Financial Statements require
payments totaling $108.4 million of which $3.3 million has been paid as of June
30, 1996, $101.8 million is due during the remainder of 1996 and $3.3 million in
1997; or, under certain circumstances, $113.9 million plus interest would be due
as follows: $35.6 million in 1996 ($3.3 million of which has been paid), $33.3
million in 1997, $25.0 million in 1998 and $20.0 million in 1999. Caremark will
review various financing alternatives, if necessary, to provide additional
financial flexibility.
Cash Flows from Continuing Operations. Cash flows from continuing operations
represent Caremark's principal source of funding to support normal business
activities. Caremark's positive cash flow from continuing operations was $85.2
million for the six months ended June 30, 1996 versus $65.8 million for the same
period of 1995. Caremark's positive cash flow from continuing operations was
$111.5, $26.8 and $39.5 million in 1995, 1994 and 1993, respectively. The
increased operating cash flows in 1995 resulted from growth in Caremark's
earnings from continuing operations after adjusting for non-cash items such as
losses on investments. Cash flow in 1995 from continuing operations also
benefitted from growth in accounts payable and accruals related to the timing of
cash disbursements. The decrease in cash flow from continuing operations in 1994
when compared to 1993 resulted primarily from growth in accounts receivable.
Cash Flows from Investing Activities. Cash flows from investing activities
consist of capital expenditures for property and equipment as well as
acquisition spending. Capital expenditures were $48.4 and $33.0 million in the
first half of 1996 and 1995 respectively. Capital expenditures were $83.4, $70.2
and $50.3 million for the years 1995, 1994 and 1993, respectively. Capital
expenditures have been made primarily in the PPM and PBM segments, including
significant investments in information systems and technology in support of
Caremark's strategy to be an innovator in delivering and managing health care
services. Acquisition spending in the first half of 1996 reflects the
acquisition of CIGNA Medical Group as well as payments related to obligations
from physician practice management affiliations initiated in prior years.
Acquisition spending of $143.5, $69.1 and $3.1 million in 1995, 1994 and 1993,
respectively, related almost entirely to new affiliations in the physician
practice management segment.
Cash Flows from Financing Activities. Cash flows from financing activities of
$47.3 million in the first half of 1996 consist of $19.8 million of cash
received upon issuances of common stock under employee benefit plans and $27.5
million of net borrowings. Cash flows from financing activities for the year
1995 reflect net debt issuances of $11.0 million and proceeds received under
employee benefit programs (primarily stock options) of $16.3 million. These
inflows were offset by $27.2 million of treasury stock purchases and $2.9
million ($0.04 per share) of Caremark Common Stock dividend payments. Caremark
used credit facility capacity during 1995 to pay for acquisitions and the June
1995 legal settlement discussed in Note 14 to Caremark's Consolidated Financial
Statements. Proceeds from divestitures in 1995 of $355.9 million, which are
reflected in cash flows from discontinued operations, were used to pay down
outstanding credit facility borrowings. Net cash flows from financing activities
of $218.8 million in 1994 reflect borrowings to fund the acquisition of Critical
Care America (which was included as part of the Home Infusion divestiture),
while 1993's net cash flows from financing activities of $65.2 million include
the 6 7/8% $100 million bond offerings made in August of that year.
Cash Flows from Discontinued Operations. Cash flows from discontinued
operations in the first half of 1996 include the proceeds received upon the
divestiture of the Nephrology Services business. Cash flows from discontinued
operations of $114.5 million for the year 1995 include divestiture proceeds of
$355.9 million. Offsetting these inflows in 1995 are payments related to the
June 1995 legal settlement discussed in Note 14 to Caremark's Consolidated
Financial Statements and other cash flows related to the divested businesses
including acquisition and capital spending made early in 1995 related to the
Caremark Orthopedic Services Inc. subsidiary and the Nephrology Services
division. Cash flows from discontinued operations in 1994 include $175 million
paid for the acquisition of Critical Care America.
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BUSINESS OF CAREMARK
GENERAL
Caremark is a leading provider of health care services through its PPM,
PBM, Disease Management and International businesses. In its PPM business,
Caremark provides PPM services to approximately 1,000 affiliated physicians
delivering comprehensive care to over one million people. Caremark also operates
one of the largest independent PBM businesses in the United States with four
mail service pharmacies dispensing 42,000 prescriptions daily and a network of
approximately 53,000 retail pharmacies serving patients' immediate prescription
needs. Caremark's disease management business provides services and therapies to
patients with certain chronic conditions, primarily hemophilia and growth
disorders. Caremark's international business provides health care services in a
number of locations outside the United States which have different regulatory
environments and payors systems.
Initiated in 1992, Caremark's PPM business provides comprehensive
management services to large multi-specialty physician practices in major
metropolitan areas. Caremark is a leader in providing capitated health care
arrangements to payors. As of June 30, 1996 Caremark provided management
services to approximately 1,000 affiliated physicians and 210 other licensed
health care professionals who deliver comprehensive health care services to over
one million people. As of June 30, 1996, Caremark had affiliated with large,
established multi-specialty physician practices in six major metropolitan
markets, including Friendly Hills HealthCare Network (that includes CIGNA
Medical Group) in Southern California, Kelsey-Seybold Clinic in Houston, North
Suburban and Glen Ellyn Clinics in Chicago, Diagnostic Clinic in Tampa/St.
Petersburg, Oklahoma City Clinic and Atlanta Medical Clinic.
Caremark's PBM business manages outpatient prescription drug benefit
programs for more than 1,200 clients, including corporations, insurance
companies, unions, government employee groups and managed care organizations
throughout the United States. Caremark's PBM business is one of the largest
independent PBMs, dispensing 42,000 prescriptions daily from four mail services
pharmacies. Caremark also manages patients' immediate prescription needs through
a network of approximately 53,000 pharmacies.
Caremark's disease management business designs and directs comprehensive
programs, including drug therapies, to meet the health care needs of individuals
with chronic diseases or conditions. Caremark currently provides therapies and
services for individuals suffering from hemophilia, growth disorders, immune
deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
Caremark continually develops additional programs to address other chronic
diseases and conditions.
Caremark's international business is developing and implementing new
approaches to health care delivery to provide services in different regulatory
environments and payor systems in six countries.
Caremark believes that it is strategically well-positioned, as a result of
its expanding managed care capabilities, to satisfy anticipated increased demand
for lower cost, patient-centered health care services. In the PPM business,
Caremark's growth strategy focuses on the provision of comprehensive management
services to physician groups, primarily large multi-specialty physician
practices located in major metropolitan areas. In the PBM business, Caremark
focuses on the reduction of health care costs through the provision of efficient
drug benefit programs. Caremark's strategy for growth within the Disease
Management and International businesses focuses on new technologies, services
and therapies in an effort to make patient services available for the treatment
of various medical conditions, as well as on geographic expansion into selected
markets that are not yet fully served.
During 1995, Caremark sold a number of non-strategic businesses to third
parties in order to focus on its four businesses. In March, Caremark sold its
Clozaril(R) Patient Management System business, which involved managing the care
of schizophrenia patients nationwide through the distribution of the Clozaril(R)
drug and related testing services, to Health Management, Inc. In April, Caremark
sold its Home Infusion business, which included Caremark's home intravenous
infusion therapy, women's health services and the Home Care Management System,
to Coram. In September, Caremark sold its Oncology Management Services business,
which provided management services to single-specialty oncology practices, to
Preferred Oncology Networks
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of America, Inc. In December, Caremark sold its Caremark Orthopedic Services
Inc. subsidiary, which provided outpatient physical therapy and rehabilitation
services, to HEALTHSOUTH. For more information regarding these divestitures see
Note 4 to "Caremark's Consolidated Financial Statements".
The divestitures of these non-strategic businesses during 1995 are part of
Caremark's reorganization into four industry segments: PPM, PBM, Disease
Management and International. In accordance with APB Opinion No. 30, which
addresses the reporting for disposition of business segments, Caremark'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.
PHYSICIAN PRACTICE MANAGEMENT
The PPM business provides comprehensive management services to physician
groups, primarily large multi-specialty physician practices in major
metropolitan areas. The effort to control health care costs in the United States
has triggered the formation of integrated health care delivery systems, with
providers and payors sharing the risk for the cost of medical care. Integrated
delivery systems are local networks that manage all of the health care needs and
costs for individuals, including physician services, hospital services,
diagnostic testing, drug therapies, mental health and other services. Today
Caremark is a national leader in providing PPM services to physicians. Caremark
is affiliated with leading clinics in major metropolitan markets such as
Friendly Hills HealthCare Network (now including CIGNA Medical Group) in
Southern California, Kelsey-Seybold Clinic in Houston, Texas, North Suburban and
Glen Ellyn Clinics in the Chicago, Illinois area, Diagnostic Clinic in Tampa/St.
Petersburg, Florida, Oklahoma City Clinic and Atlanta Medical Clinic.
A substantial portion of the revenue of Caremark's PPM business is derived
from agreements with HMOs that provide for the receipt of "capitated" fees.
"Capitated" fees are prepaid fees calculated on a per patient per month basis,
in contrast to "fee-for-service" payments, which are specific payments for
individual medical services provided. Under these agreements, Caremark's
affiliated physicians are generally responsible for the provision of all covered
outpatient benefits, whether the affiliated physicians provide the medical
services associated with the covered benefits directly or choose to subcontract
for the provision of those medical services.
In prepaid arrangements, Caremark, 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 health
coverage to the HMOs. In return, Caremark, through its affiliated physicians, is
responsible for substantially all of the medical services required by enrollees.
In many instances, Caremark and its affiliated physicians accept financial
responsibility for hospital and ancillary health care 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"), Caremark, through its affiliated physicians, provides the majority
of covered health care services to enrollees and contracts with hospitals and
other health care providers for the balance of the covered services. Caremark's
affiliated physicians maintain full professional control over their medical
practices and set their own professional standards in order to promote high
quality health care. Caremark does not engage in the practice of medicine.
In November 1995, Caremark acquired substantially all of the assets of the
Glen Ellyn Clinic, the largest multi-specialty physician group in DuPage County,
just west of Chicago, Illinois. Caremark is managing the clinic's business
operations. Glen Ellyn Clinic has 89 physicians and provides care to
approximately 27,000 prepaid HMO patients at seven sites in the Chicago western
suburbs.
Effective January 1, 1996, Caremark acquired the assets of CIGNA Medical
Group. The CIGNA Medical Group operates 29 clinics in Los Angeles, Orange, San
Bernadino and Riverside counties. These clinics provide care to approximately
300,000 prepaid HMO members. As a result of this transaction, Caremark's
expanded health care delivery system in Southern California (a combination of
the Friendly Hills and CIGNA Medical Group networks) serves approximately
400,000 HMO members under 25 prepaid contracts through a network of over 395
physicians and a total of approximately 4,000 employees.
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PHARMACEUTICAL SERVICES
Caremark's PBM business manages outpatient prescription drug benefit
programs for corporations, insurance companies, unions, government employee
groups and managed care organizations throughout the United States. Prescription
drug benefit administration involves the design and administration of programs
for reducing the costs and improving the safety, effectiveness and convenience
of prescription drugs. Caremark's PBM business is one of the largest independent
PBMs, serving millions of Americans by dispensing 42,000 prescriptions daily
from four mail service pharmacies. Caremark also manages patients' immediate
prescription needs through a network of approximately 53,000 retail pharmacies.
Caremark offers a full range of drug cost and clinical management services,
including clinical case management, drug utilization review, formulary
management, and customized prescription programs for senior citizens. Caremark's
PBM business has created a sophisticated database of pharmaceutical-related
information to be utilized by participating physicians, payors, Caremark's
affiliated physician practices and other specialty services for purposes of
designing the safest and most effective and efficient drug therapies for
patients. In addition, Caremark entered into agreements in 1995 that added more
than one million new participants.
DISEASE MANAGEMENT
The Disease Management business delivers comprehensive long-term support
for high-cost, chronic illnesses in an effort to improve outcomes for patients
and lower costs. Caremark believes that these programs can eventually provide
for all of a patient's health care needs and do so efficiently, using advanced
protocols and eliminating unnecessary procedural steps.
Caremark provides therapies and services to individuals suffering from
hemophilia, immune deficiencies, genetic emphysema, cystic fibrosis and multiple
sclerosis. Caremark estimates that there are approximately 100,000 patients in
the United States suffering from these diseases. Caremark's Disease Management
business is utilizing Caremark's integrated health data to develop therapies to
manage the high cost of treating these patients. Products provided in such
therapies include, among others, coagulation factor for the treatment of
hemophilia and immune globulin for the treatment of chronic immune system
deficiencies.
In addition, Caremark, pursuant to a distribution agreement with Genentech
Inc., distributes recombinant growth hormones marketed under the trade names
Protropin(R) and Nutropin(R). In April 1996, Caremark extended its contract with
Genentech through 1999 to remain the preferred provider of its growth hormone
products in the United States. Orphan drug status for synthetic human growth
hormones has expired allowing the introduction of potentially lower-priced
generic equivalents into the marketplace. Although there has not yet been any
significant impact from generic equivalents, the successful introduction in the
United States of generic equivalents for these drugs could have an adverse
impact on this segment's revenues and operating profits.
INTERNATIONAL
Caremark continues to be a leader in offering new approaches to health care
delivery and management around the world. Caremark offers selected health care
services outside of hospital settings in Canada, France, Germany, Japan, The
Netherlands, the United Kingdom and Puerto Rico. For example, Caremark operates
three HIV centers in Germany and is exploring additional center-based strategies
in Europe. Caremark's Japanese subsidiary is providing enteral nutrition therapy
and chemotherapy to patients in their homes. The specific therapies and services
offered in each country are tailored to respond to the identified needs of the
health care providers and patients in that country. Caremark believes increasing
health care costs, an expanding population base over age 65, advances in medical
technology and the ability to provide improved quality of life while managing
the cost of care are conditions prevalent internationally that will foster
growth of health care services. Caremark is developing PBM programs in Europe
with initial focus in The Netherlands. Caremark believes that these programs can
provide cost effective alternatives to the current system of reimbursement for
outpatient drug therapy. Medical Card System, Inc. ("MCS"), which was
established in 1982 in Puerto Rico, has contracted for preferred rates among
health care providers (hospitals, physicians, laboratories, dentists and
pharmacies), on both a preferred and an exclusive basis, on behalf of large
employer
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groups and insurers. MCS is a full service third party administrator as well as
a provider of health cost management services.
OPERATIONS
Quality Assurance. Caremark maintains rigorous quality assurance and
regulatory policies and procedures. A focus on employee training and the
development of comprehensive manuals help to maintain consistent and high
quality care. Caremark's clinical quality assurance program provides for
periodic reviews of health care professionals affiliated with Caremark to
confirm that applicable licensure, certification and accreditation requirements
are met and to maintain the consistency and effectiveness of clinical practices.
Caremark's outcomes monitoring program involves the collection, investigation,
evaluation and reporting of results of treatments for patients with the aim of
maintaining and improving clinical procedures and services.
Under Caremark's PBM quality assurance program, a computerized order
processing system reviews each prescription order for a variety of potential
concerns, including reactions with other drugs known to be prescribed to that
patient, reactions with a patient's known allergies, duplication of therapies,
appropriateness of dosage and early refill requests that may indicate
overutilization or fraud. Each prescription is verified by a licensed pharmacist
before shipment. Caremark has retained the services of an independent national
advisory panel of physician specialists that advises it on the clinical analysis
of its intervention strategies and on cost-effective clinical procedures.
Sales and Marketing. Caremark employs approximately 85 full-time sales
personnel who market to employers, insurance companies, HMOs, health benefits
consultants and other payors. Caremark's marketing strategy emphasizes complete
and responsive service to clients and their plan participants and includes a
strong focus on patient and provider education. An independent national advisory
panel assists Caremark in formulating and validating clinical strategies used in
achieving a client organization's drug benefit objectives.
Reimbursement. Caremark derives most of its PBM, Disease Management and
International revenues from third party payors, including private insurers.
Disease Management and International revenues are also derived, to a lesser
extent, from Medicare and Medicaid and workers' compensation programs. Caremark
accepts assignment of insurance benefits from patients and receives
reimbursement directly from third party payors. Caremark also provides services
as a subcontractor to hospitals or other health care providers that receive the
assignment of benefits or reimbursement from the patient and pay Caremark a
negotiated fee. Certain of Caremark's businesses are subject to lengthy
reimbursement periods as a result of third party payment practices which affect
all health care providers. Caremark has consistently managed its accounts
receivable to minimize the length of such periods and their effect on Caremark's
cash flow.
COMPETITION
Caremark's PPM business competes with several national physician practice
managers as well as HMOs, insurance companies and hospitals. PPM competitors
include Phycor, Inc. and MedPartners/Mullikin, Inc. Competition is based on
cost, service and financial stability.
Caremark's PBM business competes on the basis of cost, service and the
flexibility and range of drug benefit plan design and management services
offered. National prescription benefit drug competitors include Merck & Co.,
Inc.'s Medco Containment Services, Inc. subsidiary, Eli Lilly and Company's PCS
Health Systems and SmithKline Beecham P.L.C.'s Diversified Pharmaceutical
Services. Caremark also competes with other prescription drug benefit programs.
Caremark's claims administration services, management reporting services and
plan management programs also compete with other prescription drug claims
processors, regional claims processors and insurance companies.
In its Disease Management and International businesses, Caremark competes
with inpatient providers, including hospitals and nursing homes, and with
alternate site providers. Caremark competes on the basis of quality, service,
cost and reputation among physicians, hospitals, patients and third party
payors.
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GOVERNMENT REGULATION
Significant aspects of Caremark's business are subject to state and federal
statutes and regulations governing the operation of pharmacies, repackaging of
drug products, dispensing of controlled substances, reimbursement under federal
and state medical assistance programs, financial relationships between health
care providers and potential referral sources, medical waste disposal, risk
sharing by non-insurance companies and workplace health and safety. Caremark's
businesses 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, the National Committee for
Quality Assurance and the Joint Commission on Accreditation of Healthcare
Organizations.
Federal Referral Laws
Caremark is subject to the laws and regulations that govern reimbursement
under Medicare and Medicaid. Federal law prohibits, with some exceptions, an
entity from filing a claim for reimbursement under the Medicare or Medicaid
programs for certain designated services if the entity has a financial
relationship with the referring physician. Federal law (the "Medicare Referral
Payments Law") also prohibits the solicitation or receipt of remuneration in
exchange for, or the offer or payment of remuneration to induce, the referral of
Medicare or Medicaid beneficiaries. The OIG has promulgated regulatory "safe
harbors" under the Medicare Referral Payments Law that describe payment
practices between health care providers and referral sources that will not be
subject to criminal prosecution and that will not provide the basis for
exclusion from the Medicare and Medicaid programs. Caremark retains health care
professionals to provide services and advice to Caremark in return for
compensation pursuant to employment, consulting or service contracts. In
addition, Caremark manages physician practices in return for a management fee.
Caremark also enters into contracts with hospitals under which Caremark provides
products and administrative services for a fee. Many of the parties with whom
Caremark contracts are in a position to or do refer patients to Caremark. The
breadth of these federal laws, the paucity of court decisions interpreting these
laws, the limited nature of regulatory interpretations and the absence of court
decisions interpreting the safe harbor regulations have resulted in ambiguous
and varying interpretations of these federal laws. No assurance can be given
that the OIG or the DOJ will not seek a determination that Caremark's past or
current policies and practices regarding contracts and relationships with health
care providers violate federal law or that Caremark's interpretation of these
laws will prevail if challenged, except with respect to those matters that were
the subject of the OIG investigation. See "Legal Proceedings". Such a
determination could have a material adverse effect on the business of Caremark.
In its settlement agreement with the OIG and DOJ, Caremark agreed to
continue to enforce certain compliance-related oversight procedures. Should the
oversight procedures reveal violations of federal law, Caremark is required to
report such violations to the OIG and DOJ. Caremark is therefore subject to
increased regulatory scrutiny and, in the event that Caremark commits legal or
regulatory violations, it may be subject to an increased risk of sanctions or
penalties, including disqualification as a provider of Medicare or Medicaid
services.
State Referral Payment Laws
Caremark is also subject to state statutes and regulations that prohibit
payments for referral of patients, splitting of professional fees by physicians
and referrals by physicians to health care providers with whom the physicians
have a financial relationship. State statutes and regulations generally apply to
services reimbursed by both governmental and private payors. Violations of these
laws may result in prohibition of payment for services rendered, loss of
pharmacy or health provider licenses as well as fines and criminal penalties.
State statutes and regulations that may affect the referral of patients to
health care providers range from statutes and regulations which are
substantially the same as the federal laws and the safe harbor regulations to a
simple requirement that physicians or other health care professionals disclose
to patients any financial relationship the physicians or health care
professionals have with a health care provider that is being recommended to the
patients. These laws and regulations vary significantly from state to state, are
often vague and in many cases have not been interpreted by courts or regulatory
agencies. Caremark is not materially dependent upon
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revenues derived from any single state. However, adverse judicial or
administrative interpretations of such laws in several states could, taken
together, have a material adverse effect on the business of Caremark.
Corporate Practice of Medicine Laws
The laws of many states prohibit corporations other than professional
corporations or associations from practicing medicine and prohibit physicians
from practicing medicine in partnership with, or as employees of, any person not
licensed to practice medicine. These laws and their interpretations vary from
state to state and are enforced by regulatory authorities with broad discretion.
Although Caremark does not employ physicians to practice medicine, represent to
the public that it offers medical services or control the practice of medicine
by its affiliated physician groups, there can be no assurance that Caremark's
arrangements will not be successfully challenged as constituting the
unauthorized practice of medicine or that the enforceability of provisions
relating thereto will not be limited.
Antitrust Laws
In connection with the corporate practice of medicine laws referred to
above, the physician practices with whom Caremark is affiliated necessarily are
organized as separate legal entities. As such, the physician practice entities
may be deemed to be persons separate both from Caremark and from each other
under the antitrust laws and, accordingly, subject to a wide range of laws which
prohibit anticompetitive conduct among separate legal entities. Caremark
believes it is in compliance with these laws and intends to comply with such
state and federal laws as may affect its development of integrated health care
delivery networks, but there can be no assurance that the review of Caremark's
business by courts or regulatory authorities will not result in a determination
that could adversely affect the operation of Caremark and its affiliated
physician groups.
Insurance Laws
The assumption of risk on a prepaid basis by health provider networks is
occurring with increasing frequency, and the practice is being reviewed by
various state insurance commissioners as well as the National Association of
Insurance Commissioners to determine whether the practice constitutes the
business of insurance. Caremark believes that it is currently in material
compliance with the insurance laws in the states where it is operating and it
intends to comply with interpretative and legislative changes as they may
develop. There can be no assurance, however, that Caremark's activities will not
be challenged or scrutinized by governmental authorities.
Pharmacy Licensing and Operation
Caremark is subject to federal and state laws and regulations governing
pharmacies. Federal controlled substance laws require Caremark 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 employed by each branch must
also satisfy state licensing requirements.
Several states have enacted legislation that requires mail service
pharmacies located elsewhere to register with the state board of pharmacy prior
to mailing drugs into the state and to meet certain operating and disclosure
requirements. These statutes generally permit a mail service pharmacy to operate
in accordance with the laws of the state in which it is located. In addition,
various pharmacy associations and boards of pharmacy have promoted enactment of
laws and regulations directed at restricting or prohibiting the operation of
out-of-state mail service pharmacies by, among other things, requiring
compliance with all laws of certain states into which the mail service pharmacy
dispenses medications whether or not those laws conflict with the laws of the
state in which the pharmacy is located. To the extent that such laws or
regulations are found to be applicable to Caremark's operations, Caremark would
be required to comply with them. Some states have
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enacted laws and regulations which, if successfully enforced, would effectively
limit some of the financial incentives available to plan sponsors that offer
mail service prescription programs. With respect to self-insured plans, the
United States Department of Labor has commented that such laws and regulations
are pre-empted by the Employee Retirement Income Security Act of 1974, as
amended. The Attorney General in one state has reached a similar conclusion and
has raised additional constitutional issues. Finally, the Federal Trade
Commission's Bureau of Competition has concluded that such laws and regulations
may be anticompetitive and not in the best interests of consumers. To date,
there have been no formal administrative or judicial efforts to enforce any of
such laws against Caremark. To the extent that any of the foregoing laws or
regulations prohibit or restrict the operation of mail service pharmacies and
are found to be applicable to Caremark, they could have an adverse effect on
Caremark's prescription mail service operations. United States Postal Service
regulations expressly permit the transmission of prescription drugs through the
postal system. The United States Postal Service has authority to restrict such
transmission.
Future Legislation and Regulation
Legislative and regulatory initiatives relating to pharmacy licensing and
operation, health care reimbursement, prescription benefit management, payment
practices, physician-investor referrals, insurance regulation, the corporate
practice of medicine and other health care cost containment issues are
frequently introduced at both the state and federal level. Caremark is unable to
predict whether or when legislation may be enacted or regulations may be adopted
relating to Caremark's business or what the effect of such legislation or
regulations may be.
EMPLOYEES
As of June 30, 1996, Caremark had approximately 11,600 employees.
Management of Caremark considers its employee relations to be good.
PROPERTIES
Caremark operates more than 115 facilities providing services in 24 states,
Puerto Rico and 6 countries. Caremark's hemophilia, immune globulin and other
specialized pharmaceutical products are distributed through its licensed
pharmacies throughout the United States. Caremark's PPM business operates
facilities of multi-specialty physician practices in California, Texas,
Illinois, Florida, Oklahoma and Georgia. Caremark's PBM business operates a
central claims administration center, an FDA registered prescription drug
repackaging facility and licensed mail service pharmacies located in Florida,
Illinois, Texas and Virginia.
Caremark leases the majority of its properties. Caremark believes that its
properties are suitable for their respective uses and, in general, are adequate
for Caremark's current needs. Caremark believes that existing leases will be
renegotiated as they expire or that suitable alternative properties can be
leased on acceptable terms.
LEGAL PROCEEDINGS
In May 1996, two stockholders, each purporting to represent a class, filed
(but have not yet served) 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 proposed merger with
MedPartners/Mullikin. The complaints seek unspecified damages, injunctive
relief, and attorneys' fees and expenses. Caremark intends, if served, to defend
these cases vigorously. Caremark believes these complaints are without merit.
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 California's unfair business practices statute. The complaint seeks
unspecified treble damages, and attorneys' fees and expenses. Caremark intends
to
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defend this case vigorously. Caremark is unable at this time to estimate the
impact, if any, of the ultimate resolution of this matter.
In June 1995, Caremark agreed to settle its investigation with the DOJ,
OIG, the Veterans Administration, the Federal Employee 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.
Under the terms of the settlement, which covered allegations dating back to
1986, a subsidiary of Caremark pled guilty to two counts of mail fraud -- one
each in Minnesota and Ohio. The basis of these guilty pleas was Caremark's
failure to provide certain information to CHAMPUS and FEHBP, federally funded
healthcare benefit programs, concerning financial relationships between Caremark
and a physician in each of Minnesota and Ohio. The settlement allows Caremark to
continue participating in Medicare, Medicaid and other government health care
programs.
Under the settlement, Caremark agreed to make civil payments of $85.3
million to the federal government in installments and $44.6 million to the
states. The plea agreement imposed $29.0 million in federal criminal fines. All
of these fines and payments have been fully paid. In addition, Caremark has
contributed $2.0 million to a grant program set up under the Ryan White
Comprehensive AIDS Resources Emergency (CARE) Act. Caremark took an after-tax
charge of $154.8 million in 1995 for these settlement payments, costs to defend
ongoing derivative, security and other lawsuits, and other related costs. This
charge has been reflected in discontinued operations and will not materially
affect Caremark's ability to pursue its long-term business strategy. There can
be no assurance, however, that the ultimate costs related to the settlement will
not exceed these estimates or that additional costs, claims and damages will not
occur.
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 and the Exchange Act, and
fraud and negligence and various state law claims in connection with public
disclosures by Caremark regarding Caremark's business practices and the status
of the OIG Investigation. The complaints seek unspecified damages, declaratory
and equitable relief, and attorneys fees and expenses. In June 1996, the
complaint filed by one group of stockholders alleging violations of the Exchange
Act only, was certified as a class. The parties to all of the complaints
continue to engage in discovery proceedings. Caremark intends to defend these
cases vigorously. Management is unable at this time to estimate the impact, if
any, of the ultimate resolution of this matter.
In August 1994 and July 1995, stockholders filed derivative actions on
behalf of Caremark against Caremark, its directors and certain employees 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 and 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 will conduct a hearing on August 16, 1996 to
consider the proposed settlement. Although the proposed settlement does not
contemplate the payment of any damages by any defendant, plaintiffs are expected
to seek an award of attorneys fees and expenses not in excess of $1.025 million
in conjunction with any approval of the settlement. The Illinois and Cook County
courts have entered stays of all proceedings in those actions pending resolution
of the Delaware derivative action. In the event the proposed settlement of the
Delaware derivative action is approved by the Delaware court, Caremark
anticipates that the Illinois derivative actions will be dismissed. In the event
the proposed settlement is not approved by the Delaware court, Caremark 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 late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of the health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and
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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 this same physician filed a separate complaint in the
District Court of South Dakota against the physician, Caremark and another
corporation alleging violations of the federal laws prohibiting payment of
remuneration to induce referral of Medicare and Medicaid beneficiaries, 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. Caremark 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 September 1995, Coram filed a complaint in the San Francisco Superior
Court against Caremark and its subsidiary, Caremark Inc. and fifty unnamed
individual defendants. The complaint, which arises from Caremark's sale to Coram
of Caremark's Home Infusion business, 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 includes specific performance, declaratory relief,
injunctive relief, and damages of $5.2 billion. Caremark filed motions in
October 1995 in the Superior Court of California seeking (i) to strike certain
causes of action due to the speculative nature of the claims and damages
asserted and (ii) dismissal of Coram's lawsuit on grounds of lack of
jurisdiction over Illinois-based Caremark. The Superior Court of California
subsequently dismissed the case against the company (but not against Caremark
Inc.) on the basis of lack of jurisdiction. Caremark also filed a lawsuit in the
U.S. District Court in Chicago claiming that Coram committed securities fraud in
its sale to Caremark of its securities in connection with the sale of the
company's Home Infusion business to Coram. This case, which has been dismissed,
is on appeal and the company has filed counterclaims to the lawsuit pending in
San Francisco. Coram's lawsuit is currently in the discovery phase.
Although Caremark cannot predict with certainty the outcome of these
proceedings, based on information currently available, management believes that
the ultimate resolution of this matter is not likely to have a material adverse
effect on Caremark's results of operations, cash flows or financial position.
Caremark intends to defend these cases vigorously.
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. 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. Caremark 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.
108
<PAGE> 119
In December 1994, Caremark was notified by the FTC that it was conducting a
civil investigation of the industry concerning whether acquisitions, alliances,
agreements or activities between prescription 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 the 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. Caremark is unable at this
time to estimate the impact, if any, of the ultimate resolution of this matter.
Caremark is party to various other commitments, claims and routine
litigation arising in the ordinary course of business. Caremark does not believe
that the result of such other commitments, claims and litigation, individually
or in the aggregate, will have a material effect on Caremark's business or its
results of operations, cash flows or financial position.
PRINCIPAL STOCKHOLDERS OF CAREMARK
The following table sets forth information with respect to the number of
shares of Common Stock beneficially owned by (i) each director of Caremark, (ii)
the chief executive officer and the five other most highly compensated executive
officers of Caremark, (iii) all directors and officers of Caremark as a group,
and (iv) each stockholder known by Caremark to be a beneficial owner of more
than 5% of any class of the Company's voting securities as of December 31, 1995.
Caremark believes that except as otherwise noted, each individual named has sole
investment and voting power with respect to the shares of Caremark Common Stock
indicated as beneficially owned by such individual. Except as otherwise noted,
the information set forth below is reported as of July 29, 1996.
<TABLE>
<CAPTION>
RIGHT TO
COMMON STOCK ACQUIRE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1)(2) COMMON STOCK(3)
- -------------------------------------------------------- ------------------------- ---------------
<S> <C> <C>
Nancy G. Brinker........................................ 19,080 19,080
Vincent A. Calarco...................................... 36,915 35,840
James G. Connelly III................................... 250,557 217,477
Kristen E. Gibney....................................... 19,633 0
J. Ira Harris........................................... 85,840 35,840
Roger L. Headrick....................................... 62,890 35,840
Thomas W. Hodson........................................ 246,306 195,939
Michele J. Hooper....................................... 54,414 42,471
Ralph W. Muller......................................... 31,120 31,120
Diane L. Munson......................................... 49,124 36,778
Raymond D. Oddi......................................... 48,731 35,840
C.A. Lance Piccolo...................................... 613,348 521,929
Phillip B. Rooney....................................... 50,840 35,840
Peter F. Whitington, M.D................................ 31,120 31,120
Blaine J. Yarrington.................................... 36,840 35,840
All directors and officers as a group (20 members)...... 1,991,578 1,588,659
Trimark Financial Corporation Inc....................... 6,557,100(4)
Manning & Napier........................................ 4,295,805(5)
Jurika & Voyles......................................... 4,836,525(6)
</TABLE>
- ---------------
(1) Included in the date under "Common Stock Beneficially Owned" are shares of
Caremark Common Stock beneficially owned under the Caremark International
Inc. 401 CARE Retirement Savings Plan and the following number of shares
beneficially owned by family members of the named director or as to which
voting and investment power is shared: Mr. Calarco 1,075 shares
beneficially owned by spouse; Mr. Harris 25,000 shares beneficially owned
by spouse; Mr. Headrick 1,000 shares beneficially owned by spouse; Mr.
Hodson 6,939 shares subject to shared voting and investment power; Mr. Oddi
880 shares
109
<PAGE> 120
beneficially owned by spouse and 62 shares subject to shared voting and
investment power; Mr. Piccolo 50 shares beneficially owned by child and
8,596 shares subject to shared voting and investment power. Of the shares
shown as beneficially owned by the officers and directors as a group,
46,563 shares are subject to shared voting and investment power and 28,045
shares shown as beneficially owned by the officers and directors as a group
are beneficially owned by family members of officers and directors.
(2) Each of the individuals named above owns less than 1% of the outstanding
Caremark Common Stock. The directors and officers as a group own 2.4% of
the outstanding Caremark Common Stock.
(3) These shares represent options which are exercisable within 60 days and are
also included in data under "Common Stock Beneficially Owned."
(4) According to the Schedule 13G filed with the Commission by Trimark Financial
Corporation Inc. on February 12, 1996, the 6,557,100 shares listed in the
table above represented 8.0% of Caremark's outstanding Common Stock as of
December 31, 1995. The address for Trimark Financial Corporation Inc. is
One First Canadian Place, Suite 5600, P.O. Box 487, Toronto, Ontario, M5X
IE5.
(5) According to the Schedule 13G filed with the Commission by Manning & Napier
on February 2, 1996, the 4,295,805 shares listed in the table above
represented 5.3% of Caremark's outstanding Common Stock as of December 31,
1995. The address for Manning & Napier is 1100 Chase Square, Rochester, New
York 14604-1907.
(6) According to the Schedule 13G filed with the Commission by Jurika & Voyles
on February 7, 1996, the 4,836,525 shares listed in the table above
represented 5.96% of Caremark's outstanding Common Stock as of December 31,
1995. The address for Jurika & Voyles is 1999 Harrison Street, Oakland,
California 94612.
110
<PAGE> 121
PRO FORMA CONDENSED FINANCIAL INFORMATION
MEDPARTNERS, INC.
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected pro forma financial information for the combined
companies gives effect to the Merger as a pooling of interests. All of the
following selected pro forma financial information should be read in conjunction
with the pro forma financial information, including the notes thereto, appearing
elsewhere in this Prospectus-Joint Proxy Statement. The pro forma financial
information set forth in this Prospectus-Joint Proxy Statement is not
necessarily indicative of the results that actually would have occurred had the
Merger been consummated on the date indicated or that may be obtained in the
future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................ $1,787,021 $2,626,669 $3,637,914 $1,677,282 $2,352,731
Operating expenses:
Affiliated physician services............................ 296,318 436,927 689,740 298,418 469,011
Outside referral expenses................................ 70,427 102,496 149,185 64,556 156,506
Other clinic expenses.................................... 277,839 397,840 696,485 293,733 495,584
Cost of goods and services sold.......................... 884,009 1,365,203 1,688,075 829,681 985,231
Other nonclinic operating expenses....................... 72,576 88,064 92,527 46,378 42,062
General corporate expenses............................... 62,643 81,472 87,859 40,931 53,931
Depreciation and amortization............................ 25,453 40,847 61,549 26,878 43,090
Net interest expense..................................... 7,021 14,885 18,061 8,451 12,414
Merger expenses.......................................... -- -- 66,564 1,051 35,232
Loss on disposal of assets............................... 122 1,627 86,600 -- --
---------- ---------- ---------- ---------- ----------
Net operating expenses............................. 1,696,408 2,529,361 3,636,645 1,610,077 2,293,061
---------- ---------- ---------- ---------- ----------
Income (loss) before pro forma income taxes and
discontinued operations.................................. 90,613 97,308 1,269 67,205 59,670
Pro forma income tax expense (benefit)..................... 42,853 43,717 (16,638) 24,733 23,519
Cumulative effect of change in method of accounting for
income taxes............................................. 298 -- -- -- --
---------- ---------- ---------- ---------- ----------
Income from continuing operations.......................... 47,462 53,591 17,907 42,472 36,151
Loss (income) from discontinued operations................. (30,808) (25,902) 136,528 139,531 66,799
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)................................ $ 78,270 $ 79,493 $ (118,621) $ (97,059) $ (30,648)
========== ========== ========== ========== ==========
Pro forma net income (loss) per share(1)................... $ 0.64 $ 0.61 $ (0.83) $ (0.72) $ (0.20)
========== ========== ========== ========== ==========
Number of shares used in pro forma net income (loss) per
share calculations(1)(2)................................. 121,495 129,524 143,215 134,838 153,252
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................................... $ 125,787
Working capital (deficit)....................................................................... (89,955)
Total assets.................................................................................... 2,119,435
Long-term debt, less current portion............................................................ 201,102
Total stockholders' equity...................................................................... 733,183
</TABLE>
- ---------------
(1) Pro forma net income (loss) per share is computed by dividing net income
(loss) by the number of common equivalent shares outstanding during the
periods in accordance with the applicable rules of the SEC. All stock
options and warrants issued have been considered as outstanding common
share equivalents for all periods presented, even if anti-dilutive, under
the treasury stock method. Shares of MedPartners Common Stock issued in
February 1995 upon conversion of the then outstanding MedPartners
Convertible Preferred Stock are assumed to be common share equivalents for
all periods presented.
(2) Number of shares used in pro forma net income (loss) per share gives effect
to the Merger by using the fixed exchange ratio of 1.21 to the Caremark
shares outstanding and gives effect to the merger of insignificant
entities.
111
<PAGE> 122
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------------------------------
MEDPARTNERS/ NEW
MULLIKIN CAREMARK CARDINAL SUMMIT MRA CHS MANAGEMENT
----------- ---------- -------- ------- ------- ------ ----------
(A) (B)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 56,221 $ 63,000 $ 206 $1,275 $ 372 $2,127 $ 175
Accounts receivable less allowance for bad
debts........................................... 165,105 376,300 3,254 8,677 -- 211 --
Inventory......................................... 11,087 99,600 -- 188 -- -- --
Prepaid expenses and other current assets......... 23,839 23,800 21 44 -- 910 59
Deferred tax assets............................... 4,139 64,200 -- -- -- 97 --
-------- ---------- ------ ------- ------- ------- -------- --
Total current assets........................ 260,391 626,900 3,481 10,184 372 3,345 234
Property and equipment.............................. 167,502 366,700 2,175 -- 9,626 133 --
Intangible assets, net.............................. 139,169 320,500 -- -- -- -- --
Deferred tax assets................................. 34,285 -- -- -- -- 227 --
Other assets........................................ 16,837 89,500 1,067 961 92 67 544
-------- ---------- ------ ------- ------- ------- -------- --
Total assets................................ $ 618,184 $1,403,600 $ 6,723 $11,145 $10,090 $3,772 $ 778
======== ========== ====== ======= ======= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 29,084 $ 357,000 $ 733 $1,764 $ 79 $ 75 $ 5
Payable to physician groups....................... 28,616 -- -- -- -- -- --
Accrued medical claims payable.................... 44,235 29,700 -- -- -- -- --
Other accrued expenses and liabilities............ 49,770 137,200 2,247 4,634 -- 1,071 18
Short-term debt and current portion of long-term
debt............................................ 7,648 289,600 3,061 53 3,388 2,550 129
-------- ---------- ------ ------- ------- ------- -------- --
Total current liabilities................... 159,353 813,500 6,041 6,451 3,467 3,696 152
Long-term debt, net of current portion.............. 35,080 130,200 1,636 -- 2,403 41 2,642
Other long-term liabilities......................... 9,140 71,900 -- 600 344 310 --
Stockholders' equity:
Common stock...................................... 52 82,200 -- -- -- 1 --
Additional paid-in capital........................ 435,618 199,600 566 -- -- 250 --
Shares held in trust.............................. -- (150,200) -- -- -- -- --
Notes receivable from shareholders................ (1,818) -- -- -- -- -- --
Unrealized loss on marketable equity securities... -- -- -- -- -- -- --
Accumulated earnings (deficit).................... (19,241) 256,400 (1,520 ) 4,094 3,876 (526) (2,016)
Treasury stock, at cost........................... -- -- -- -- -- -- --
-------- ---------- ------ ------- ------- ------- -------- --
Total stockholders' equity.................. 414,611 388,000 (954 ) 4,094 3,876 (275) (2,016)
-------- ---------- ------ ------- ------- ------- -------- --
Total liabilities and stockholders'
equity.................................... $ 618,184 $1,403,600 $ 6,723 $11,145 $10,090 $3,772 $ 778
======== ========== ====== ======= ======= ========= ==========
<CAPTION>
EMERGENCY
PROFESSIONAL PRO FORMA PRO FORMA
SERVICES ADJUSTMENTS COMBINED
-------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 2,411 $ -- $ 125,787
Accounts receivable less allowance for bad
debts........................................... 5,801 -- 559,348
Inventory......................................... -- -- 110,875
Prepaid expenses and other current assets......... 182 -- 48,855
Deferred tax assets............................... -- 96,500(D) 164,936
------- --------- ----------
Total current assets........................ 8,394 96,500 1,009,801
Property and equipment.............................. 66 (130,350)(D) 415,852
Intangible assets, net.............................. -- 88,763(I) 548,432
Deferred tax assets................................. 1,760 -- 36,272
Other assets........................................ 10 -- 109,078
------- --------- ----------
Total assets................................ $10,230 $ 54,913 $2,119,435
======= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 180 $ 100,550(D) $ 489,470
Payable to physician groups....................... -- -- 28,616
Accrued medical claims payable.................... -- -- 73,935
Other accrued expenses and liabilities............ 6,366 -- 201,306
Short-term debt and current portion of long-term
debt............................................ -- -- 306,429
Total current liabilities................... 6,546 100,550 1,099,756
------- --------- ----------
Long-term debt, net of current portion.............. -- 29,100(D) 201,102
Other long-term liabilities......................... 3,100 -- 85,394
Stockholders' equity:
Common stock...................................... -- (82,098)(E) 155
Additional paid-in capital........................ 264 82,098(E) 656,959
(150,200)(F)
88,763(I)
Shares held in trust.............................. -- 150,200(F) --
Notes receivable from shareholders................ -- -- (1,818)
Unrealized loss on marketable equity securities... -- -- --
Accumulated earnings (deficit).................... 320 (163,500)(D) 77,887
------- --------- ----------
Treasury stock, at cost........................... --
Total stockholders' equity.................. 584 (74,737) 733,183
------- --------- ----------
Total liabilities and stockholders'
equity.................................... $10,230 $ 54,913 $2,119,435
======= ========= ==========
</TABLE>
112
<PAGE> 123
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------------------
MEDPARTNERS/
MULLIKIN CAREMARK CARDINAL SUMMIT MRA CHS
------------ ---------- -------- ------- ------ -------
(A) (B)
<S> <C> <C> <C> <C> <C> <C>
Net revenue............................................. $703,683 $1,569,587 $ 17,085 $23,770 $1,082 $29,496
Operating expenses:
Affiliated physician services......................... 301,280 121,663 6,994 8,512 -- 24,575
Outside referral expenses............................. 83,516 72,990 -- -- -- --
Other clinic expenses................................. 230,521 243,525 8,434 12,922 -- --
Cost of goods and services sold....................... -- 985,231 -- -- -- --
Other nonclinic operating expenses.................... -- 42,062 -- -- -- --
General corporate expenses............................ 39,540 5,687 708 2,185 449 4,792
Depreciation and amortization......................... 16,482 24,700 217 -- 565 9
Net interest expense.................................. 2,811 9,289 99 -- 107 --
Merger expenses....................................... 34,448 -- -- -- -- 784
Loss on disposal of assets............................ -- -- -- -- -- --
-------- -------- -------- -------- ------- -------
Net operating expenses.......................... 708,598 1,505,147 16,452 23,619 1,121 30,160
-------- -------- -------- -------- ------- -------
Income (loss) before pro forma income taxes and
discontinued operations............................... (4,915) 64,440 633 151 (39) (664)
Pro forma income tax expense (benefit).................. 360 22,988 11 60 -- 30
-------- -------- -------- -------- ------- -------
Income (loss) from continuing operations................ (5,275) 41,452 622 91 (39) (694)
Loss from discontinued operations....................... -- 66,799 -- -- -- --
-------- -------- -------- -------- ------- -------
Pro forma net income (loss)............................. $ (5,275) $ (25,347) $ 622 $ 91 $ (39) $ (694)
======== ======== ======== ======== ======= =======
Pro forma net income (loss) per share................... $ (0.11) $ (0.33) $ -- $ -- $(0.11) $(14.16)
======== ======== ======== ======== ======= =======
Number of shares used in pro forma net income (loss) per
share
calculations.......................................... 50,034 77,400 -- -- 344(G) 49
======== ======== ======== ======== ======= =======
<CAPTION>
PROFESSIONAL PRO PRO
MANAGEMENT SERVICES ADJUSTMENTS COMBINED
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net revenue............................................. $1,314 $ 7,796 $(1,082)(K) $2,352,731
Operating expenses:
Affiliated physician services......................... -- 5,987 -- 469,011
Outside referral expenses............................. -- -- -- 156,506
Other clinic expenses................................. -- 1,264 (1,082)(K) 495,584
Cost of goods and services sold....................... -- -- -- 985,231
Other nonclinic operating expenses.................... -- -- -- 42,062
General corporate expenses............................ 207 363 -- 53,931
Depreciation and amortization......................... -- 7 1,110(J) 43,090
Net interest expense.................................. 108 -- -- 12,414
Merger expenses....................................... -- -- -- 35,232
Loss on disposal of assets............................ -- -- -- --
------ --------- ------- ----------
Net operating expenses.......................... 315 7,621 28 2,293,061
------ --------- ------- ----------
Income (loss) before pro forma income taxes and
discontinued operations............................... 999 175 (1,110) 59,670
Pro forma income tax expense (benefit).................. -- 70 -- 23,519
------ --------- ------- ----------
Income (loss) from continuing operations................ 999 105 (1,110) 36,151
Loss from discontinued operations....................... -- -- -- 66,799
------ --------- ------- ----------
Pro forma net income (loss)............................. $ 999 $ 105 $(1,110) $ (30,648)
====== ========= ======= ==========
Pro forma net income (loss) per share................... $ 2.78 $ -- $ (0.20)
====== ========= ==========
Number of shares used in pro forma net income (loss)
per share calculations................................ 359(G) -- 25,066(H) 153,252
====== ========= ======= ==========
</TABLE>
113
<PAGE> 124
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------
MEDPARTNERS/ NEW
MULLIKIN CAREMARK CHS MANAGEMENT
------------ ---------- -------- ----------
(A) (B)
<S> <C> <C> <C> <C>
Net revenue............................................................. $547,450 $1,120,126 $ -- $1,524
Operating expenses:
Affiliated physician services......................................... 240,225 52,280 -- --
Outside referral expenses............................................. 50,364 14,192 -- --
Other clinic expenses................................................. 191,172 100,598 -- --
Cost of goods and services sold....................................... -- 829,681 -- --
Other nonclinic operating expenses.................................... -- 46,378 -- --
General corporate expenses............................................ 32,167 8,363 -- 148
Depreciation and amortization......................................... 13,962 12,909 -- --
Net interest expense.................................................. 3,367 4,971 -- 113
Merger expenses....................................................... 1,051 -- -- --
Loss on disposal of assets............................................ -- -- -- --
------------ ---------- -------- ----------
Net operating expenses.................................................. 532,308 1,069,372 -- 261
------------ ---------- -------- ----------
Income (loss) before pro forma income taxes and discontinued
operations............................................................ 15,142 50,754 -- 1,263
Pro forma income tax expense............................................ 4,411 20,302 -- --
------------ ---------- -------- ----------
Income from continuing operations....................................... 10,731 30,452 -- 1,263
(Income) from discontinued operations................................... -- 139,531 -- --
------------ ---------- -------- ----------
Pro forma net income.................................................... $ 10,731 $ (109,079) $ -- $1,263
=========== ========= ======== ==========
Pro forma net income per share.......................................... $ 0.26 $ (1.47) $ -- $ 3.52
=========== ========= ======== ==========
Number of shares issued in pro forma net income (loss) per share
calculations.......................................................... 41,867 74,800 -- 359(G)
=========== ========= ======== ==========
<CAPTION>
PRO PRO
EMERGENCY FORMA FORMA
PROFESSIONAL ADJUSTMENTS COMBINED
SERVICE ----------- ----------
<S> <C> <C> <C>
Net revenue............................................................. $8,182 $ -- $1,677,282
Operating expenses:
Affiliated physician services......................................... 5,913 -- 298,418
Outside referral expenses............................................. -- -- 64,556
Other clinic expenses................................................. 1,963 -- 293,733
Cost of goods and services sold....................................... -- -- 829,681
Other nonclinic operating expenses.................................... -- -- 46,378
General corporate expenses............................................ 253 -- 40,931
Depreciation and amortization......................................... 7 -- 26,878
Net interest expense.................................................. -- -- 8,451
Merger expenses....................................................... -- -- 1,051
Loss on disposal of assets............................................ -- -- --
------ --------- ----------
Net operating expenses.................................................. 8,136 -- 1,610,077
------ --------- ----------
Income (loss) before pro forma income taxes and discontinued
operations............................................................ 46 -- 67,205
Pro forma income tax expense............................................ 20 -- 24,733
------ --------- ----------
Income from continuing operations....................................... 26 -- 42,472
(Income) from discontinued operations................................... -- -- 139,531
------ --------- ----------
Pro forma net income.................................................... $ 26 $ -- $ (97,059)
====== ======== =========
Pro forma net income per share.......................................... $ -- $ (0.72)
====== =========
Number of shares issued in pro forma net income (loss) per share
calculations.......................................................... -- 17,812(H) 134,838
====== ======== =========
</TABLE>
114
<PAGE> 125
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------------------------
MEDPARTNERS/
MULLIKIN CAREMARK CARDINAL SUMMIT MRA CHS
------------ --------- -------- -------- -------- ------
(A) (B)
<S> <C> <C> <C> <C> <C> <C>
Net revenue.................................... $1,153,557 $2,374,263 $ 20,881 $ 48,576 $ 2,540 $2,658
Operating expenses:
Affiliated physician services................ 506,811 124,596 10,366 22,005 -- --
Outside referral expenses.................... 109,934 39,251 -- -- -- --
Other clinic expenses........................ 394,679 260,410 11,371 23,939 -- --
Cost of goods and services sold.............. -- 1,688,075 -- -- -- --
Other nonclinic operating expenses........... -- 92,527 -- -- -- --
General corporate expenses................... 64,713 14,044 1,068 3,289 933 2,374
Depreciation and amortization................ 29,088 28,555 297 -- 1,356 9
Net interest expense......................... 8,443 8,780 144 -- 470 --
Merger expenses.............................. 66,564 -- -- -- -- --
Loss on investment........................... -- 86,600 -- -- -- --
------------ ---------- -------- -------- -------- ------
Net operating expenses................. 1,180,232 2,342,838 23,246 49,233 2,759 2,383
------------ ---------- -------- -------- -------- ------
Income (loss) before pro forma income taxes and
discontinued operations...................... (26,675) 31,425 (2,365) (657) (219) 275
Pro forma income tax expense (benefit)......... (27,233) 11,267 (26) (483) -- 107
------------ ---------- -------- -------- -------- ------
Income (loss) from continuing operations....... 558 20,158 (2,339) (174) (219) 168
Loss from discontinued operations.............. -- 136,528 -- -- -- --
------------ ---------- -------- -------- -------- ------
Pro forma net income (loss).................... $ 558 $ (116,370) $ (2,339) $ (174) $ (219) $ 168
=========== ========= ======== ======== ======== ======
Pro forma net income (loss) per share.......... $ 0.01 $ (1.55) $ -- $ -- $ (0.64) $ 3.43
=========== ========= ======== ======== ======== ======
Number of shares used in pro forma net income
(loss) per share calculations................ 42,720 75,100 -- -- 344(G) 49
=========== ========= ======== ======== ======== ======
<CAPTION>
PROFESSIONAL PRO PRO
MANAGEMENT SERVICES ADJUSTMENTS COMBINED
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net revenue.................................... $2,948 $ 35,031 $(2,540)(K) $3,637,914
Operating expenses:
Affiliated physician services................ -- 25,962 -- 689,740
Outside referral expenses.................... -- -- -- 149,185
Other clinic expenses........................ -- 8,626 (2,540)(K) 696,485
Cost of goods and services sold.............. -- -- -- 1,688,075
Other nonclinic operating expenses........... -- -- -- 92,527
General corporate expenses................... 314 1,124 -- 87,859
Depreciation and amortization................ -- 25 2,219(J) 61,549
Net interest expense......................... 224 -- -- 18,061
Merger expenses.............................. -- -- -- 66,564
Loss on investment........................... -- -- -- 86,600
---------- ------------ ----------- ----------
Net operating expenses................. 538 35,737 (321) 3,636,645
---------- ------------ ----------- ----------
Income (loss) before pro forma income taxes and
discontinued operations...................... 2,410 (706) (2,219) 1,269
Pro forma income tax expense (benefit)......... -- (270) -- (16,638)
---------- ------------ ----------- ----------
Income (loss) from continuing operations....... 2,410 (436) (2,219) 17,907
Loss from discontinued operations.............. -- -- -- 136,528
---------- ------------ ----------- ----------
Pro forma net income (loss).................... $2,410 $ (436) $(2,219) $ (118,621)
========== ========= ========== =========
Pro forma net income (loss) per share.......... $ 6.71 $ -- $ (0.83)
========== ========= =========
Number of shares used in pro forma net income
(loss) per share calculations................ 359(G) -- 24,643(H) (I) 143,215
========== ========= ========== =========
</TABLE>
115
<PAGE> 126
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------
MEDPARTNERS/ NEW
MULLIKIN CAREMARK CHS MANAGEMENT
------------ ---------- ------ ----------
(B)
(A)
<S> <C> <C> <C> <C>
Net revenue......................................................... $815,041 $1,775,203 $ -- $3,085
Operating expenses:
Affiliated physician services..................................... 349,036 63,039 -- --
Outside referral expenses......................................... 86,974 15,522 -- --
Other clinic expenses............................................. 288,623 100,933 -- --
Cost of goods and services sold................................... -- 1,365,203 -- --
Other nonclinic operating expenses................................ -- 88,064 -- --
General corporate expenses........................................ 56,653 23,643 -- 220
Depreciation and amortization..................................... 21,892 18,924 -- --
Net interest expense.............................................. 5,958 8,695 -- 232
Merger expenses................................................... -- -- -- --
Loss on disposal of assets........................................ 1,627 -- -- --
-------- ---------- ------ ------
Net operating expenses...................................... 810,763 1,684,023 -- 452
-------- ---------- ------ ------
Income (loss) before pro forma income taxes and discontinued
operations........................................................ 4,278 91,180 -- 2,633
Pro forma income tax expense (benefit).............................. 7,350 36,672 -- --
-------- ---------- ------ ------
Income (loss) from continuing operations............................ (3,072) 54,508 -- 2,633
Income from discontinued operations................................. -- (25,902) -- --
-------- ---------- ------ ------
Pro forma net income (loss)......................................... $ (3,072) $ 80,410 $ -- $2,633
======== ========== ====== ======
Pro forma net income (loss) per share............................... $ (0.08) $ 1.08 $ -- $ 7.33
======== ========== ====== ======
Number of shares issued in pro forma net income (loss) per share.... 36,553 74,800 -- 359(G)
======== ========== ====== ======
<CAPTION>
EMERGENCY PRO PRO
PROFESSIONAL FORMA FORMA
SERVICES ADJUSTMENTS COMBINED
------------ ----------- ----------
<S> <C> <C> <C>
Net revenue......................................................... $ 33,340 $ -- $2,626,669
Operating expenses:
Affiliated physician services..................................... 24,852 -- 436,927
Outside referral expenses......................................... -- -- 102,496
Other clinic expenses............................................. 8,284 -- 397,840
Cost of goods and services sold................................... -- -- 1,365,203
Other nonclinic operating expenses................................ -- -- 88,064
General corporate expenses........................................ 956 -- 81,472
Depreciation and amortization..................................... 31 -- 40,847
Net interest expense.............................................. -- -- 14,885
Merger expenses................................................... -- -- --
Loss on disposal of assets........................................ -- -- 1,627
------- ------- ----------
Net operating expenses...................................... 34,123 -- 2,529,361
------- ------- ----------
Income (loss) before pro forma income taxes and discontinued
operations........................................................ (783) -- 97,308
Pro forma income tax expense (benefit).............................. (305) -- 43,717
------- ------- ----------
Income (loss) from continuing operations............................ (478) -- 53,591
Income from discontinued operations................................. -- -- (25,902)
------- ------- ----------
Pro forma net income (loss)......................................... $ (478) $ -- $ 79,493
======= ======= ==========
Pro forma net income (loss) per share............................... $ -- $ 0.61
======= ==========
Number of shares issued in pro forma net income (loss) per share.... -- 17,812(H) 129,524
======= ======= ==========
</TABLE>
116
<PAGE> 127
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------------
EMERGENCY
MEDPARTNERS/ NEW PROFESSIONAL
MULLIKIN CAREMARK CHS MANAGEMENT SERVICES
------------ ---------- ------ ---------- ----------
(A) (B) (C)
<S> <C> <C> <C> <C> <C>
Net revenue.................................................... $549,695 $1,203,957 $ -- $3,110 $ 30,259
Operating expenses:
Affiliated physician services................................ 224,770 48,913 -- -- 22,635
Outside referral expenses.................................... 59,861 10,566 -- -- --
Other clinic expenses........................................ 197,098 73,381 -- -- 7,360
Cost of goods and services sold.............................. -- 884,009 -- -- --
Other nonclinic operating expenses........................... -- 72,576 -- -- --
General corporate expenses................................... 42,196 19,449 -- 85 913
Depreciation and amortization................................ 14,057 11,353 -- -- 43
Net interest expense......................................... 3,338 3,444 -- 239 --
Merger expenses.............................................. -- -- -- -- --
Loss on disposal of assets................................... 122 -- -- -- --
------------ ---------- ------ ---------- ----------
Net operating expenses................................ 541,442 1,123,691 -- 324 30,951
------------ ---------- ------ ---------- ----------
Income (loss) before pro forma income taxes and discontinued
operations................................................... 8,253 80,266 -- 2,786 (692)
Pro forma income tax expense (benefit)......................... 9,723 33,403 -- -- (273)
Cumulative effect of change in method of accounting for income
taxes........................................................ 298 -- -- -- --
------------ ---------- ------ ---------- ----------
Income (loss) from continuing operations....................... (1,768) 46,863 -- 2,786 (419)
Income from discontinued operations............................ -- (30,808) -- -- --
------------ ---------- ------ ---------- ----------
Pro forma net income (loss).................................... $ (1,768) $ 77,671 $ -- $2,786 $ (419)
============ ========== ====== =========== ===========
Pro forma net income (loss) per share.......................... $ (0.06) $ 1.04 $ -- $ 7.76 $ --
============ ========== ====== =========== ===========
Number of shares used in pro forma net income (loss) per share
calculations................................................. 28,403 74,900 -- 359(G) --
============ ========== ====== =========== ===========
<CAPTION>
PRO PRO
FORMA FORMA
ADJUSTMENTS COMBINED
----------- ----------
<S> <C> <C>
Net revenue.................................................... $ -- $1,787,021
Operating expenses:
Affiliated physician services................................ -- 296,318
Outside referral expenses.................................... -- 70,427
Other clinic expenses........................................ -- 277,839
Cost of goods and services sold.............................. -- 884,009
Other nonclinic operating expenses........................... -- 72,576
General corporate expenses................................... -- 62,643
Depreciation and amortization................................ -- 25,453
Net interest expense......................................... -- 7,021
Merger expenses.............................................. -- --
Loss on disposal of assets................................... -- 122
----------- ----------
Net operating expenses................................ -- 1,696,408
----------- ----------
Income (loss) before pro forma income taxes and discontinued
operations................................................... -- 90,613
Pro forma income tax expense (benefit)......................... -- 42,853
Cumulative effect of change in method of accounting for income
taxes........................................................ -- 298
----------- ----------
Income (loss) from continuing operations....................... -- 47,462
Income from discontinued operations............................ -- (30,808)
----------- ----------
Pro forma net income (loss).................................... $ -- $ 78,270
=========== ==========
Pro forma net income (loss) per share.......................... $ 0.64
==========
Number of shares used in pro forma net income (loss) per share
calculations................................................. 17,833(H) 121,495
=========== ==========
</TABLE>
117
<PAGE> 128
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION
The proposed mergers with Caremark, CHS and New Management and Emergency
Professional Services are intended to be accounted for as poolings-of-interests.
The proposed mergers with Cardinal, Summit and MRA are accounted for under the
purchase method of accounting (see below). The pro forma combined statements of
operations assume that the mergers were consummated at the beginning of the
earliest period presented. The pro forma condensed combined balance sheet
assumes that the transactions were consummated on June 30, 1996.
The pro forma financial information contains no adjustments to conform the
accounting policies of these companies because any such adjustments have been
determined to be immaterial.
The following adjustments are necessary to reflect the mergers:
A. These historical amounts for MedPartners/Mullikin for the years ended
December 31, 1995, 1994 and 1993 do not agree with the Form 10-K filed with the
SEC because the amounts have been restated to reflect the merger with PPSI which
was accounted for as a pooling-of-interests.
B. CHS was incorporated in August 1995 and commenced operations in
September 1995.
C. For purposes of combining with MedPartners/Mullikin, the Emergency
Professional Services balance sheet at April 30, 1996 was combined with the
MedPartners/Mullikin balance sheet at June 30, 1996. The Emergency Professional
Services income statements for the twelve month periods ended January 31, 1994,
1995 and 1996 and for the three month period ended April 30, 1995 and 1996 were
combined with the MedPartners/Mullikin statements of operations for the years
ended December 31, 1993, 1994 and 1995 and the six month period ended June 30,
1995 and 1996, respectively.
D. The pro forma combined statements of operations do not reflect
nonrecurring costs and charges resulting directly from the proposed mergers.
These costs and charges are estimated as follows:
<TABLE>
<CAPTION>
PROPERTY LONG-TERM TOTAL
DEFERRED AND ACCOUNTS DEBT, ACCUMULATED MERGER
TAX ASSET EQUIPMENT PAYABLE NET EARNINGS CHARGE
--------- --------- -------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Caremark.................. $92,800 $(128,100) $ 92,800 $29,100 $(157,200) $250,000
CHS and New
Management.............. 1,900 -- 5,000 -- (3,100) 5,000
Emergency Professional
Services................ 1,800 (2,250) 2,750 -- (3,200) 5,000
------- --------- -------- ------- --------- --------
$96,500 $(130,350) $100,550 $29,100 $(163,500) $260,000
======= ========= ======== ======= ========= ========
</TABLE>
The following is a detail of the estimated merger expense related to the
Caremark merger:
<TABLE>
<S> <C>
Severance and related benefits................................. $ 62,700
Operational restructuring...................................... 47,000
Lease abandonment.............................................. 30,500
Non-compatible technology...................................... 27,000
Brokerage fees................................................. 25,300
Professional fees.............................................. 24,900
Other transaction related costs................................ 20,600
Transition costs............................................... 6,000
Debt restructuring costs....................................... 5,000
Filing fees.................................................... 1,000
--------
$250,000
========
</TABLE>
The excess capacity, restructuring and market rationalization primarily
relates to computer hardware and software and leases that will be abandoned
after the merger. These assets are currently being utilized in the operations of
Caremark but are not compatible with the planned operations for
MedPartners/Mullikin. Severance and related benefits represent anticipated
payments to identified employees, as required by their respective employment
agreements, who will be terminated after the merger.
118
<PAGE> 129
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
E. To reflect the approximate number of MedPartners/Mullikin Common Stock
exchanged for the stock or assets of the proposed acquirees as follows:
<TABLE>
<S> <C>
Caremark.................................................... 93,654,000
CHS......................................................... 2,051,000
New Management.............................................. 359,000
Emergency Professional Services............................. 2,256,000
Cardinal.................................................... 2,205,000
Summit...................................................... 2,349,000
MRA......................................................... 344,000
-----------
103,218,000
===========
</TABLE>
F. To reflect the termination of the trust holding the shares held in
trust.
G. Represents the approximate shares of MedPartners/Mullikin Common Stock
to be distributed in exchange for partnership interest based on an assumed
trading price of $19.50 per share.
<TABLE>
<S> <C> <C>
New Management........................... $(7,000,000/$19.50) 359,000
MRA...................................... $(6,700,000/$19.50) 344,000
</TABLE>
H. To adjust pro forma amounts based on historical share amounts,
converting each outstanding share of the acquirees stock into
MedPartners/Mullikin Common Stock based on the following exchange ratios:
<TABLE>
<CAPTION>
EXCHANGE
RATIO
---------
<S> <C>
Caremark...................................................... 1.21(1)
Cardinal...................................................... 47,937.57(2)
Summit........................................................ 41,205.58(2)
CHS........................................................... 41.86(2)
Emergency Professional Services............................... 8,482.75(2)
</TABLE>
- ---------------
(1) The exchange ratio is fixed.
(2) The exchange ratio was based on an assumed trading price of $19.50 per
share.
The proposed mergers with Cardinal, Summit and MRA are accounted for under
the purchase method of accounting in the pro forma condensed financial
information, although consummation of the transactions are conditioned upon the
mergers being accounted for as poolings of interests. The Company and its
independent auditors are in the process of determining compliance of the
transactions with pooling accounting requirements; however, that determination
is not complete. If the mergers were accounted for as poolings of interests,
amortization expense and net loss in the pro forma condensed statement of
operations for the year ended December 31, 1995 and six months ended June 30,
1996 would be reduced by the following amounts:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Amortization expense..................................... $ 2,219,000 $ 1,110,000
Pro forma net loss....................................... 1,331,000 660,000
</TABLE>
The following adjustments are necessary to reflect the Cardinal, Summit and
MRA mergers:
I. To reflect excess purchase price over net assets acquired related to the
purchase of Cardinal, Summit and MRA. For purposes of these pro forma financial
statements, all of the excess purchase price over net assets acquired is
allocated to goodwill. Goodwill is amortized over 40 years which is the period
of the practice management agreement.
119
<PAGE> 130
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
The final amount of the excess purchase price and the allocation among the
net assets may differ from the amounts estimated. The approximate goodwill is as
follows:
<TABLE>
<S> <C>
Cardinal.................................................... $43,940,000
Summit...................................................... 42,054,000
MRA......................................................... 2,769,000
------------
$88,763,000
==========
</TABLE>
J. To record the amortization related to the recorded goodwill.
K. To eliminate rent income and expense between affiliated entities (Summit
and MRA).
120
<PAGE> 131
DESCRIPTION OF CAPITAL STOCK OF MEDPARTNERS/MULLIKIN
AUTHORIZED CAPITAL STOCK
The MedPartners/Mullikin Certificate currently provides that
MedPartners/Mullikin may issue 9,500,000 shares of Preferred Stock, par value
$.001 per share ("MedPartners/Mullikin Preferred Stock"), 500,000 shares of
MedPartners/Mullikin Series C Preferred Stock, par value $.001 per share, and
200,000,000 shares of MedPartners/Mullikin Common Stock.
MEDPARTNERS/MULLIKIN COMMON STOCK
Holders of MedPartners/Mullikin Common Stock are entitled to one vote for
each share held of record on all matters to be submitted to a vote of the
stockholders and do not have preemptive rights. Subject to preferences that may
be applicable to any outstanding shares of MedPartners/Mullikin Preferred Stock,
holders of MedPartners/ Mullikin Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the
MedPartners/Mullikin Board of Directors out of funds legally available therefor.
See "Summary of Prospectus-Joint Proxy Statement -- Market and Market Prices".
All outstanding shares of MedPartners/Mullikin Common Stock are, and the shares
to be issued in the Merger will be, when issued pursuant to the Plan of Merger,
fully paid and nonassessable. In the event of any liquidation, dissolution or
winding-up of the affairs of MedPartners/Mullikin, holders of MedPartners/
Mullikin Common Stock will be entitled to share ratably in the assets of
MedPartners/Mullikin remaining after payment or provision for payment of all of
MedPartners/Mullikin's debts and obligations and liquidation payments to holders
of any outstanding shares of MedPartners/Mullikin Preferred Stock.
MEDPARTNERS/MULLIKIN PREFERRED STOCK
The MedPartners/Mullikin Board of Directors, without further stockholder
authorization, is authorized to issue shares of MedPartners/Mullikin Preferred
Stock in one or more series and to determine and fix the rights, preferences and
privileges of each series, including dividend rights and preferences over
dividends on the MedPartners/Mullikin Common Stock and one or more series of
MedPartners/Mullikin Preferred Stock, conversion rights, voting rights (in
addition to those provided by law), redemption rights and the terms of any
sinking fund therefor, and rights upon liquidation, dissolution or winding up,
including preferences over the MedPartners/Mullikin Common Stock and one or more
series of MedPartners/Mullikin Preferred Stock. Although MedPartners/Mullikin
has no present plans to issue any shares of MedPartners/Mullikin Preferred
Stock, the issuance of shares of MedPartners/Mullikin Preferred Stock, or the
issuance of rights to purchase such shares, may have the effect of delaying,
deferring or preventing a change in control of MedPartners/ Mullikin or an
unsolicited acquisition proposal.
CERTAIN PROVISIONS OF THE MEDPARTNERS/MULLIKIN CERTIFICATE AND THE DGCL
Classified Board of Directors. The MedPartners/Mullikin Certificate of
Incorporation and MedPartners/Mullikin By-Laws provide for the
MedPartners/Mullikin Board of Directors to be divided into three classes of
directors, as nearly equal in number as is reasonably possible, serving
staggered terms so that directors' terms expire either at the 1997, 1998 or 1999
annual meeting of stockholders of MedPartners/ Mullikin. One class, consisting
of three directors (Richard M. Scrushy, Ted H. McCourtney, Jr. and Rosalio J.
Lopez, M.D.), has been elected to a term which expires in 1997. One class,
consisting of four directors (Larry R. House, Charles W. Newhall III, John S.
McDonald, J.D. and Richard J. Kramer), has been elected to a term which expires
in 1998. One class, consisting of three directors (Scott F. Meadow, Larry D.
Striplin, Jr. and Walter T. Mullikin, M.D.), has been elected to a term which
expires in 1999. See "MedPartners/Mullikin's Management -- Classified Board of
Directors".
MedPartners/Mullikin believes that a classified board of directors will
help to assure the continuity and stability of the MedPartners/Mullikin Board of
Directors and MedPartners/Mullikin's business strategies and policies as
determined by the MedPartners/Mullikin Board of Directors, since a majority of
the directors at any given time will have had prior experience as directors of
MedPartners/Mullikin. MedPartners/Mullikin believes that this, in turn, will
permit the MedPartners/Mullikin Board of Directors to more effectively represent
the interests of stockholders.
With a classified board of directors, at least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
the majority of the MedPartners/Mullikin Board of Directors. As a
121
<PAGE> 132
result, a provision relating to a classified MedPartners/Mullikin Board of
Directors may discourage proxy contests for the election of directors or
purchases of a substantial block of the MedPartners/Mullikin Common Stock
because its provisions could operate to prevent obtaining control of the
MedPartners/Mullikin Board of Directors in a relatively short period of time.
The classification provision could also have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
MedPartners/Mullikin. Under the DGCL, unless the certificate of incorporation
otherwise provides, a director on a classified board may be removed by the
stockholders of the corporation only for cause. The MedPartners/ Mullikin
Certificate does not provide otherwise.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. The MedPartners/Mullikin By-laws establish an advance
notice procedure with regard to the nomination, other than by or at the
direction of the MedPartners/Mullikin Board of Directors or a committee thereof,
of candidates for election as directors (the "Nomination Procedure") and with
regard to other matters to be brought by stockholders before an annual meeting
of stockholders of MedPartners/Mullikin (the "Business Procedure").
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the MedPartners/Mullikin
Board of Directors to the Secretary of MedPartners/ Mullikin. The requirements
as to the form and timing of that notice are specified in the
MedPartners/Mullikin By-laws. If the Chairman of the MedPartners/Mullikin Board
of Directors determines that a person was not nominated in accordance with the
Nomination Procedure, such person will not be eligible for election as a
director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Secretary of MedPartners/Mullikin. The requirements as to the form and
timing of that notice are specified in the MedPartners/Mullikin By-laws. If the
Chairman of the MedPartners/Mullikin Board of Directors determines that the
other business was not properly brought before such meeting in accordance with
the Business Procedure, such business will not be conducted at such meeting.
Although the MedPartners/Mullikin By-laws do not give the
MedPartners/Mullikin Board of Directors any power to approve or disapprove
stockholder nominations for the election of directors or of any other business
desired by stockholders to be conducted at an annual or any other meeting, the
MedPartners/ Mullikin By-laws (i) may have the effect of precluding a nomination
for the election of directors or precluding the conduct of business at a
particular annual meeting if the proper procedures are not followed or (ii) may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
MedPartners/Mullikin, even if the conduct of such solicitation or such attempt
might be beneficial to MedPartners/Mullikin and its stockholders.
Delaware Takeover Statute. MedPartners/Mullikin 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 stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or after such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
122
<PAGE> 133
MEDPARTNERS/MULLIKIN STOCKHOLDERS' RIGHTS PLAN
The following is a description of the MedPartners/Mullikin Stockholders'
Rights Plan (the "MedPartners/Mullikin Rights Plan"). The description thereof
set forth below is qualified in its entirety by reference to the
MedPartners/Mullikin Rights Plan, a copy of which has been filed as an exhibit
to the Registration Statement of which this Prospectus-Joint Proxy Statement is
a part. See "Available Information".
The MedPartners/Mullikin Rights Plan provides that one right (a "Right")
will be issued with each share of MedPartners/Mullikin Common Stock (whether
originally issued or from MedPartners/Mullikin's treasury) prior to the Rights
Distribution Date (as defined herein). The Rights are not exercisable until the
Rights Distribution Date and will expire at the close of business on the date
which is 10 years from the date of the distribution unless previously redeemed
by MedPartners/Mullikin as described below. When exercisable, each Right will
entitle the owner to purchase from MedPartners/Mullikin one one-hundredth of a
share of MedPartners/Mullikin Series C Preferred Stock at a purchase price of
$52.00 per share. The MedPartners/ Mullikin Series C Preferred Stock may be
issued in fractional shares.
Except as described below, the Rights will be evidenced by all the
MedPartners/Mullikin Common Stock certificates and will be transferred with the
MedPartners/Mullikin Common Stock certificates, and no separate Rights
certificates will be distributed. The Rights will separate from the
MedPartners/Mullikin Common Stock and a "Rights Distribution Date" will occur
upon the earlier of (i) 10 days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has acquired,
or obtained the right to acquire, beneficial ownership of 10% or more of the
outstanding MedPartners/ Mullikin Common Stock (the "Stock Acquisition Date")
and (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person or group becoming an Acquiring
Person.
After the Rights Distribution Date, Rights certificates will be mailed to
holders of record of shares of MedPartners/Mullikin Common Stock as of the
Rights Distribution Date and thereafter the separate Rights certificates alone
will represent the Rights.
The MedPartners/Mullikin Series C Preferred Stock issuable upon exercise of
the Rights will be entitled to a minimum preferential quarterly dividend payment
of $.001 per share and will be entitled to an aggregate dividend of 100 times
the dividend, if any, declared for each share of MedPartners/Mullikin Common
Stock. In the event of liquidation, the holders of the MedPartners/Mullikin
Series C Preferred Stock will be entitled to a minimum preferential liquidation
payment of $52.00 per share and will be entitled to an aggregate payment of 100
times the payment made per share of MedPartners/Mullikin Common Stock. Each
share of MedPartners/Mullikin Series C Preferred Stock will have 100 votes and
will vote together with the shares of MedPartners/Mullikin Common Stock. In the
event of any merger, consolidation or other transaction in which shares of
MedPartners/Mullikin Common Stock are changed or exchanged, each share of
MedPartners/Mullikin Series C Preferred Stock will be entitled to receive 100
times the amount received per share of MedPartners/Mullikin Common Stock. These
rights are protected by customary anti-dilution provisions. The
MedPartners/Mullikin Series C Preferred Stock will, if issued, be junior to any
other series of Preferred Stock which may be authorized and issued by
MedPartners/Mullikin, unless the terms of any such other series provide
otherwise. The MedPartners/Mullikin Series C Preferred Stock will not be
redeemable. Once the shares of MedPartners/Mullikin Series C Preferred Stock are
issued, the MedPartners/Mullikin Certificate may not be amended in a manner
which would materially alter or change the powers, preferences or special rights
of the MedPartners/Mullikin Series C Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of two-thirds or more of
the outstanding shares of MedPartners/Mullikin Series C Preferred Stock, voting
separately as a class. Because of the nature of the MedPartners/Mullikin Series
C Preferred Stock dividend, liquidation and voting rights, the value of a share
of MedPartners/Mullikin Series C Preferred Stock purchasable upon exercise of
each Right should approximate the value of one share of MedPartners/Mullikin
Common Stock.
In the event that (i) a person becomes an Acquiring Person (except pursuant
to a tender offer or an exchange offer for all outstanding shares of
MedPartners/Mullikin Common Stock at a price and on terms determined by at least
a majority of the members of the MedPartners/Mullikin Board of Directors who are
not officers of MedPartners/Mullikin and who are not representatives, nominees,
affiliates or associates of an Acquiring Person, to be (a) at a price which is
fair to MedPartners/Mullikin stockholders and (b) otherwise in the best
interests of MedPartners/Mullikin and its stockholders (a "Qualifying Offer")),
(ii) an Acquiring
123
<PAGE> 134
Person engages in certain self-dealing transactions involving
MedPartners/Mullikin, such as, (a) merging or consolidating into or with
MedPartners/Mullikin where MedPartners/Mullikin survives and the
MedPartners/Mullikin Common Stock remains outstanding, (b) transferring assets
to MedPartners/Mullikin in exchange for MedPartners/Mullikin securities, or
acquiring securities from MedPartners/Mullikin other than on the same basis as
from all other stockholders, (c) transferring assets to or from
MedPartners/Mullikin on terms less favorable than arm's length, (d) transferring
to or from MedPartners/Mullikin's assets having a fair market value in excess of
$5,000,000, (e) receiving unusual compensation or (f) receiving any other
financial benefit not provided to all other stockholders, or (iii) during such
time as there is an Acquiring Person, there is any reclassification of
securities, recapitalization, merger or consolidation which increases by more
than 1% the amount of MedPartners/Mullikin Common Stock beneficially owned by
the Acquiring Person, each holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise price, shares of
MedPartners/Mullikin Common Stock (or, in certain circumstances, cash, property
or other securities of MedPartners/Mullikin) having a value equal to two times
the exercise price of the Right. Notwithstanding any of the foregoing, following
the occurrence of any such events, all Rights that are, or (under certain
circumstances specified in the MedPartners/Mullikin Rights Plan) were,
beneficially owned by any Acquiring Person (or certain related parties), will be
null and void. However, Rights are not exercisable following the occurrence of
the events set forth above until such time as the Rights are no longer
redeemable by MedPartners/Mullikin as set forth below.
In the event that, at any time following the Stock Acquisition Date, (i)
MedPartners/Mullikin is acquired in a merger or other business combination
transaction in which MedPartners/Mullikin is not the surviving corporation or
the MedPartners/Mullikin Common Stock is changed or exchanged (other than a
merger which follows an Qualifying Offer and satisfied certain other
requirements), or (ii) 50% or more of MedPartners/Mullikin's assets or earning
power is sold or transferred, each holder of a Right (except Rights which
previously have been voided as set forth above) shall thereafter have the right
to receive upon the exercise thereof at the then current exercise price, common
stock of the acquiring company having a value equal to two times the exercise
price of the Right.
At any time until ten days following the Stock Acquisition Date,
MedPartners/Mullikin may redeem the Rights in whole, but not in part, at a price
of $.001 per Right. Immediately upon the action of the MedPartners/Mullikin
Board of Directors ordering redemption of the Rights, the Rights will terminate,
and the only right of the holders of the Rights will be to receive the $.001
redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of MedPartners/Mullikin, including without limitation,
the right to vote or to receive dividends. While the distribution of the Rights
will not be taxable to stockholders or to MedPartners/Mullikin, stockholders
may, depending upon the circumstances, recognize taxable income in the event
that the Rights become exercisable for shares of MedPartners/Mullikin Common
Stock (or other consideration) or for common stock of the acquiring company as
set forth above.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Plan may be amended by the
MedPartners/Mullikin Board of Directors prior to the Rights Distribution Date.
After the Rights Distribution Date, the provisions of the Rights Agreement may
be amended by the MedPartners/Mullikin Board of Directors in order to cure any
ambiguity, to make changes which do not adversely affect the interests of
holders of Rights (excluding the interests of any Acquiring Person) or to
shorten or lengthen any time period under the Rights Agreement, provided that no
amendment to adjust the time period governing redemption shall be made at such
time as the Rights are not redeemable.
The Rights have certain anti-takeover effects as they will cause
substantial dilution to a person or group that acquires a substantial interest
in MedPartners/Mullikin without the prior approval of the MedPartners/ Mullikin
Board of Directors. The effect of the Rights may be to inhibit a change in
control of MedPartners/ Mullikin (including through a third party tender offer
at a price which reflects a premium to then prevailing trading prices) that may
be beneficial to MedPartners/Mullikin stockholders.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
MedPartners/Mullikin's Certificate contains a provision eliminating or
limiting director liability to MedPartners/Mullikin and its stockholders for
monetary damages arising from acts or omissions in the director's capacity as a
director. The provision does not, however, eliminate or limit the personal
liability of a
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director (i) for any breach of such director's duty of loyalty to
MedPartners/Mullikin or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under the DGCL making directors personally liable, under a negligence
standard, for unlawful dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. This provision offers persons who serve on the MedPartners/Mullikin
Board of Directors protection against awards of monetary damages resulting from
breaches of their duty of care (except as indicated above). As a result of this
provision, the ability of MedPartners/Mullikin or a stockholder thereof to
successfully prosecute an action against a director for a breach of his duty of
care is limited. However, the provision does not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care. The SEC has taken the position that the provision
will have no effect on claims arising under the federal securities laws.
In addition, the MedPartners/Mullikin Certificate and the
MedPartners/Mullikin By-laws provide for mandatory indemnification rights,
subject to limited exceptions, to any director, officer, employee, or agent of
MedPartners/Mullikin who by reason of the fact that he or she is a director,
officer, employee, or agent of MedPartners/Mullikin, is involved in a legal
proceeding of any nature. Such indemnification rights include reimbursement for
expenses incurred by such director, officer, employee, or agent in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of the DGCL.
REGISTRATION RIGHTS
Pursuant to a Registration Agreement entered into in August 1993 and
amended in March 1994 (the "Registration Agreement"), the prior holders of the
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock of
MedPartners, which Convertible Preferred Stock has now been converted into
MedPartners/Mullikin Common Stock, were entitled to certain rights with respect
to the registration under the Securities Act of the 7,000,562 shares of Common
Stock into which the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock were converted. The shares of MedPartners/Mullikin
Common Stock covered by the foregoing registration rights are now eligible for
resale either under Rule 144 of the Securities Act or without restriction.
Accordingly, at the request of MedPartners/Mullikin, most of the holders of the
Common Stock, have agreed to terminate their rights with respect to the
Registration Agreement, leaving approximately 1,200,000 shares that are
presently covered by the Registration Agreement.
MedPartners/Mullikin has entered into a Registration Rights Agreement with
certain of the holders of MedPartners/Mullikin Common Stock pursuant to which
such persons will have the right to require that MedPartners/Mullikin register
shares of MedPartners/Mullikin Common Stock owned by them for sale, at one year
intervals up to three times during 1997, 1998 and 1999. Unlimited piggyback
registration rights have also been granted. The holders of these registration
rights are Walter T. Mullikin, M.D., John S. McDonald, Rosalio J. Lopez, M.D.
and DCNHS, who are the only persons deemed to be "affiliates" of MedPartners/
Mullikin, following the combination of MedPartners and MME. In the March 1996
public offering carried out by MedPartners/Mullikin, 1,358,921 shares of
MedPartners/Mullikin Common Stock were sold by Drs. Mullikin and Lopez and Mr.
McDonald at $30.25 per share pursuant to the rights granted under the Agreement.
See "Principal Stockholders of MedPartners/Mullikin".
In addition, from time-to-time, MedPartners/Mullikin will grant
registration rights, both on a contractual and a piggyback basis to various
persons in connection with acquisitions made on a private placement basis. At
June 30, 1996, a total of 2,207,318 shares of MedPartners/Mullikin Common Stock
were subject to such registration rights.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for MedPartners/Mullikin Common Stock is
ChaseMellon Shareholder Services, L.L.C., New York, New York.
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COMPARISON OF RIGHTS OF CAREMARK
AND MEDPARTNERS/MULLIKIN STOCKHOLDERS
Both Caremark and MedPartners/Mullikin are incorporated in Delaware.
Holders of the Caremark Common Stock will continue to have their rights and
obligations as stockholders of MedPartners/Mullikin after the Merger governed by
the DGCL. Set forth below is a summary comparison of the material differences in
the rights of a MedPartners/Mullikin stockholder under the MedPartners/Mullikin
Certificate and the MedPartners/Mullikin By-laws, on the one hand, and the
rights of a Caremark stockholder under the Caremark Certificate, and the
Caremark By-Laws, on the other hand. The information set forth below is
qualified in its entirety by reference to the MedPartners/Mullikin Certificate,
the MedPartners/Mullikin By-laws, the Caremark Certificate and the Caremark
By-Laws.
After the Merger, the rights and obligations of holders of Caremark Shares
exchanged for MedPartners/ Mullikin Common Stock with respect to the classes and
series of capital stock of MedPartners/Mullikin and the other matters described
below will be governed by the MedPartners/Mullikin Certificate and the
MedPartners/Mullikin By-laws.
CLASSES AND SERIES OF CAPITAL STOCK
Caremark. Caremark is authorized to issue up to 220,000,000 shares of
capital stock, of which 200,000,000 shares, are designated as Caremark Common
Stock, and of which 20,000,000 shares, par value $.01 per share, are designated
as preferred stock ("Caremark Preferred Stock"). Two million shares of Caremark
Preferred Stock have been designated as Series A Junior Participating Preferred
Stock ("Caremark Series A Junior Participating Preferred Stock"). As of the
Caremark Record Date, 82,318,626 shares of Caremark Common Stock were issued and
outstanding. In addition, there were outstanding options under Caremark stock
options plans to purchase an additional 7,365,579 shares of Caremark Common
Stock. The Caremark Board has the authority to issue the Caremark Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions for such series, without any further vote or action by the Caremark
stockholders. As of the Caremark Record Date, there were no shares of Caremark
Preferred Stock issued and outstanding, and the Caremark Board has no present
intention of issuing shares of Caremark Preferred Stock.
MedPartners/Mullikin. MedPartners/Mullikin is authorized by the
MedPartners/Mullikin Certificate to issue up to 210,000,000 shares of capital
stock, of which 200,000,000 shares are designated MedPartners/ Mullikin Common
Stock, 9,500,000 shares are designated MedPartners/Mullikin Preferred Stock, and
500,000 shares are designated MedPartners/Mullikin Series C Preferred Stock. As
of the MedPartners/ Mullikin Record Date, there were 52,540,180 shares of
MedPartners/Mullikin Common Stock outstanding. In addition, there were
outstanding options under MedPartners/Mullikin Option Plans to purchase an
additional 5,872,530 shares of MedPartners/Mullikin Common Stock. An additional
1,920,900 shares of MedPartners/Mullikin Common Stock have been reserved for
future option grants under such MedPartners/ Mullikin Option Plans. The
MedPartners/Mullikin Board of Directors has the authority to issue the
MedPartners/Mullikin Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions for each such series, without
any further vote or action by the stockholders. As of the MedPartners/Mullikin
Record Date, there were no shares of MedPartners/Mullikin Preferred Stock issued
and outstanding, and the MedPartners/Mullikin Board of Directors has no present
intention of issuing shares of MedPartners/Mullikin Preferred Stock.
As a consequence of and following the Merger, Caremark stockholders will no
longer hold Caremark Common Stock or rights to acquire Caremark Series A Junior
Participating Preferred Stock, but will instead hold shares of
MedPartners/Mullikin Common Stock with associated rights to acquire
MedPartners/Mullikin Series C Preferred Stock.
SIZE AND ELECTION OF THE BOARD OF DIRECTORS
Caremark. The Caremark Certificate provides that the number of directors
which shall constitute the Caremark Board shall be the number from time to time
fixed by the Caremark Board but in no event shall be less than three or more
than twenty. The Caremark Board currently consists of twelve directors.
Directors of
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Caremark are elected by a plurality of the votes present in person or
represented by proxy at the annual meeting of stockholders and entitled to vote
thereat.
MedPartners/Mullikin. The MedPartners/Mullikin By-laws provide that the
MedPartners/Mullikin Board of Directors shall consist of eleven directors, but
in any event consist of at least three directors, and that the size of the
MedPartners/Mullikin Board of Directors shall be fixed by the
MedPartners/Mullikin By-laws. Directors of MedPartners/Mullikin are elected by a
plurality of votes cast at the annual meeting of stockholders.
As a consequence of and following the Merger, the rights and obligations of
holders of Caremark Shares exchanged for MedPartners/Mullikin Common Stock with
respect to the size and composition of the MedPartners/Mullikin Board of
Directors will be as discussed under "Operations and Management of
MedPartners/Mullikin After the Merger -- Management" and as otherwise governed
by the MedPartners/ Mullikin By-laws as described in the immediately preceding
paragraph. At the Effective Time, the MedPartners/Mullikin By-laws shall be
amended to provide that the MedPartners/Mullikin Board of Directors shall
consist of thirteen directors.
AMENDMENT OR REPEAL OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
Under the DGCL, unless its certificate of incorporation or by-laws
otherwise provide, amendment of a corporation's certificate of incorporation
generally requires the approval of the holders of a majority of the outstanding
stock entitled to vote thereon, and if such amendment would increase or decrease
the number of authorized shares of any class or series or the par value of such
shares or would adversely affect the shares of such class or series, requires
the approval of the holders of a majority of the outstanding stock of such class
or series.
Caremark. The Caremark Certificate provides that the Caremark Certificate
shall not be amended in any manner which would materially alter or change the
power, preferences or special rights of the Series A Junior Participating
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding shares of Caremark Series A
Junior Participating Preferred Stock, voting separately as a class.
Additionally, the Caremark Certificate provides that provisions in the
Caremark Certificate relating to the classification of the Caremark Board and
the filling of vacancies in the Caremark Board may not be amended or repealed
without the affirmative vote of at least two-thirds of the holders of all the
securities of Caremark then entitled to vote on such change.
The stockholders of Caremark by a majority vote of the holders of the
majority of the voting power of the shares of capital stock of Caremark issued
or outstanding, or the directors of Caremark, by the affirmative vote of a
majority of the directors present at any meeting, may amend or alter any
Caremark By-laws, provided the substance of the proposed amendment shall have
been stated in the notice of the meeting at which such amendment was approved.
MedPartners/Mullikin. The MedPartners/Mullikin Certificate provides that
the powers and rights of the MedPartners/Mullikin Series C Preferred Stock
cannot be materially altered adversely without the affirmative vote of the
holders of a majority of the outstanding shares of MedPartners/Mullikin Series C
Preferred Stock, voting separately as a class. The MedPartners/Mullikin
Certificate of Incorporation and the MedPartners/Mullikin By-laws provide that
the MedPartners/Mullikin By-laws may be altered, amended or repealed by a vote
of a majority of the entire MedPartners/Mullikin Board of Directors.
At the Effective Time, the MedPartners/Mullikin By-laws shall be amended to
provide that the MedPartners/Mullikin Board of Directors shall consist of
thirteen directors. As a consequence of the following Merger, the stockholders
of Caremark who currently cannot materially alter or change the power,
preferences or special rights of the Caremark Series A Junior Participating
Preferred Stock without the affirmative vote of the holders of a majority of the
outstanding shares of Caremark Series A Junior Participating Preferred Stock,
voting separately as a class, as stockholders of MedPartners/Mullikin, will not
be able to materially alter
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adversely the powers and rights of the Series C Preferred Stock without the
affirmative vote of the holders of a majority of the outstanding
MedPartners/Mullikin Series C Preferred Stock, voting separately as a class.
SPECIAL MEETINGS OF STOCKHOLDERS
Caremark. The Caremark By-laws provide that special meetings of the
stockholders for any purpose or purposes may be called only (i) by the Chairman
of the Board and Chief Executive Officer or Secretary, and shall be called by
the Chairman of the Board and Chief Executive Officer or Secretary upon a
request in writing therefor, stating the purpose or purposes thereof, delivered
to the Chairman of the Board and Chief Executive Officer or Secretary, signed by
a majority of the directors, or (ii) by resolution of the directors.
MedPartners/Mullikin. The MedPartners/Mullikin By-laws provide that a
special meeting of the MedPartners/Mullikin stockholders may be called by the
President and shall be called by the President or the Secretary at the request
in writing by a majority of the MedPartners/Mullikin Board of Directors or by
the holders of at least a majority of the outstanding shares of capital stock of
MedPartners/Mullikin entitled to vote.
As a consequence of and following the Merger, the stockholders of Caremark,
who currently do not have the right to call a special meeting of stockholders
under the Caremark Certificate and Caremark By-Laws, will, as stockholders of
MedPartners/Mullikin, gain the right to call a special meeting of stockholders
as described in the immediately preceding paragraph.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS
OF DIRECTORS
Caremark. The Caremark By-Laws provide that, subject to the rights of
holders of any class or series of stock having a preference over the Caremark
Common Stock as to dividends or upon liquidation, nomination for the election of
directors may be made by any stockholders entitled to vote in the election of
directors generally only if written notice of such stockholder's intent to make
such nomination or nominations has been given, either by personal delivery or by
United States mail, postage prepaid, to the secretary of Caremark and has been
received by the secretary not later than the following dates: (i) with respect
to an election of directors to be held at an annual meeting of stockholders, 60
days in advance of such meeting if such meeting is to be held on a day which is
within 30 days preceding the anniversary of the previous year's annual meeting,
or 90 days in advance of such meeting if such meeting is to be held on or after
the anniversary of the previous year's annual meeting; and (ii) with respect to
an election to be held at an annual meeting of stockholders held at a time other
than within the time periods set forth in the immediately preceding clause (i),
or at a special meeting of stockholders for the election of directors, the close
of business on the tenth day following the date on which notice of such meeting
is first given to stockholders. Each such notice must set forth: (i) the name
and address, as they appear on Caremark's books and records, of the stockholder
who intends to make the nomination and of the person or persons to be nominated;
(ii) a representation that the stockholder is a holder of record of stock of
Caremark entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(iii) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; and (iv) such other information regarding each nominee proposed
by such stockholder as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the SEC had the nominee been nominated, or
intended to be nominated, by Caremark.
The Caremark By-Laws provide that only such business shall be conducted at
a meeting of Caremark Stockholders as shall have been properly brought before
the meeting in accordance with the procedure described below. To be properly
brought before a meeting, business must be: (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Caremark
Board; (b) otherwise properly brought before the meeting by or at the direction
of the Caremark Board; or (c) otherwise (i) properly be requested to be brought
before the meeting by a stockholder of record entitled to vote in the election
of directors generally; and (ii) constitute a proper subject to be brought
before such meeting. for business to be properly brought before a meeting of
stockholders, any stockholder who intends to bring any
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matter (other than in connection with the election of directors) before a
meeting of stockholders and is entitled to vote on such matter must deliver
written notice of such stockholder's intent to bring such matter before the
meeting of stockholders, either by personal delivery or by United States mail,
postage prepaid, to the secretary of Caremark. Such notice must be received by
the secretary not later than the following dates: (a) with respect to an annual
meeting of stockholders, 60 days in advance of such meeting if such meeting is
to be held on a day which is within 30 days preceding the anniversary of the
previous year's annual meeting, or 90 days in advance of such meeting if such
meeting is to be held on or after the anniversary of the previous year's annual
meeting; and (b) with respect to an annual meeting of stockholders held at a
time other than within the time periods set forth in the immediately preceding
clause (a), or a special meeting of stockholders, the close of business on the
tenth day following the date of public disclosure of the date of such meeting.
A stockholder's notice to the secretary must set forth as to each matter
the stockholder proposes to bring before the meeting of stockholders: (a) a
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting; (b) the name and
address, as they appear on the corporation's books and records, of the
stockholder intending to propose such business; (c) a representation that the
stockholder is a holder of stock of the corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to present
such proposal; and (d) any material interest of the stockholder in such
business.
MedPartners/Mullikin. The MedPartners/Mullikin By-laws establish an
advance notice procedure with regard to the nomination, other than by or at the
direction of the MedPartners/Mullikin Board of Directors or a committee thereof,
of candidates for election as directors and with regard to other matters to be
brought by stockholders before an annual meeting of stockholders of
MedPartners/Mullikin.
The MedPartners/Mullikin By-laws provide that nominations of persons for
election to the MedPartners/Mullikin Board of Directors may be made at a meeting
of stockholders by or at the direction of the MedPartners/Mullikin Board of
Directors, by any nominating committee or person appointed by the
MedPartners/Mullikin Board of Directors, or by any stockholder of
MedPartners/Mullikin who complies with the notice procedures set forth below.
Such nominations, other than those made by or at the direction of the
MedPartners/Mullikin Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of MedPartners/Mullikin. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of MedPartners/Mullikin not less than 60 days nor
more than 90 days prior to the meeting. Such notice shall set forth (i) the
name, age, business address and residence address of the nominee, (ii) the
principal occupation or employment of the nominee, (iii) the class and number of
shares of capital stock of MedPartners/Mullikin which are beneficially owned by
the nominee and (iv) any other information relating to the nominee that is
required to be disclosed in solicitations for proxies for election of directors
pursuant to Section 14 of the Exchange Act; and (b) as to the stockholder giving
the notice, (i) the name and address of the stockholder, (ii) the class or
series and number of shares of capital stock of MedPartners/Mullikin which are
owned by the stockholder, (iii) a description of all arrangements or
understandings between the stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by the stockholder, (iv) a representation that such stockholder
intends to appear in person or by proxy at the meeting to nominate the persons
named in such notice and (v) any other information relating to the stockholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for the election
of directors pursuant to Section 14 of the Exchange Act. Such notice must be
accompanied by a written consent of each nominee to serve as a director if
elected. MedPartners/Mullikin may require any proposed nominee to furnish such
other information as may reasonably be required by MedPartners/Mullikin to
determine the eligibility of such proposed nominee to serve as a director of
MedPartners/Mullikin.
The MedPartners/Mullikin By-laws provide that at an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the MedPartners/Mullikin Board of Directors,
otherwise properly brought before the meeting by or at the direction of the
MedPartners/Mullikin Board of Directors or otherwise
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properly brought before the meeting by a stockholder. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to MedPartners/Mullikin. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of
MedPartners/Mullikin, not less than 60 days nor more than 90 days prior to the
meeting. The notice must set forth, (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (ii) the name and record address of the
stockholder proposing such business, (iii) the class or series and number of
shares of capital stock of MedPartners/Mullikin which are owned beneficially or
of record by the stockholder, (iv) a description of all arrangements or
understandings between the stockholder and any other person or persons
(including their names) in connection with the proposal of such business by the
stockholder and any material interest of the stockholder in such business, and
(v) a representation that the stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting.
As a consequence of and following the Merger, Caremark stockholders wishing
to nominate candidates to the MedPartners/Mullikin Board of Directors or bring
business before a meeting of stockholders will have to comply with notice
procedures of MedPartners/Mullikin, which differ from those of Caremark,
including with respect to the time such notice must be given.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorneys' fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL provides that indemnification may not be made
for any claim, issue or matter as to which a person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation, unless and only to the extent a court determines that
the person is entitled to indemnity for such expenses as the court deems proper.
Caremark. The Caremark Certificate provides that Caremark will indemnify
and advance expenses to each person who serves as an officer or director of the
corporation or a subsidiary of the corporation and each person who serves or may
have served at the request of the corporation as a director, officer, employee,
or agent or another corporation, partnership, joint venture, trust or other
enterprise from any liability incurred as a result of such service to the
fullest extent permitted by the DGCL as it may from time to time be amended,
except with respect to an action commenced by such director or officer against
the corporation or by such director or officer as a derivative action by or in
the right of the corporation.
MedPartners/Mullikin. The MedPartners/Mullikin Certificate and the
MedPartners/Mullikin By-laws provide that each person who is involved in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of MedPartners/Mullikin, or is or was
serving at the request of MedPartners/Mullikin as a director, officer, employee
or agent of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to an employee benefit plan,
will be indemnified by MedPartners/ Mullikin to the full extent permitted by the
DGCL, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits
MedPartners/Mullikin to provide broader indemnification rights than said law
permitted prior to such amendment) or by other applicable laws then in effect.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling
MedPartners/Mullikin pursuant to the foregoing provisions, MedPartners/ Mullikin
has been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
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EXPERTS
The consolidated financial statements of MedPartners/Mullikin, Inc. and the
financial statements of Cardinal Healthcare, P.A., CHS Management, Inc., New
Management and Emergency Professional Services, Inc. for the indicated periods
detailed in the Index to Financial Statements appearing in this Prospectus-Joint
Proxy Statement and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Caremark International Inc. as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 included in this Prospectus-Joint Proxy Statement and
Registration Statement have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of MedPartners/Mullikin Common Stock to be
issued to the stockholders of Caremark pursuant to the Merger will be passed
upon by Haskell Slaughter & Young, L.L.C., Birmingham, Alabama.
ADDITIONAL INFORMATION
STOCKHOLDER PROPOSALS
Caremark Stockholders. If the Merger is not consummated, in order to be
eligible for inclusion in Caremark's proxy solicitation materials for its 1997
annual meeting of stockholders, any stockholder proposal to be considered at
such meeting must have been received by Caremark not later than November 20,
1996. Caremark will not be required to include in its proxy solicitation
material a stockholder proposal which is received after that date or which
otherwise fails to meet the requirements for stockholder proposals established
by regulations of the SEC. If the Merger is consummated, there will be no 1997
annual meeting of Caremark stockholders.
MedPartners/Mullikin Stockholders. In order to be eligible for inclusion
in MedPartners/Mullikin's proxy solicitation materials for its 1997 annual
meeting of stockholders, any stockholder proposal to be considered at such
meeting must have been received by MedPartners/Mullikin not less than 60 days,
nor more than 90 days, prior to the meeting, the date of which has not been set
as of the date hereof. MedPartners/Mullikin will not be required to include in
its proxy solicitation material a stockholder proposal which is received after
that date or which otherwise fails to meet the requirements for stockholder
proposals established by regulations of the SEC.
OTHER BUSINESS
The Caremark and MedPartners/Mullikin Boards of Directors are not aware of
any business to be acted upon at the Special Meetings other than as described
herein. If, however, other matters are properly brought before the Special
Meetings, or any adjournments or postponements thereof, the persons appointed as
proxies will have discretion to vote or act thereon according to their best
judgment and applicable SEC rules.
131
<PAGE> 142
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
MEDPARTNERS/MULLIKIN, INC.
Report of Independent Auditors...................................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995........................ F-4
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995.......................................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995............................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995.......................................................................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
MEDPARTNERS/MULLIKIN, INC. (UNAUDITED)
Consolidated Balance Sheet as of June 30, 1996 (unaudited).......................... F-22
Consolidated Statements of Operations for the six months ended June 30, 1995 and
1996 (unaudited).................................................................. F-23
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and
1996 (unaudited).................................................................. F-24
Notes to Unaudited Consolidated Financial Statements................................ F-25
CAREMARK INTERNATIONAL INC.
Report of Independent Accountants................................................... F-29
Consolidated Balance Sheets as of December 31, 1994 and 1995........................ F-30
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995.......................................................................... F-31
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994,
and 1995.......................................................................... F-32
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994,
and 1995.......................................................................... F-33
Notes to Consolidated Financial Statements.......................................... F-34
CAREMARK INTERNATIONAL INC. (UNAUDITED)
Consolidated Balance Sheet as of June 30, 1996 (unaudited).......................... F-50
Consolidated Statements of Operations for the six months ended June 30, 1995 and
1996 (unaudited).................................................................. F-51
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and
1996 (unaudited).................................................................. F-52
Notes to Consolidated Financial Statements (unaudited).............................. F-53
CARDINAL HEALTHCARE, P.A.(1)
Report of Independent Auditors...................................................... F-57
Balance Sheet as of December 31, 1995............................................... F-58
Statement of Operations for the year ended December 31, 1995........................ F-59
Statement of Changes in Stockholders' Deficit for the year ended December 31,
1995.............................................................................. F-60
Statement of Cash Flows for the year ended December 31, 1995........................ F-61
Notes to Financial Statements....................................................... F-62
CARDINAL HEALTHCARE, P.A. (UNAUDITED)(1)
Balance Sheet as of December 31, 1994 (unaudited)................................... F-67
Statements of Income for the years ended December 31, 1993 and 1994 (unaudited)..... F-68
Statements of Changes in Stockholders' Equity for the years ended December 31, 1993
and 1994 (unaudited).............................................................. F-69
Statements of Cash Flows for the years ended December 31, 1993 and 1994
(unaudited)....................................................................... F-70
Notes to Unaudited Financial Statements............................................. F-71
Balance Sheet as of June 30, 1996 (unaudited)....................................... F-75
Statements of Income for the six months ended June 30, 1995 and 1996 (unaudited).... F-76
Statements of Cash Flows for the six months ended June 30, 1995 and 1996
(unaudited)....................................................................... F-77
Note to Unaudited Financial Statements.............................................. F-78
</TABLE>
F-1
<PAGE> 143
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
CHS MANAGEMENT, INC.(1)
Report of Independent Auditors...................................................... F-79
Balance Sheet as of December 31, 1995............................................... F-80
Statement of Income for the period from September 1, 1995 (inception) through
December 31, 1995................................................................. F-81
Statement of Stockholders' Equity for the period from September 1, 1995 (inception)
through December 31, 1995......................................................... F-82
Statement of Cash Flows for the period from September 1, 1995 (inception) through
December 31, 1995................................................................. F-83
Notes to Financial Statements....................................................... F-84
CHS MANAGEMENT, INC. (UNAUDITED)(1)
Condensed Balance Sheet as of June 30, 1996 (unaudited)............................. F-89
Condensed Statement of Operations and Accumulated Deficit for the six months ended
June 30, 1996 (unaudited)......................................................... F-90
Condensed Statement of Cash Flows for the six months ended June 30, 1996
(unaudited)....................................................................... F-91
Notes to Unaudited Condensed Financial Statements................................... F-92
NEW MANAGEMENT(1)
Report of Independent Auditors...................................................... F-93
Balance Sheets as of December 31, 1994 and 1995..................................... F-94
Statements of Income for the years ended December 31, 1994 and 1995................. F-95
Statements of Partners' Deficiency for the years ended December 31, 1994 and 1995... F-96
Statements of Cash Flows for the years ended December 31, 1994 and 1995............. F-97
Notes to Financial Statements....................................................... F-98
NEW MANAGEMENT (UNAUDITED)(1)
Balance Sheet as of December 31, 1993 (unaudited)................................... F-100
Statement of Income for the year ended December 31, 1993 (unaudited)................ F-101
Statement of Cash Flows for the year ended December 31, 1993 (unaudited)............ F-102
Notes to Unaudited Financial Statements............................................. F-103
Condensed Balance Sheet as of June 30, 1996 Unaudited).............................. F-105
Condensed Statements of Income for the six months ended June 30, 1995 and 1996
(unaudited)....................................................................... F-106
Condensed Statements of Cash Flows for the six months ended June 30, 1995 and 1996
(unaudited)....................................................................... F-107
Note to Unaudited Condensed Financial Statements.................................... F-108
EMERGENCY PROFESSIONAL SERVICES, INC.(1)
Report of Independent Auditors...................................................... F-109
Balance Sheets as of January 31, 1995 and 1996...................................... F-110
Statements of Operations for the years ended January 31, 1994, 1995 and 1996........ F-111
Statements of Changes in Stockholders' Equity for the years ended January 31, 1994,
1995 and 1996..................................................................... F-112
Statements of Cash Flows for the years ended January 31, 1994, 1995 and 1996........ F-113
Notes to Financial Statements....................................................... F-114
EMERGENCY PROFESSIONAL SERVICES, INC. (UNAUDITED)(1)
Balance Sheet as of April 30, 1996 (unaudited)...................................... F-117
Statements of Income for the three months ended April 30, 1995 and 1996
(unaudited)....................................................................... F-118
Statements of Cash Flows for the three months ended April 30, 1995 and 1996
(unaudited)....................................................................... F-119
Note to Unaudited Financial Statements.............................................. F-120
</TABLE>
- ---------------
(1) These entities are probable combinations with or acquisitions of
MedPartners/Mullikin.
F-2
<PAGE> 144
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MedPartners/Mullikin, Inc.
We have audited the accompanying consolidated balance sheets of
MedPartners/Mullikin, 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/Mullikin, 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
February 22, 1996
F-3
<PAGE> 145
MEDPARTNERS/MULLIKIN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 66,623 $ 55,328
Marketable equity securities........................................... 37,689 35,567
Accounts receivable, less allowances for bad debts of
$21,504,000 and $29,777,000......................................... 88,340 135,176
Inventories............................................................ 5,543 9,779
Income taxes........................................................... -- 977
Prepaid expenses and other current assets.............................. 8,759 19,214
-------- --------
Total current assets........................................... 206,954 256,041
Property and equipment, net.............................................. 122,023 155,376
Intangible assets, net................................................... 74,933 111,971
Deferred tax asset....................................................... 1,267 35,002
Other assets............................................................. 12,797 18,343
-------- --------
Total assets................................................... $417,974 $576,733
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 21,980 $ 32,158
Payable to physician groups............................................ 24,669 31,810
Accrued compensation................................................... 15,557 15,949
Other accrued expenses and liabilities................................. 9,834 31,650
Accrued medical claims payable......................................... 44,924 43,433
Income taxes payable................................................... 1,729 --
Current portion of long-term liabilities............................... 12,656 9,149
-------- --------
Total current liabilities...................................... 131,349 164,149
Long-term debt, net of current portion................................... 146,498 200,814
Other long-term liabilities.............................................. 5,936 6,272
Estimated malpractice liability.......................................... 4,958 2,781
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; 75,000,000 shares authorized; issued --
28,123,000 in 1994 and 42,508,000 in 1995........................... 28 42
Additional paid-in capital............................................. 116,240 214,422
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)
Accumulated deficit.................................................... (1,149) (7,128)
-------- --------
Total stockholders' equity..................................... 109,232 202,717
-------- --------
Total liabilities and stockholders' equity..................... $417,974 $576,733
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 146
MEDPARTNERS/MULLIKIN, 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........................................... $549,695 $815,041 $1,153,557
Operating expenses:
Cost of affiliated physician services............... 224,770 349,036 506,811
Clinic salaries, wages and benefits................. 112,489 159,010 216,119
Outside hospitalization expense..................... 59,861 86,974 109,934
Clinic rent and lease expense....................... 18,832 27,515 41,825
Clinic supplies..................................... 24,529 34,453 47,744
Other clinic costs.................................. 41,248 67,645 88,991
General corporate expenses.......................... 42,196 56,653 64,713
Depreciation and amortization....................... 14,057 21,892 29,088
Net interest expense................................ 3,338 5,958 8,443
Merger expenses..................................... -- -- 66,564
Loss on disposal of assets.......................... 122 1,627 --
-------- -------- ----------
Net operating expenses...................... 541,442 810,763 1,180,232
-------- -------- ----------
Income (loss) before income taxes and cumulative
effect of change in method of accounting............ 8,253 4,278 (26,675)
Income tax expense (benefit).......................... 4,685 5,071 (27,233)
-------- -------- ----------
Income (loss) before cumulative effect of change in
method of accounting................................ 3,568 (793) 558
Cumulative effect of change in method of accounting
for income taxes.................................... 298 -- --
-------- -------- ----------
Net income (loss)..................................... 3,270 (793) 558
Pro forma income taxes................................ 5,038 2,279 --
-------- -------- ----------
Pro forma net income (loss)........................... $ (1,768) $ (3,072) $ 558
======== ======== =========
Pro forma net income (loss) per share................. $ (0.06) $ (0.08) $ 0.01
======== ======== =========
Number of shares used in pro forma net income (loss)
per share........................................... 28,403 36,553 42,720
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 147
MEDPARTNERS/MULLIKIN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
NOTES GAIN/(LOSS)
COMMON STOCK ADDITIONAL RECEIVABLE ON MARKETABLE UNAMORTIZED RETAINED TOTAL
--------------- PAID-IN FROM EQUITY DEFERRED EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS SECURITIES COMP. (DEFICIT) EQUITY
------ ------ ---------- ------------ ------------- ----------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1992..................... 15,709 $ 16 $ 33,466 $ (2,042) $ -- $ (11) $ 14,166 $ 45,595
Capital contributions.... 5,219 5 32,326 -- -- -- -- 32,331
Capital distributions.... (76) -- (389) -- -- -- -- (389)
Dividends and
distributions
paid................... -- -- -- -- -- -- (13,114) (13,114)
Net change in notes
receivable from
stockholders........... -- -- -- (354) -- -- -- (354)
Unrealized loss on
marketable equity
securities, net of
deferred taxes......... -- -- -- -- (166) -- -- (166)
Expenses related to
offering............... -- -- (71) -- -- -- -- (71)
Purchase of Medical
Business Solutions,
Inc.................... 60 -- 60 -- -- -- -- 60
Redemption of shares at
par on September 1,
1993................... (675) (1) -- -- -- -- -- (1)
Pro forma tax provision
of pooled entities..... -- -- -- -- -- -- 5,038 5,038
Stock options............ 251 -- 2,287 -- -- -- -- 2,287
Amortization of deferred
compensation........... -- -- -- -- -- 11 -- 11
Pro forma net loss....... -- -- -- -- -- -- (1,768) (1,768)
------ ------ ---------- ------------ ------ ----------- -------- -------------
Balances at December 31,
1993..................... 20,488 20 67,679 (2,396) (166) -- 4,322 69,459
Capital contributions.... 7,605 8 47,052 -- -- -- -- 47,060
Capital distributions.... (42) -- (3,594) -- -- -- -- (3,594)
Dividends and
distributions
paid................... -- -- -- -- -- -- (4,678) (4,678)
Net change in notes
receivable from
stockholders........... -- -- -- 47 -- -- -- 47
Unrealized gain on
marketable equity
securities, net of
deferred taxes......... -- -- -- -- 180 -- -- 180
Expenses related to
redeemable convertible
preferred stock........ -- -- (49) -- -- -- -- (49)
Pro forma tax provision
of pooled entities..... -- -- -- -- -- -- 2,279 2,279
Deferred compensation on
issuance of options.... -- -- 4,350 -- -- (4,350) -- --
Stock options............ 72 -- 802 -- -- -- -- 802
Amortization of deferred
compensation........... -- -- -- -- -- 798 -- 798
Pro forma net loss....... -- -- -- -- -- -- (3,072) (3,072)
------ ------ ---------- ------------ ------ ----------- -------- -------------
Balances at December 31,
1994..................... 28,123 28 116,240 (2,349) 14 (3,552) (1,149) 109,232
Balance for immaterial
pooling-of-interests
entities................. -- -- 2 -- -- -- (308) (306)
Capital contributions.... 6,605 6 77,532 -- -- -- -- 77,538
Capital distributions.... (26) -- (470) -- -- -- -- (470)
Dividends and
distributions
paid................... -- -- -- -- -- -- (6,229) (6,229)
Net change in notes
receivable from
stockholders........... -- -- -- 419 -- -- -- 419
Unrealized loss on
marketable equity
securities, net of
deferred taxes......... -- -- -- -- (21) -- -- (21)
Conversion of preferred
stock.................. 7,001 7 19,994 -- -- -- -- 20,001
Stock options............ 805 1 1,124 -- -- -- -- 1,125
Amortization of deferred
compensation........... -- -- -- -- -- 870 -- 870
Pro forma net income..... -- -- -- -- -- -- 558 558
------ ------ ---------- ------------ ------ ----------- -------- -------------
Balances at December 31,
1995..................... 42,508 $ 42 $214,422 $ (1,930) $ (7) $(2,682) $ (7,128) $ 202,717
====== ====== ======== ========== =========== ========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 148
MEDPARTNERS/MULLIKIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Pro forma net income (loss)................................. $(1,768) $ (3,072) $ 558
Adjustments to reconcile pro forma net income (loss) to net
cash and cash equivalents provided by (used in) operating
activities:
Depreciation and amortization............................ 14,057 21,892 29,088
Provision for deferred taxes............................. (371) (1,564) (33,171)
Merger expenses.......................................... -- -- 66,564
Loss on disposal of assets............................... 122 1,627 --
Amortization of premium on marketable securities......... 67 1,111 1,218
Pro forma tax provision of pooled entities............... 5,038 2,279 --
Other.................................................... (316) 349 (617)
Changes in operating assets and liabilities, net of effects
of acquisitions.......................................... 13,819 (8,896) (77,099)
------- --------- ---------
Net cash and cash equivalents provided by (used in)
operating activities.............................. 30,648 13,726 (13,459)
Investing activities:
Net cash used to fund acquisitions.......................... (14,313) (57,597) (61,531)
Additions to intangible assets, net of effects of
acquisitions............................................. (745) (1,728) (7,235)
Purchase of property and equipment.......................... (15,627) (32,082) (39,394)
Proceeds from sale of property and equipment................ 961 2,124 --
Net proceeds (purchases) of marketable securities........... (8,212) (17,560) 1,636
Other....................................................... 379 (1,701) 546
------- --------- ---------
Net cash and cash equivalents used in investing
activities........................................ (37,557) (108,544) (105,978)
Financing activities:
Capital contributions....................................... 42,713 116,298 65,764
Capital distributions....................................... (389) (3,625) (7,650)
Net proceeds from debt...................................... 16,334 35,075 139,496
Repayment of debt........................................... (17,940) (27,319) (83,011)
Dividends and distributions paid............................ (13,114) (4,453) (6,455)
Other....................................................... (188) 67 (2)
------- --------- ---------
Net cash and cash equivalents provided by financing
activities........................................ 27,416 116,043 108,142
------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......... 20,507 21,225 (11,295)
Cash and cash equivalents at beginning of year................ 24,891 45,398 66,623
------- --------- ---------
Cash and cash equivalents at end of year...................... $45,398 $ 66,623 $ 55,328
======= ========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest................................................. $ 5,223 $ 7,809 $ 12,226
======= ========= =========
Income taxes............................................. $ 3,027 $ 6,036 $ 8,014
======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 149
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ACCOUNTING POLICIES
Description of Business
MedPartners, Inc. (MedPartners) and Mullikin Medical Enterprises, L.P.
(MME) merged on November 29, 1995 to form MedPartners/Mullikin, Inc. (the
Company). MedPartners was incorporated in January 1993 in Delaware. MedPartners'
business is to operate and/or manage physician practices. MedPartners, through
wholly owned subsidiaries, acquires certain assets of and manages physician
practices under long-term practice management agreements with affiliated
physician groups that practice through such practices. MME was formed on March
26, 1994 through the merger of Mullikin Management Partnership, L.P. (MMP) and
the limited partners of Pioneer Hospital. The Company operates a 99-bed acute
care hospital (Pioneer) and a 102-bed acute care hospital (U.S. Family Care
Medical Center) and provides management systems and services, nonphysician
health care personnel, facilities and equipment to affiliated medical
organizations and independent hospitals. The affiliated medical organizations
employ and contract with physicians and health maintenance organizations (HMOs)
to provide professional health care services to members of HMOs. The Company
also contracts with the HMOs to provide institutional (hospital) services to a
majority of the same members. In addition, through its wholly owned
subsidiaries, the Company contracts with hospitals to provide Medical Staff for
various hospital departments.
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 44-year practice management agreements between
the Company's wholly owned subsidiaries and the various professional
corporations, the Company has assumed full responsibility for the operating
expenses in return for the assignment of the revenue of the professional
corporations. The Company believes it has, as opposed to affiliates of the
Company, perpetual, unilateral control over the assets and operations of the
various professional corporations, and notwithstanding the lack of technical
majority ownership of the stock of such entities, consolidation of the various
professional corporations 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 successive extension periods provided by the agreements, (iii) the
continuing investment of capital by the Company, (iv) the employment of the
majority of the nonphysician personnel, and (v) the nature of the services
provided to the professional corporations by the Company. Two affiliated medical
organizations, Mullikin Medical Center, a Medical Group, Inc., and Moore-White
Medical Group have been treated as special purpose entities and consolidated
with the Company by virtue of the fact that these entities have nominal capital
and their activities and resulting substantive risks and rewards rest directly
or indirectly with the Company. On January 1, 1995, MMP entered into a long-term
management agreement with Mullikin Independent Physician Association, a Medical
Corporation (MIPA). This agreement expires in the year 2038 and provides for the
assignment of virtually all of MIPA's revenue to MMP. Accordingly, beginning
January 1, 1994, the revenues and expenses of MIPA are reflected in the
Company's consolidated statements of operations. All intercompany accounts and
transactions have been eliminated in the consolidation.
Nature of Physician Compensation Arrangements
MedPartners compensates PCs with which it has contracted to provide
healthcare services to MedPartners' clinics under four basic arrangements. In
all circumstances, MedPartners is responsible for the billing and collection of
the revenue related to services provided at MedPartners' clinics as well as for
paying all expenses of the clinic including physician compensation. In the
Company's financial statements, MedPartners records all such revenue for
services performed by the physicians at the clinics. In no instance is
F-8
<PAGE> 150
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MedPartners paid a fixed fee to cover clinic operating expenses. MedPartners
always remains at risk for the expenses of the clinics. In all four types of
arrangements described below, the Company is not sharing revenue with the PCs or
its physician owners.
Over one half of MedPartners' revenue (approximately 53.0% at December 31,
1995) is received under capitation arrangements. Under these arrangements,
MedPartners 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 PC's that are affiliated with MedPartners through management
agreements. Pursuant to these arrangements the PC is paid on a per member per
month basis by MedPartners. 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 23.1%
of MedPartners' revenue at December 31, 1995, MedPartners pays the PC for the
health care services provided at MedPartners' clinics a negotiated fixed dollar
amount. At MedPartners' 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 MedPartners management and is not directly
correlated to clinic revenue and gross profit. In these arrangements,
MedPartners 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 23.2%
of MedPartners' revenue at December 31, 1995, the PC is compensated on a
negotiated fee-for-service basis for health care services performed at
MedPartners' clinics. In these arrangements MedPartners 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 0.7% of
MedPartners' revenue at December 31, 1995, MedPartners pays the PC a negotiated
percentage (typically 75 to 88 percent) of the gross profits of the clinic.
Gross profit represents net clinic revenues less operating expenses of the
clinic. In these arrangement, MedPartners is responsible for the billing and
collection for the services rendered at its clinics and the payment of the
clinic expenses, including physicians' compensation. In some instances under
these types of arrangements, the physicians are guaranteed a minimum salary.
The fee retained by MedPartners 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 gross profits (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.
F-9
<PAGE> 151
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 approximates fair value.
Marketable Securities
Effective August 1, 1994, the Company adopted Financial Accounting
Standards Board (FASB) 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 in a separate component of
stockholders' equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. The cost of securities sold is
based on the specific identification method.
Inventories
Inventories 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.
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. As of December 31, 1995, the
Company had entered into practice management agreements with 14 physician groups
which contain a voluntary termination clause granting the affiliated physician
group the right to terminate the agreement after a specified time, typically on
the fifth anniversary of the agreement, these physician groups account for
approximately 6% of net revenue as of December 31, 1995, and the original
goodwill recorded related to the acquisition of these physician groups was
approximately $6,000,000. The Company believes that amortizing the related
goodwill over 20 years rather than the noncancellable term of the practice
management agreements generally is appropriate considering (i) termination
options are exercisable only during restrictive windows and (ii) the physician
groups exercising such option are required to purchase substantially all of the
assets used in the practice, which would make the termination of the practice
management agreements not probable. The goodwill that was previously on the
books of MME is generally being amortized over 30 years and that previously on
the books of PPSI over periods ranging from 5 to 25 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 costs. The
Company has elected to amortize these costs over a shorter period than the term
of the
F-10
<PAGE> 152
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related practice management agreements. Currently, these costs are being
amortized over three years. 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.
Payable to Physician Groups
Amounts payable to physician groups primarily represent monthly
compensation to the physicians which, based on the practice management
agreements, are generally payable to the physicians by the 15th day following
the end of each month.
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
under the Medicare program and approximately 4% was received under state
reimbursement programs. The Medicare program and state reimbursement 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 represents approximately 67%, 62% and 54% of
the Company's 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.
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.
Unamortized Deferred Compensation
Unamortized deferred compensation represents the difference between the
grant price and the market price on the date that stock options were granted to
the physicians at Riverside Medical Clinic, Inc. This cost is being amortized
over the five year vesting period.
Reinsurance
The Company cedes reinsurance to allow management to control exposure to
potential losses arising from large risks. Reinsurance expense is estimated
based on the terms of the respective reinsurance agreements. The estimated
expense is continually reviewed and any adjustments which become necessary are
included in current operations. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policies.
F-11
<PAGE> 153
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restatement of Financial Statements
The Company has merged with the following entities during 1995 and in the
first quarter of 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 27,819,000 shares of its common stock in
these and other immaterial transactions.
<TABLE>
<CAPTION>
EFFECTIVE DATE OF
ENTITY NAME MERGER
- ------------------------------------------------------------------------ -------------------
<S> <C>
MEDCTR, Inc. (MEDCTR)................................................... June 20, 1995
Team Health............................................................. June 30, 1995
Texas Back Institute, Inc. (TBI)........................................ November 2, 1995
Vanguard Healthcare Group, Inc. (Vanguard).............................. November 13, 1995
Mullikin Medical Enterprises, L.P. (MME) and related real estate
partnerships.......................................................... November 29, 1995
Pacific Physician Services, Inc. (PPSI)................................. February 22, 1996
</TABLE>
Prior to the pooling, MEDCTR, TBI and RVAA 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
the consolidated statements of operations to provide for additional federal and
state income taxes which would have been incurred had these entities been taxed
as C Corporations.
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.
Pro Forma Net Income (Loss) Per Share
Pro forma net income (loss) per share is computed, after adjusting
historical net income for the estimated tax provisions applicable to the pooled
companies described above, by dividing net income (loss) by the number of common
and common equivalent shares outstanding during the periods in accordance with
the applicable rules of the Securities and Exchange Commission. All stock
options issued have been considered as outstanding common stock equivalents for
all periods presented, even if anti-dilutive, under the treasury stock method
(based on initial public offering price). Shares of common stock issuable upon
conversion of the Series A and Series B Convertible Preferred Stock of
MedPartners are assumed to be common share equivalents for all periods
presented.
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, no
compensation expense is recognized.
Impairment of Long-Lived Assets
Effective December 31, 1995, the Company adopted FASB Statement 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. The Statement also addresses the
accounting for long-lived assets that are expected to be disposed of. Statement
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
F-12
<PAGE> 154
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined that long-lived assets are fairly stated in the accompanying balance
sheet, and that no indicators of impairment are present. In accordance with the
new rules, the Company's prior year financial statements have not been restated
to reflect the change in accounting principle.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash......................................................................... $ 6,467 $14,118
Certificates of deposit...................................................... 14,783 15,780
Commercial paper............................................................. 4,994 --
Money market accounts........................................................ 37,560 15,437
Repurchase agreements........................................................ 2,819 9,993
------- -------
$66,623 $55,328
======== ========
</TABLE>
The amounts above approximate the fair value of the respective cash
equivalents.
The repurchase agreements represent overnight funds purchased through a
bank and are secured by Treasury Bills held in the bank's name.
Interest income, including interest income from marketable debt securities,
was $2,150,000, $3,489,000 and $5,353,000 for the years ended December 31, 1993,
1994 and 1995, respectively.
3. MARKETABLE SECURITIES
The following is a summary of available-for-sale securities at December 31,
1995:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
GROSS COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt securities issued by:
Federal government..................................... $ 7,799 $ -- $ -- $ 7,799
State and state agencies............................... 13,884 3 (19) 13,868
Political subdivision of state......................... 13,895 38 (33) 13,900
---------- --- ----- ----------
$ 35,578 $ 41 $(52) $ 35,567
========= ======== ======== ========
</TABLE>
The amortized cost and estimated fair value of marketable securities
classified as available-for-sale at December 31, 1995, by contractual maturity,
are as follows:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Debt securities:
Due in one year or less................................................... $19,180 $ 19,163
Due after one year through two years...................................... 13,506 13,480
Due after two years through three years................................... 1,007 1,004
Due after three years..................................................... 1,885 1,920
------- ----------
$35,578 $ 35,567
======== ========
</TABLE>
F-13
<PAGE> 155
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of available-for-sale securities at December 31,
1994:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
GROSS COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt securities issued by:
Federal government................................. $ 5,890 $-- $ -- $ 5,890
State and state agencies........................... 15,108 -- (351) 14,757
Political subdivision of state..................... 14,855 -- (323) 14,532
Equity securities.................................... 2,510 -- -- 2,510
---------- --- ------ ----------
$ 38,363 $-- $ (674) $ 37,689
========= ======== ============= ========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Excess of cost over fair value of assets acquired........................... $59,471 $ 99,683
Noncompetition agreements................................................... 8,370 3,771
Medical records............................................................. 6,387 2,257
Favorable lease rate on facilities.......................................... 2,740 2,740
Organizational costs........................................................ 845 1,075
Clinic service agreements................................................... 2,554 7,879
Other intangible assets..................................................... 6,986 7,169
------- --------
87,353 124,574
Less accumulated amortization............................................... 12,420 12,603
------- --------
$74,933 $111,971
======== =========
</TABLE>
Amortization expense was $3,642,000, $6,820,000 and $9,040,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land....................................................................... $ 11,937 $ 12,798
Buildings and improvements................................................. 54,953 49,358
Equipment.................................................................. 82,014 117,165
Equipment under capital leases............................................. 10,790 5,855
Leasehold improvements..................................................... 22,185 43,269
Construction in progress................................................... 1,305 3,079
-------- --------
183,184 231,524
Less accumulated depreciation and amortization............................. 61,161 76,148
-------- --------
$122,023 $155,376
========= =========
</TABLE>
Depreciation and amortization expense was $10,415,000, $15,072,000 and
$20,048,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
F-14
<PAGE> 156
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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........................................ $ 17,900 $ 90,000
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 shareholders in annual installments through
2001, interest rates ranging from 7.0% to 12.0%.......................... 3,000 2,332
Notes payable to medical groups in annual installments through 1998,
interest rates ranging from 5.0% to 9.0%................................. 5,080 3,996
Notes payable to former partners for buyout of partnership interests,
unsecured, maturing through 1999, interest rates at 7.0% and 10.0%....... 3,165 4,456
10.0% note payable to Walter T. Mullikin and Kathryn D. Mullikin as
trustees of the Mullikin Family Trust, collateralized by deed of trust on
partnership property..................................................... 3,706 3,477
Notes payable to stockholders.............................................. 7,180 --
Other long-term notes payable.............................................. 22,318 13,066
Capital lease obligations.................................................. 4,939 5,247
-------- --------
159,154 209,963
Less amounts due within one year........................................... (12,656) (9,149)
-------- --------
$146,498 $200,814
========= =========
</TABLE>
The amounts recorded above approximate the fair value of the obligations.
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 (the Bank Credit Facility) of up to $150 million. Advances under
the Bank Credit Facility initially bear interest at the London Interbank Offered
Rate (LIBOR) plus 2.0% which approximates 7.9% at December 31, 1995. The Bank
Credit Facility has an expiration date of May 10, 1998 and is renewable for two
additional one-year periods. In conjunction with the Bank 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.
The Bank Credit Facility contains affirmative and negative covenants which,
among other things, require the Company to maintain certain financial ratios
(including maintain net worth, minimum fixed charge overage ratio, maximum
indebtedness to cash flow), limit the amount of additional indebtedness, and set
certain restrictions on investments, mergers and sales of assets. As of December
31, 1995, the Company was in compliance with the covenants in the Bank Credit
Facility. Additionally, the Company is required to obtain bank consent for
acquisitions with an aggregate purchase price in excess of $15 million.
In December 1993, PPSI issued $69 million of convertible subordinated
debentures for net proceeds of approximately $66,547,000. The debentures are
convertible into common stock of PPSI at the option of the holder at a
conversion price of $29 per share. Interest on the debentures at 5 1/2% is
payable semi-annually on June 15 and December 15. The debentures are redeemable
for cash at any time, at the option of PPSI and are subordinated to all senior
indebtedness, as defined in the Indenture Agreement. The Indenture Agreement
governing the debentures provides that upon a change in control over PPSI, the
holders of the debentures have the right to require PPSI to purchase all or part
of the debentures at 100% of the principal amount plus accrued interest. There
are no restrictions on the incurrence of additional indebtedness by PPSI or any
subsidiary. At December 31, 1995, the fair value of the convertible subordinated
debentures, based on quoted
F-15
<PAGE> 157
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market price, was approximately $57,788,000. Subsequent to the acquisition of
PPSI in February of 1996, the Company paid off these debentures.
The following is a schedule of principal maturities of long-term debt as of
December 31, 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996........................................................ $ 9,215
1997........................................................ 8,577
1998........................................................ 96,967
1999........................................................ 4,962
2000........................................................ 2,266
Thereafter.................................................. 87,976
--------------
Total............................................. $209,963
===========
</TABLE>
Operating Leases: Operating leases generally consist of short-term lease
agreements for professional office space where the medical practices are
located. 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........................................................ $ 36,426
1997........................................................ 32,286
1998........................................................ 28,776
1999........................................................ 24,934
2000........................................................ 21,411
Thereafter.................................................. 111,110
--------------
$254,943
===========
</TABLE>
Interest expense was $5,488,000, $9,447,000 and $13,796,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
7. INCOME TAX EXPENSE
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 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 $14,571,000
because it was more likely than not that the deferred tax asset would not be
utilized in future periods. The valuation allowance has been decreased by
$14,240,000 in 1995 because the realization of the deferred tax asset is now
more likely than not.
F-16
<PAGE> 158
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
-------- -------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Net operating losses............................................ $ 8,419 $22,992
Purchase reserves and restructuring............................. -- 14,724
Accrued payroll and vacation.................................... 2,129 3,383
Accrued and deferred compensation benefits...................... 2,464 3,375
Bad debts....................................................... 6,210 9,474
Other........................................................... 4,463 3,270
-------- -------
Gross deferred tax assets......................................... 23,685 57,218
Valuation allowance for deferred tax assets....................... (14,571) (331)
Deferred tax liabilities
Goodwill........................................................ -- 8,590
Excess tax depreciation......................................... 1,193 2,463
Prepaid expenses................................................ 504 2,419
Accrual to cash adjustment...................................... 1,863 273
Shared risk receivable.......................................... 4,041 7,182
Other........................................................... 246 958
-------- -------
Gross deferred tax liabilities.................................... 7,847 21,885
-------- -------
Net deferred tax asset............................................ $ 1,267 $35,002
======== =======
</TABLE>
Income tax expense (benefit) 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.................................................. $4,109 $5,454 $ 5,414
State.................................................... 1,068 1,417 1,323
------ ------ --------
5,177 6,871 6,737
Deferred:
Federal.................................................. (466) (1,629) (29,793)
State.................................................... (26) (171) (4,177)
------ ------ --------
(492) (1,800) (33,970)
------ ------ --------
$4,685 $5,071 $(27,233)
====== ====== ========
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax at statutory rate.............................. $3,944 $4,216 $ (8,484)
Add (deduct):
State income tax, net of federal tax benefit............. 608 684 (3,355)
Decrease in valuation allowance.......................... -- -- (14,240)
Other.................................................... 133 171 (1,154)
------ ------ --------
$4,685 $5,071 $(27,233)
====== ====== ========
</TABLE>
F-17
<PAGE> 159
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CAPITALIZATION
The Company's Restated Certificate of Incorporation provides that the
Company may issue 9,500,000 shares of Preferred Stock, par value $0.001 per
share, 500,000 shares of Series C Junior Participating Preferred Stock, par
value $0.001 per share, and 75,000,000 shares of Common Stock.
On September 1, 1993, the Company committed to sell 4,001,000 shares of
Series A Convertible Preferred Stock at $2.00 per share. The Company received,
net of expenses, $7,230,000 in 1993 and $698,000 on February 1, 1994. During
1994, the Company sold 3,000,000 shares of Series B Convertible Preferred Stock
at $4.00 per share. The Company received, net of expenses, $11,958,000. 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 7,001,000 shares of the Company's Common
Stock.
On February 28, 1995, the Company completed an initial public offering of
5,060,000 shares of its common stock. Gross and net proceeds of the offering
were $65,780,000 and $60,417,000, respectively. Proceeds of the offering were
used to pay all outstanding indebtedness under the bank credit facility of
$30,400,000. The remainder of the net proceeds were used to fund acquisitions of
certain assets of physician practices, expansion of physician services, working
capital and other general corporate purposes.
In March of 1996, 6,632,800 shares of the Company's Common Stock were sold
in a secondary offering. The net proceeds from this offering were approximately
$194 million. The offering provided for over-allotments of 1,237,500 shares
which have not yet been exercised. If exercised, the Company would receive an
additional $36 million from the over-allotments. These proceeds were used to
pay-off the line of credit and the debentures discussed in Note 6.
9. 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 1,555,000 and 5,899,150 shares of Common Stock, respectively. The
number of shares covered under the 1995 Stock Option Plan is subject to
expansion to 7,099,150 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, 1995, the Company had granted options to acquire 4,426,750
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 702,380 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 $377,000.
10. ACQUISITIONS
During the year ended December 31, 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 a 20-year term.
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.
Generally, the practice management agreements cannot be terminated by the
physician group or Company without cause, which includes material default or
bankruptcy. Upon termination for cause or expiration of the clinic services
agreement, the physician group has the option to purchase some or all of the
assets owned by the Company, generally at current book values.
F-18
<PAGE> 160
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the net
assets based on the estimated fair values at the date of acquisition. The
accounts receivable were valued at net collective value based upon detailed
analyses by the Company and the property and equipment values were based upon
independent appraisals. The estimated fair value of assets acquired is
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
<S> <C>
Accounts receivable, net............................................... $ 22,117
Prepaid expenses and other current assets.............................. 2,100
Property and equipment................................................. 15,128
Liabilities assumed.................................................... (9,888)
Excess of costs over fair value of assets acquired..................... 45,521
-------
74,978
Less value of stock issued............................................. 13,447
-------
Cash purchase price, net of cash received.............................. $ 61,531
=======
</TABLE>
11. RETIREMENT SAVINGS PLAN
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 anticipates a
required contribution of 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, which may be
incorporated into the Company's plan during 1995 and 1996. The expenses related
to all plans during the years ended December 31, 1993, 1994 and 1995 were
approximately $1,464,000, $1,858,000 and $3,195,000, respectively.
F-19
<PAGE> 161
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. MERGERS
The Company merged with the following entities in transactions that were
accounted for as pooling 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 pooling of interests.
<TABLE>
<CAPTION>
MME AND
RELATED PPSI
REAL OTHER AND
ESTATE IMMATERIAL TEAM
MEDPARTNERS PARTNERSHIPS MEDCTR TBI VANGUARD POOLINGS HEALTH COMBINED
----------- ------------ ------- ------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1993
Net revenue.......... $ 1,277 $298,415 $11,410 $25,881 $17,128 $7,972 $187,612 $ 549,695
Net (loss) income.... (1,206) (1,495) (369 ) (177) (873 ) 276 7,114 3,270
Year ended December 31,
1994
Net revenue.......... 77,432 370,798 10,963 20,816 18,493 8,313 308,226 815,041
Net (loss) income.... (1,601) (4,647) 76 (1,346) (847 ) (26) 7,598 (793)
Year ended December 31,
1995
Net revenue.......... 238,887 431,875 11,343 23,679 28,684 7,957 411,132 1,153,557
Net (loss) income.... 3,022 (9,412) (11 ) (453) (2,905 ) 112 10,205 558
</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:
<TABLE>
<S> <C>
Investment banking fees............................................... $ 8,771,200
Professional fees..................................................... 7,267,075
Other transaction costs............................................... 5,028,820
Restructuring charges:
Severance costs for identified employees............................ 19,625,728
Impairment of assets................................................ 8,095,411
Abandonment of facilities........................................... 6,401,246
Noncompatible technology............................................ 2,601,578
Unamortized loan costs.............................................. 2,323,667
Conforming of accounting policies................................... 2,248,810
Restructuring of benefits........................................... 1,888,749
Other restructuring charges......................................... 2,311,654
-----------
Total................................................................. $66,563,938
==========
</TABLE>
The PPSI merger was effective February 22, 1996, therefore, the merger
costs related to this transaction are not included in the amounts above. They
will be included in the results of operations for 1996.
13. CONTINGENCIES
In addition to the general liability and malpractice insurance carried by
the individual physicians, the Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. Management is
not aware of any claims against the Company which might have a material impact
on the Company's consolidated financial position.
Employed physicians are also covered by a general liability and malpractice
insurance policy. The Company has not accrued a loss for reported or unreported
incidents, as the amount, if any, cannot be reasonably estimated and the
probability of an adverse outcome cannot be determined at this time. It is the
F-20
<PAGE> 162
MEDPARTNERS/MULLIKIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
opinion of management that the ultimate resolution of any asserted or unasserted
claims will not have a material adverse effect on the financial position or
operating results of the Company.
PPSI, through its wholly-owned captive insurance company, Pacific
Indemnity, Ltd., has provided for an estimate of the cost of the incurred but
not reported claims and deductible amounts for the employed physicians servicing
emergency departments. At July 31, 1995, Pacific Indemnity, Ltd. purchased
insurance to cover all claims for incidents occurring through July 31, 1995
("tail coverage") for all employee physicians of the affiliated medical
organizations. Team Health has an agreement with its insurance carrier to
purchase insurance associated with claims incurred and not yet reported.
Management believes that the recorded accruals for such losses and deductibles
related to malpractice claims for the hospital-based contracting physicians and
the hospital are sufficient to cover incidents occurring prior to December 31,
1995.
PPSI is self-insured for employee and dependent health insurance costs and
certain workers' compensation costs. Reinsurance of defined excess cost has been
purchased from an outside insurance company. Management believes that amounts
accrued are sufficient to cover claims and costs incurred through December 31,
1995.
14. MAJOR PAYORS
Two payors represented individually more than 10% of the Company's net
revenue as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
NET REVENUE
----------------------
YEAR ENDED DECEMBER
31,
----------------------
CUSTOMER 1993 1994 1995
---------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Pacificare...................................................... 17% 19% 18%
Health Net...................................................... 13 11 9
</TABLE>
F-21
<PAGE> 163
MEDPARTNERS/MULLIKIN, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1996
---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 56,221
Marketable securities........................................................ --
Accounts receivable, less allowances for bad debts of $39,574,000............ 165,105
Inventories.................................................................. 11,087
Income tax receivable........................................................ 4,139
Prepaid expenses and other current assets.................................... 23,839
---------------
Total current assets................................................. 260,391
Property and equipment, net.................................................... 167,502
Intangible assets, net......................................................... 139,169
Deferred tax asset............................................................. 34,285
Other assets................................................................... 16,837
---------------
Total assets......................................................... $ 618,184
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 29,084
Payable to physician groups.................................................. 28,616
Accrued compensation......................................................... 19,165
Accrued medical claims payable............................................... 44,235
Other accrued expenses and liabilities....................................... 30,605
Current portion of long-term liabilities..................................... 7,648
---------------
Total current liabilities............................................ 159,353
Long-term debt, net of current portion......................................... 35,080
Other long-term liabilities.................................................... 9,140
Stockholders' equity:
Common stock, $.001 par value; 200,000,000 shares authorized; 52,311,000
shares issued............................................................. 52
Additional paid-in capital................................................... 435,618
Notes receivable from stockholders........................................... (1,818)
Unrealized loss on marketable equity securities, net of deferred taxes....... --
Unamortized deferred compensation............................................ --
Accumulated deficit.......................................................... (19,241)
---------------
Total stockholders' equity........................................... 414,611
---------------
Total liabilities and stockholders' equity........................... $ 618,184
===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-22
<PAGE> 164
MEDPARTNERS/MULLIKIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1995 1996
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenue............................................................ $547,450 $703,683
Operating expenses:
Cost of affiliated physician services................................ 240,225 301,280
Clinic salaries, wages and benefits.................................. 105,133 116,600
Outside hospitalization expense...................................... 50,364 83,516
Clinic rent and lease expense........................................ 19,744 23,814
Clinic supplies...................................................... 22,519 30,953
Other clinic costs................................................... 43,776 59,154
General corporate expenses........................................... 32,167 39,540
Depreciation and amortization........................................ 13,962 16,482
Net interest expense................................................. 3,367 2,811
Merger expenses...................................................... 1,051 34,448
-------- --------
Net operating expenses....................................... 532,308 708,598
-------- --------
Income (loss) before income taxes...................................... 15,142 (4,915)
Income tax expense (benefit)........................................... 4,411 360
-------- --------
Net income (loss)...................................................... $ 10,731 $ (5,275)
======== ========
Pro forma net income (loss) per share.................................. $ 0.26 $ (0.11)
======== ========
Number of shares used in pro forma net income (loss) per share......... 41,867 50,034
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-23
<PAGE> 165
MEDPARTNERS/MULLIKIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Pro forma net income (loss)............................................ $ 10,731 $ (5,275)
Adjustments to reconcile pro forma net income (loss) to net cash and
cash provided by (used in) operating activities:
Depreciation and amortization....................................... 13,962 16,482
Provision for deferred taxes........................................ (1,425) (5,848)
Merger expenses..................................................... 1,051 34,448
Other............................................................... 129 --
Changes in operating assets and liabilities, net of effects of
acquisitions........................................................ (11,288) (33,762)
-------- --------
Net cash and cash equivalents provided by operating
activities.................................................... 13,160 6,045
INVESTING ACTIVITIES:
Cash paid for merger charges........................................... (541) (25,932)
Net cash used to fund acquisitions..................................... (27,237) (29,671)
Additions of intangible assets, net of effects of acquisitions......... (3,440) (4,478)
Purchase of property and equipment..................................... (15,571) (21,833)
Net proceeds (purchases) of marketable securities...................... (12,132) 27,482
Other.................................................................. (959) 5
-------- --------
Net cash and cash equivalents used in investing activities..... (59,880) (54,427)
FINANCING ACTIVITIES:
Capital contributions.................................................. 62,231 214,656
Capital distributions.................................................. (3,259) --
Net proceeds from debt................................................. 43,262 --
Repayment of debt...................................................... (46,256) (167,453)
Other.................................................................. (3,492) 105
-------- --------
Net cash and cash equivalents provided by financing
activities.................................................... 52,486 47,308
-------- --------
Net increase (decrease) in cash and cash equivalents........... 5,766 (1,074)
Cash and cash equivalents at beginning of period....................... 66,623 56,133
Beginning cash and cash equivalents of immaterial pooling-of-interests
entities............................................................ -- 1,162
-------- --------
Cash and cash equivalents at end of period............................. $ 72,389 $ 56,221
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest....................................................... $ 5,975 $ 4,252
======== ========
Income taxes................................................... $ 3,752 $ 476
======== ========
Issuance of 316,000 common shares as consideration for
acquisitions accounted for as purchases....................... $ -- $ 5,920
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-24
<PAGE> 166
MEDPARTNERS/MULLIKIN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries and have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. As a result of the merger with
Pacific Physician Services, Inc. (PPSI) in February 1996, certain
reclassifications have been made to the financial statements.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
items) necessary for a fair presentation of results for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements and footnote
disclosures should be read in conjunction with the December 31, 1995 audited
consolidated financial statements and the notes thereto.
Restatement of Financial Statements
During the first quarter of 1996 the Company combined with PPSI in a
business combination that was accounted for as a pooling of interests.
Accordingly, the financial statements for all periods prior to February 22,
1996, the effective date of the merger, have been restated to include the
results of PPSI (Note 3).
Pro Forma Net Income (Loss) Per Share
Pro forma net income (loss) per share is computed by dividing net income
(loss) by the number of common and common equivalent shares outstanding during
the periods in accordance with the applicable rules of the Securities and
Exchange Commission. All stock options issued have been considered as
outstanding common stock equivalents for all periods presented, even if
anti-dilutive, under the treasury stock method. Shares of common stock issuable
upon conversion of the Series A and Series B Convertible Preferred Stock of
MedPartners in February 1995 are assumed to be common share equivalents for all
periods presented.
Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (ABP 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 option equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
2. CAPITALIZATION
The Company's Second Amended and Restated Certificate of Incorporation
provides that the Company may issue 9,500,000 shares of Preferred Stock, par
value $0.001 per share, 500,000 shares of Series C Junior Participating
Preferred Stock, par value $0.001 per share, and 200,000,000 shares of Common
Stock, par value $0.001 per share. As of December 31, 1995 and June 30, 1996 no
shares of the preferred stock were outstanding.
On March 13, 1996, the Company completed a secondary public offering of
6,632,800 shares of its Common Stock. The net proceeds of the offering were $194
million. Proceeds of the offering were used to pay all outstanding indebtedness
under the bank credit facility of $70 million. In April 1996, $69 million of the
proceeds were used to pay-off the Company's convertible subordinated debentures.
The remainder of the net proceeds will be used to fund acquisitions of certain
assets of physician practices, expansion of physician services, working capital
and other general corporate purposes.
F-25
<PAGE> 167
MEDPARTNERS/MULLIKIN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996 the number of shares covered under the 1995 Stock Option Plan
(the Plan) was increased on two occasions. At a special meeting of the
stockholders on February 22, 1996, the Plan was increased by 1,325,000 shares
and on April 25, 1996 at the Annual Meeting of Stockholders it was increased by
1,200,000 shares. As of April 25, 1996 a maximum of 7,099,150 shares of Common
Stock were covered by the Plan.
3. ACQUISITIONS
During the six months ended June 30, 1996, 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 to 44 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. Generally, the practice management
agreements cannot be terminated by the physician group or Company without cause,
which includes material default or bankruptcy. Upon termination for cause or
expiration of the clinic services agreement, the physician group has the option
to purchase some or all of the assets owned by the Company, generally at current
book values. The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the net
assets based on the estimated fair values at the date of acquisition. The
estimated fair value of assets acquired is $35,593,000. A total of $29,671,000
in cash and 316,000 shares of stock valued at $5,920,000 were given in exchange
for these assets during the six months ended June 30, 1996.
Effective February 22, 1996, the Company merged with PPSI in a transaction
that was accounted for as a pooling of interests. Accordingly, the Company's
historical statements for all periods prior to the effective date of the merger
have been restated to include the results of PPSI. The Company exchanged
10,983,346 shares of its common stock in exchange for all of the outstanding
common stock of PPSI.
Prior to its merger with the Company, PPSI reported on a fiscal year ending
on July 31. The restated financial statements for all periods prior to and
including December 31, 1995 are based on a combination of the Company's results
for its December 31 fiscal year and an October 31 fiscal year for PPSI.
Beginning January 1, 1996, PPSI adopted a December 31 fiscal year end;
accordingly, all consolidated financial statements for periods after December
31, 1995 are based on a consolidation of all of the Company's subsidiaries on a
December 31 year end. PPSI's historical results of operations for the two months
ended December 31, 1995 are not included in the Company's consolidated
statements of operations or cash flows. An adjustment has been made to
stockholders' equity as of January 1, 1996 to adjust for PPSI's results of
F-26
<PAGE> 168
MEDPARTNERS/MULLIKIN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations for the two months ended December 31, 1995. The following is a
summary of operations and cash flows for the two months ended December 31, 1995:
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Net revenue............................................................ $ 69,850
Operating expenses:
Cost of affiliated physician services................................ 32,600
Clinic salaries, wages and benefits.................................. 13,142
Outside hospitalization expenses..................................... 14,861
Clinic rent and lease expense........................................ 1,963
Clinic supplies...................................................... 3,556
Other clinic costs................................................... 7,373
General corporate expenses........................................... 5,235
Depreciation and amortization........................................ 2,371
Net interest expense................................................. 426
Loss on disposal of assets........................................... 41
--------------
Net operating expenses....................................... 81,568
--------------
Loss before taxes...................................................... (11,718)
Income tax benefit..................................................... (3,661)
--------------
Net loss..................................................... $ (8,057)
===========
STATEMENT OF CASH FLOW DATA:
Net cash and cash equivalents used in operating activities........... $ (3,569)
Net cash and cash equivalents provided by investing activities....... 4,455
Net cash and cash equivalents used in financing activities........... (81)
--------------
Net increase in cash and cash equivalents.................... $ 805
===========
</TABLE>
Included in pre-tax loss for the six months ended June 30, 1996 are merger
costs totaling $34.4 million. The components of this cost are as follows:
<TABLE>
<S> <C>
Investment banking fees................................................. $ 6,624,920
Professional fees....................................................... 2,616,356
Other transaction costs................................................. 1,098,444
Restructuring charges:
Abandonment of facilities............................................. 10,767,562
Severance costs for identified employees.............................. 5,865,295
Restructuring of benefits............................................. 2,392,431
Unamortized bond issue costs.......................................... 1,921,661
Noncompatible technology.............................................. 1,700,000
Impairment of assets.................................................. 1,361,004
Other restructuring charges........................................... 100,000
-----------
Total................................................................... $34,447,673
==========
</TABLE>
5. CONTINGENCIES
In addition to the general liability and malpractice insurance carried by
the individual physicians, the Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. Management is
not aware of any claims against the Company which might have a material impact
on the Company's consolidated financial position.
F-27
<PAGE> 169
MEDPARTNERS/MULLIKIN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employed physicians are also covered by a general liability and malpractice
insurance policy. The Company has not accrued a loss for reported or unreported
incidents, as the amount, if any, cannot be reasonably estimated and the
probability of an adverse outcome cannot be determined at this time. It is the
opinion of management that the ultimate resolution of any asserted or unasserted
claims will not have a material adverse effect on the financial position or
operating results of the Company.
PPSI, through its wholly-owned captive insurance company, Pacific
Indemnity, Ltd., has provided for an estimate of the cost of the incurred but
not reported claims and deductible amounts for the employed physicians servicing
emergency departments. At July 31, 1995, Pacific Indemnity, Ltd. purchased
insurance to cover all claims for incidents occurring through July 31, 1995
("tail coverage") for all employee physicians of the affiliated medical
organizations. Team Health has an agreement with its insurance carrier to
purchase insurance associated with claims incurred and not yet reported.
Management believes that the recorded accruals for such losses and deductibles
related to malpractice claims for the hospital-based contracting physicians and
the hospital are sufficient to cover incidents occurring prior to June 30, 1996.
PPSI is self-insured for employee and dependent health insurance costs and
certain workers' compensation costs. Reinsurance of defined excess cost has been
purchased from an outside insurance company. Management believes that amounts
accrued are sufficient to cover claims and costs incurred through June 30, 1996.
6. SUBSEQUENT EVENTS
On March 11, 1996, the Company agreed to acquire CHS Management, Inc., a
health care management service organization that provides management services to
an IPA of 325 primary care and specialist physicians and a medical group of 43
primary care physicians. The consideration for this transaction is expected to
be approximately $47 million of the Company's Common Stock. The transaction is
expected to be accounted for as a pooling of interests and is expected to close
prior to September 30, 1996.
On May 14, 1996, the Company agreed to merge with Caremark International
Inc., a leading provider of healthcare services in the United States and
overseas. Caremark, through its large, multi-specialty group practices, is
affiliated with 1,604 physicians and provides care to more than one million
people, 663,000 of whom are in prepaid health plans. Caremark also provides
pharmaceutical services, disease management, and international services. The
consideration for this transaction is expected to be approximately $2.5 billion
of the Company's Common Stock. The transaction is expected to be accounted for
as a pooling of interests and is expected to close prior to September 30, 1996.
F-28
<PAGE> 170
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Caremark International Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and stockholders'
equity, present fairly, in all material respects, the financial position of
Caremark International Inc. and its subsidiaries at December 31, 1994 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Chicago, Illinois
January 24, 1996, except as to
the third paragraph of Note 14,
which is as of March 19, 1996
F-29
<PAGE> 171
CAREMARK INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and equivalents.............................................. $ 32,100 $ 28,400
Accounts receivable, net.......................................... 311,600 365,400
Inventories....................................................... 92,700 112,500
Short-term deferred income taxes.................................. 33,300 41,100
Prepaid expenses and other current assets......................... 12,400 18,600
---------- ----------
Total current assets...................................... 482,100 566,000
---------- ----------
Property and equipment, net......................................... 168,300 299,200
Goodwill and other intangible assets................................ 105,300 259,300
Investments and other noncurrent assets............................. 38,600 69,700
Long-term deferred income tax asset................................. -- 33,700
Net assets of discontinued operations............................... 399,900 36,300
---------- ----------
Total assets.............................................. $1,194,200 $1,264,200
========= =========
Current liabilities:
Notes payable..................................................... $ 109,300 $ 81,900
Current maturities of long-term debt and lease obligations........ 2,600 3,900
Accounts payable, trade and other................................. 195,400 253,900
Accrued liabilities............................................... 92,600 135,000
---------- ----------
Total current liabilities................................. 399,900 474,700
---------- ----------
Long-term debt and lease obligations................................ 233,500 325,400
Long-term deferred income tax liability............................. 42,700 37,700
Other noncurrent liabilities........................................ 31,400 33,000
Commitments and contingent liabilities (Note 14)
Stockholders' equity:
Preferred stock, $.01 par value, authorized 20,000,000 shares,
none issued.................................................... -- --
Common stock, $1 par value, authorized 200,000,000 shares, issued
71,898,166 shares in 1994 and 81,497,489 shares in 1995........ 71,900 81,500
Additional contributed capital.................................... 18,400 188,200
Shares held in trust, 7,700,000 shares in 1995.................... -- (150,200)
Retained earnings................................................. 400,900 281,700
Common stock in treasury, at cost, 259,300 shares in 1994 and
406,136 shares in 1995......................................... (4,500) (7,800)
---------- ----------
Total stockholders' equity.......................................... 486,700 393,400
---------- ----------
Total liabilities and stockholders' equity.......................... $1,194,200 $1,264,200
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 172
CAREMARK INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net revenues............................................... $1,204,000 $1,775,200 $2,374,300
Cost of goods and services sold............................ 1,001,100 1,520,600 2,016,400
Marketing and administrative expenses...................... 107,600 138,000 207,100
Provision for doubtful accounts............................ 13,300 16,900 24,200
---------- ---------- ----------
Operating income from continuing operations................ 82,000 99,700 126,600
Non-operating expense (income):
Losses on investments.................................... -- -- 86,600
Interest expense, net.................................... 3,400 8,700 8,700
Other.................................................... (1,700) (200) (200)
---------- ---------- ----------
Income from continuing operations before income taxes...... 80,300 91,200 31,500
Income tax expense......................................... 33,400 36,700 11,300
---------- ---------- ----------
Income from continuing operations.......................... 46,900 54,500 20,200
Discontinued operations:
Income (loss) from discontinued operations, net of income
taxes of $20,700, $18,000 and $(72,100) in 1993, 1994
and 1995, respectively................................ 30,800 25,900 (168,300)
Net gains on sales of discontinued operations, net of
income taxes of $21,200............................... -- -- 31,800
---------- ---------- ----------
Income (loss) from discontinued operations............... 30,800 25,900 (136,500)
---------- ---------- ----------
Net income (loss).......................................... $ 77,700 80,400 $ (116,300)
========= ========= =========
Earnings (loss) per common and common equivalent share:
Primary
Income from continuing operations..................... $ 0.64 $ 0.73 $ 0.27
Operating income (loss) from discontinued
operations.......................................... $ 0.42 0.35 $ (2.24)
Net gains on sales of discontinued operations......... -- -- $ 0.42
Net income (loss)..................................... $ 1.06 $ 1.08 $ (1.55)
Fully Diluted
Income from continuing operations..................... $ 0.63 $ 0.73 $ 0.27
Operating income (loss) from discontinued
operations.......................................... $ 0.41 $ 0.35 $ (2.24)
Net gains on sales of discontinued operations......... -- -- $ 0.42
Net income (loss)..................................... $ 1.04 $ 1.08 $ (1.55)
Weighted average common and common equivalent shares
outstanding:
Primary.................................................. 73,300 74,800 75,100
Fully diluted............................................ 74,900 74,800 75,100
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 173
CAREMARK INTERNATIONAL 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................................ $ 71,100 $ 71,800 $ 71,900
Stock issued under employee benefit plans................. 700 100 100
Stock issued in connection with acquisitions.............. -- -- 1,800
Contribution to employee benefit trust.................... -- -- 7,700
--------- --------- ---------
Balance, end of year...................................... 71,800 71,900 81,500
--------- --------- ---------
Additional contributed capital:
Balance, beginning of year................................ 12,300 19,000 18,400
Stock issued under employee benefit plans................. 6,700 (600) (3,400)
Stock issued in connection with acquisitions.............. -- -- 30,700
Contribution to employee benefit trust.................... -- -- 142,500
--------- --------- ---------
Balance, end of year...................................... 19,000 18,400 188,200
--------- --------- ---------
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................................ 248,800 323,500 400,900
Net income (loss)......................................... 77,700 80,400 (116,300)
Common stock dividends.................................... (3,000) (3,000) (2,900)
--------- --------- ---------
Balance, end of year...................................... 323,500 400,900 281,700
--------- --------- ---------
Common stock in treasury:
Balance, beginning of year................................ -- (4,700) (4,500)
Purchases................................................. (7,600) (14,600) (27,200)
Stock issued under employee benefit plans................. 2,900 14,800 20,800
Stock issued in connection with acquisitions.............. -- -- 3,100
--------- --------- ---------
Balance, end of year...................................... (4,700) (4,500) (7,800)
--------- --------- ---------
Total stockholders' equity................................ $ 409,600 $ 486,700 $ 393,400
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 174
CAREMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- --------- --------
(IN THOUSANDS)
(BRACKETS DENOTE CASH OUTFLOWS)
<S> <C> <C> <C>
Cash flows from continuing operations:
Income from continuing operations.......................... $ 46,900 $ 54,500 $ 20,200
Adjustments for non-cash items:
Losses on investments...................................... -- -- 86,600
Provision for doubtful accounts............................ 13,300 16,900 24,200
Depreciation and amortization.............................. 11,400 18,900 28,600
Deferred income taxes...................................... 25,100 9,800 (14,400)
Other...................................................... 1,600 3,700 1,000
Changes in balance sheet items:
Accounts receivable........................................ (61,800) (95,500) (79,300)
Inventories................................................ (8,700) (4,200) (17,600)
Payables and accrued liabilities........................... 21,300 23,300 84,000
Prepaids and other......................................... (9,600) (600) (21,800)
--------- --------- --------
Cash flows from continuing operations........................ 39,500 26,800 111,500
--------- --------- --------
Cash flows from investing activities:
Capital expenditures....................................... (50,300) (70,200) (83,400)
Acquisitions, net of cash received......................... (3,100) (69,100) (143,500)
--------- --------- --------
Cash flows from investing activities......................... (53,400) (139,300) (226,900)
--------- --------- --------
Cash flows from financing activities:
Net change in short-term debt and credit facility
borrowings.............................................. (26,100) 230,900 7,500
Issuances of other long-term debt and lease obligations.... 112,100 400 5,000
Redemptions of other long-term debt and lease
obligations............................................. (19,300) (6,700) (1,500)
Stock issued under employee benefit plans.................. 9,100 11,800 16,300
Purchases of treasury stock................................ (7,600) (14,600) (27,200)
Common stock cash dividends................................ (3,000) (3,000) (2,900)
--------- --------- --------
Cash flows from financing activities......................... 65,200 218,800 (2,800)
--------- --------- --------
Cash flows from discontinued operations, net of divestiture
proceeds................................................... 25,500 (180,000) 114,500
--------- --------- --------
Increase (decrease) in cash and equivalents.................. 76,800 (73,700) (3,700)
Cash and equivalents, beginning of year...................... 29,000 105,800 32,100
--------- --------- --------
Cash and equivalents, end of year............................ $ 105,800 $ 32,100 $ 28,400
========= ========= ========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash and equivalents include cash, cash investments and marketable
securities with original maturities of three months or less. Income taxes
paid, net of refunds, were $24.0, $22.4 and $6.7 million in 1993, 1994 and
1995, respectively. Interest payments, net of amounts capitalized,
approximated $1.8, $10.2 and $20.7 million in 1993, 1994 and 1995,
respectively.
Non-cash investing activities include notes and other obligations issued
for acquisitions of $5.8, $1.2 and $30.8 million in 1993, 1994 and 1995,
respectively, and $123.6 million in notes and other securities received from
divestitures in 1995. Non-cash financing activities include the issuance of
$35.6 million of stock for acquisitions in 1995 and capital lease
obligations of $0.7, $0.4 and $3.9 million in 1993, 1994 and 1995,
respectively.
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 175
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
NOTE 1: NATURE OF OPERATIONS
Caremark International Inc. (the "company" or "Caremark") is a leading
provider of health care services in the United States and overseas, serving
millions of people through its Physician Practice Management, Pharmaceutical
Services, Disease Management and International businesses. The Physician
Practice Management business provides comprehensive management services to
physician groups, primarily multi-specialty physician practices located in major
metropolitan areas. The Pharmaceutical Services business manages outpatient
prescription drug benefit programs for corporations, insurance companies,
unions, government employee groups, and managed care organizations throughout
the United States. The Disease Management business provides therapies and
services to individuals suffering from hemophilia, immune system deficiencies
and other blood disorders characterized by protein deficiencies. In addition,
this business distributes recombinant growth hormone. In its International
business, the company offers selected health care services outside hospitals in
Canada, France, Germany, Japan, the Netherlands, the United Kingdom and Puerto
Rico.
INDUSTRY SEGMENTS
Caremark operates in four industry segments: Physician Practice Management,
Pharmaceutical Services, Disease Management and International.
NET REVENUES FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management.............................. $ 135,600 $ 190,100 $ 454,600
Pharmaceutical Services.................................... 631,200 1,097,300 1,432,300
Disease Management......................................... 389,800 422,300 408,000
International.............................................. 47,400 65,500 79,400
---------- ---------- ----------
Totals from continuing operations.......................... $1,204,000 $1,775,200 $2,374,300
========= ========= =========
</TABLE>
OPERATING INCOME FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management.............................. $ (1,400) $ 4,100 $ 16,100
% of segment revenues.................................... (1.0)% 2.2% 3.5%
Pharmaceutical Services.................................... $ 31,600 $ 46,200 $ 56,000
% of segment revenues.................................... 5.0% 4.2% 3.9%
Disease Management......................................... $ 76,000 $ 76,600 $ 69,500
% of segment revenues.................................... 19.5% 18.1% 17.0%
International.............................................. $ (2,400) $ (1,500) $ 1,300
% of segment revenues.................................... (5.1)% (2.3)% 1.6%
General Corporate.......................................... $(21,800) $(25,700) $(16,300)
-------- -------- --------
Totals from continuing operations.......................... $ 82,000 $ 99,700 $126,600
======== ======== ========
</TABLE>
F-34
<PAGE> 176
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IDENTIFIABLE ASSETS FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management................................. $ 90,400 $183,900 $ 482,500
Pharmaceutical Services....................................... 212,300 300,300 371,300
Disease Management............................................ 124,900 142,400 144,400
International................................................. 29,600 38,600 49,900
General Corporate............................................. 179,000 129,100 179,800
-------- -------- ----------
Totals from continuing operations............................. $636,200 $794,300 $1,227,900
======== ======== =========
</TABLE>
CAPITAL EXPENDITURES FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management..................................... $ 8,400 $17,100 $42,500
Pharmaceutical Services........................................... 24,700 37,000 30,700
Disease Management................................................ 900 1,200 3,200
International..................................................... 6,100 4,500 4,800
General Corporate................................................. 10,200 10,400 2,200
------- ------- -------
Totals from continuing operations................................. $50,300 $70,200 $83,400
======= ======= =======
</TABLE>
DEPRECIATION AND AMORTIZATION FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Practice Management..................................... $ 4,200 $ 6,500 $14,300
Pharmaceutical Services........................................... 5,500 8,400 9,200
Disease Management................................................ 200 400 800
International..................................................... 900 1,700 2,300
General Corporate................................................. 600 1,900 2,000
------- ------- -------
Totals from continuing operations................................. $11,400 $18,900 $28,600
======= ======= =======
</TABLE>
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the company's Consolidated Financial
Statements. These policies are in conformity with generally accepted accounting
principles, and have been consistently applied in all material respects. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
BASIS OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Caremark and
its majority-owned subsidiaries. All material intercompany accounts and
transactions are eliminated in consolidation.
The company has acquired certain assets of and operates clinics under 33-40
year management service agreements with affiliated physician groups that
maintain separate legal entities within which they practice medicine. These
groups have no other operations or rights to practice except to conduct such
practices exclusively in company clinics. Under these agreements, the physician
groups have responsibility for all medical-related decisions, enter into payor
contracts and provide Caremark input on the management of the
F-35
<PAGE> 177
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
practice. Caremark compensates the physicians for their services under these
affiliations using four general models: (a) approximately 28% of clinic revenues
and 5% of total revenues in 1995 were generated by clinics whose physicians were
compensated on a capitated, per-member, per-month arrangement; (b) approximately
10% of clinic revenues and 2% of total revenues in 1995 were generated by
clinics whose physicians received a salary plus a bonus; (c) approximately 56%
of clinic revenues and 11% of total revenues in 1995 were generated by clinics
whose physicians received a salary plus bonus and receive 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; (d) approximately 6% of clinic
revenues and 1% of total revenues in 1995 were generated by clinics whose
physicians received 85% of a defined amount (generally, revenues less management
expenses paid to the company) to cover all medical costs including physician
compensation, outside referral expenses, allied healthcare expenses and
professional liability insurance. Any amounts remaining after paying these
expenses represented additional incentive compensation to the physicians.
Caremark is responsible for providing all non-medical personnel, premises,
equipment, and supplies necessary to operate the clinics, providing financial,
accounting and administrative services, negotiating all payor and vendor
contracts on behalf of the clinics, billing and collecting fees, paying clinic
expenses, and performing marketing and public relations services. Caremark also
has the right to utilize the cash in the physician group bank accounts and is
required to fund future capital expenditures as well as working capital needs.
The fee paid to Caremark includes Caremark's direct management expenses of
operating the clinics, plus incentive payments which reflect a portion or all of
the residual equity interest in the clinics after payment of physician
compensation, other medical costs and management expenses. Under the four
general models discussed above, these incentive payments take the following
forms: (a) a variable percentage of the clinic's managed capital; (b) a variable
percentage of the clinic's managed capital plus 100% of clinic earnings; (c) a
variable percentage of the clinic's managed capital or net revenues plus 50% of
clinic earnings; and (d) 15% of the defined amount described above.
Based on the legal structures in place, the physician groups record all
revenues from the payor contracts and related medical expenses including
physician compensation, allied health professional costs, professional liability
insurance costs and Caremark's management fee. However, Caremark believes it has
essentially all of the risks and rewards of ownership and perpetual and
unilateral control over the assets and operations of the various physician
groups. Therefore, notwithstanding the lack of ownership of the stock of the
legal entities in which the physicians practice, consolidation of the revenues
and expenses of the various physician groups 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. Under consolidation, the company reports all the
revenues and operating expenses of the clinics as its own, eliminating the
management fees paid by the physician groups to the company, recording all
revenue initially reflected as physician revenue as company revenue and
reflecting physician earnings as compensation expense.
The company believes that this control over the assets and operations is
perpetual rather than temporary because of (i) the length of the original terms
of the agreements, (ii) the likelihood of successive extension periods of the
agreements, (iii) the continuing investment of capital by the company, (iv) the
control by the company of the assets necessary to operate the clinics, (v) the
employment of all non-medical personnel, (vi) the nature of the services
provided by the company to and the delegation of authority to the company from
the physician groups to carry out all of the critical revenue generating
responsibilities of the business other than the actual treating of patients, and
(vii) the nominal capital investments of the physician groups.
REVENUES
The company records revenues net of estimated contractual allowances.
Revenue is deferred related to cash payments received for which the company is
obligated to perform future services.
F-36
<PAGE> 178
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories, which are primarily finished goods, consist of pharmaceutical
drugs, medical equipment and supplies and are valued at the lower of cost
(first-in, first-out method) or market.
MARKETABLE SECURITIES
Investments in marketable securities with readily determinable fair values
have been classified as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of stockholders' equity unless a decline in
value is judged other than temporary. When this is the case, unrealized losses
are reflected in income. The company owns no investments that are considered to
be trading or held-to-maturity securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Assets purchased in acquisitions are recorded at their respective fair values.
Expenditures that extend the useful life of property and equipment or that
increase productivity are capitalized, whereas maintenance and repairs are
charged to expense in the year incurred.
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.
Depreciation and amortization are provided for financial reporting purposes
principally on the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, over the terms of related leases if
shorter. Both straight-line and accelerated methods of depreciation are used for
income tax purposes.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, which totaled $86.3 and $227.3 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. It
is amortized on a straight-line basis over estimated useful lives not exceeding
40 years. Other intangible assets include management service agreements and
other identified rights that are amortized on a straight-line basis over the
lesser of their legal or estimated useful lives. As of December 31, 1994 and
1995, intangible assets, including goodwill, are stated net of accumulated
amortization of $8.9 and $14.2 million, respectively. The company reviews the
carrying value of intangibles and other long-lived assets for impairment when
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. This review is performed by comparing estimated
undiscounted future cash flows from use of the asset to the recorded value of
the asset.
INCOME TAXES
Income tax expense is based on pre-tax income for financial reporting
purposes, adjusted for the effects of permanent differences between such income
and that reported for tax return purposes. Deferred tax assets and liabilities
are recognized for expected future tax consequences of temporary differences
between the carrying amounts and tax bases of the underlying assets and
liabilities.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares represent the potential dilutive impact of
stock options, employee stock purchase plan subscriptions and contingent stock
rights.
F-37
<PAGE> 179
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain prior-year balances have been reclassified to conform with the
current year's presentation.
NOTE 3: ACQUISITIONS
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 following summary,
prepared on a pro forma basis, combines the results of operations of Caremark
and Friendly Hills as if the Friendly Hills transaction had been consummated as
of the beginning of the periods presented after including the impact of certain
adjustments such as amortization of intangibles, interest expense on debt
assumed to have been incurred to complete the transaction and the related income
tax effects.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1994 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Net revenues.......................................................... $1,950,200 $2,437,400
Income before income taxes from continuing operations................. $ 90,500 $ 28,900
Income from continuing operations..................................... $ 54,100 $ 18,600
Earnings from continuing operations per common and common equivalent
share:
Primary............................................................. $ .72 $ .25
Fully diluted....................................................... $ .72 $ .25
</TABLE>
These pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the entire periods
presented and are not intended to project future results.
The company invested approximately $68.2 million in cash, stock and notes
for other acquisitions in 1995 involving the Physician Practice Management
business. Consideration paid in connection with 1993 and 1994 acquisitions
approximated $9.4 and $69.1 million, respectively. Results of operations would
not have been materially different in 1993, 1994 and 1995 had these other
transactions occurred as of the beginning of the respective years.
In September 1995, Caremark entered into a definitive agreement with CIGNA
Healthcare of California, a managed health care 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. In 1994 net revenues
from these operations were in excess of $400 million. The transaction was
completed effective January 1, 1996 and will be accounted for using the purchase
method of accounting.
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 Caremark's Consolidated Financial Statements as of
their respective dates of acquisition.
NOTE 4: DISCONTINUED OPERATIONS
During 1995, Caremark divested of several non-strategic businesses as part
of the company's transformation to four business lines -- Physician Practice
Management, Pharmaceutical Services, Disease Management and International. In
accordance with APB 30, which addresses the reporting for disposition of
business segments, the company's Consolidated Financial Statements present the
operating results and net assets of discontinued operations separately from
continuing operations. Prior periods have been restated to conform with this
presentation.
Effective March 31, 1995, the company sold its Clozaril(R) Patient
Management System to Health Management, Inc. for $23.3 million in cash and
notes. This business involved managing the care of schizophrenia patients
nationwide through the distribution of the Clozaril drug and related testing
services to
F-38
<PAGE> 180
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, the company 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 Contingent
Liabilities). Net revenues of this business for the period ended April 1, 1995
were $96.1 million and were $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, the company 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 the company 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.
In September 1995, the company adopted a formal plan to dispose of its
Nephrology Services division by sale to a third party. This business provides a
wide range of nephrology support services, including dialysis services and
supplies, transplant and laboratory services. Net revenues of this business were
$2.7, $39.7 and $46.6 million for the years 1993, 1994, and 1995, respectively.
Any gain or loss from this planned disposal is not expected to be material.
NOTE 5: 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 $27.4 and $48.5 million at December 31, 1994 and
1995, respectively. The carrying value of debt obligations was $99.5 and $99.6
million at December 31, 1994 and 1995, respectively. The fair value of these
obligations approximated $83.8 and $98.6 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 $4.1, $11.8 and $16.7 million in 1993, 1994 and
1995, respectively. Interest income totaled $0.7, $3.1 and $8.0 million in 1993,
1994 and 1995, respectively.
NOTE 6: TRADE RECEIVABLES
The company provides credit, in the normal course of business, to
third-party payors (such as private insurers, Medicare and Medicaid), patients
and private enterprises. The company performs ongoing credit evaluations of its
customers and maintains an allowance for doubtful accounts based on the
collectibility of trade receivables. Credit losses have historically coincided
with management's expectations.
F-39
<PAGE> 181
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity in the allowance for doubtful accounts is
presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year............................. $ 14,700 $ 20,100 $ 28,700
Provision for doubtful accounts........................ 13,300 16,900 24,200
Write-offs, net of recoveries.......................... (9,200) (15,600) (24,200)
Other(1)............................................... 1,300 7,300 21,600
-------- -------- --------
Balance, end of year................................... $ 20,100 $ 28,700 $ 50,300
======== ======== ========
</TABLE>
- ---------------
(1) Represents valuation accounts of acquired or divested companies, account
transfers and foreign currency translation adjustments.
NOTE 7: OTHER BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment, net:
Land................................................................. $ 15,800 $ 25,700
Buildings and leasehold improvements................................. 45,000 97,200
Machinery and other equipment........................................ 88,200 137,700
Software systems..................................................... 14,300 36,500
Construction in progress............................................. 60,000 78,800
-------- --------
Property and equipment, at cost...................................... 223,300 375,900
Accumulated depreciation and amortization............................ (55,000) (76,700)
-------- --------
Property and equipment, net.......................................... $168,300 $299,200
======== ========
</TABLE>
Accrued liabilities include employee compensation and related taxes of
$31.0 and $25.8 million at December 31, 1994 and 1995, respectively.
NOTE 8: CREDIT FACILITIES
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 the company 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. The modified
credit facilities contain maximum EBITDA, minimum interest coverage and
debt-to-total-capital ratio requirements, as well as certain restrictions
regarding compliance with the company's integrity program and litigation. The
company was in compliance with the debt covenants at year-end. Borrowings under
these facilities were $200.0 million at December 31, 1995, all of which was
classified as long-term debt. As of December 31, 1994, $210.0 million was
borrowed, of which $125.0 million was classified as long-term.
The company also has a $25 million uncommitted line of credit that offers
more flexible overnight borrowing capabilities to accommodate daily cash flow
needs. $25.0 million was outstanding under this facility at December 31, 1995.
The average annual interest rate for the aforementioned credit facilities
approximated 6.6% in 1995. The company also maintains short-term credit
arrangements approximating $20.4 million in support of international operations.
Borrowings under these arrangements were $6.4 and $14.5 million at December 31,
1994 and 1995, respectively.
F-40
<PAGE> 182
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9: LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt and lease obligations consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term credit facility borrowings........................... $125,000 $200,000
6 7/8% notes, due 2003, less unamortized discount of $0.4
million...................................................... 99,500 99,600
Long-term notes due 1996 through 2011, at various rates........ 9,200 24,400
Capitalized lease obligations due 1996 through 2000............ 2,400 5,300
-------- --------
Total long-term debt and lease obligations..................... 236,100 329,300
Current portion................................................ (2,600) (3,900)
-------- --------
Long-term portion.............................................. $233,500 $325,400
======== ========
</TABLE>
During 1993, the company issued $100 million of 67 7/8% senior notes
maturing in August 2003. The net proceeds, $98.8 million after discount and
underwriting fees, were used to repay credit facility borrowings and to fund
acquisitions, as well as for other general corporate purposes. Debt issuance
costs of $1.3 million were capitalized in connection with this offering and are
being amortized over the term of the debt. Other long-term notes relate
primarily to business acquisitions. The company has guaranteed secured loans
totaling $20.7 million on behalf of unconsolidated affiliates. The underlying
loans mature in 1996 through 1999. The affiliates have complied with related
debt service requirements.
The company leases certain facilities and equipment under operating and
capital leases expiring at various dates. Most of the operating leases contain
renewal options. Total rent expense under operating leases approximated $12.1,
$17.9 and $26.7 million in 1993, 1994 and 1995, respectively.
Future minimum lease payments (including interest) under capital and
noncancelable operating leases and aggregate long-term debt maturities are
summarized as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL DEBT
LEASES LEASES MATURITIES
--------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1996.................................................... $ 26,300 $ 2,500 $ 1,900
1997.................................................... 22,700 1,700 8,400
1998.................................................... 20,200 1,100 203,600
1999.................................................... 15,800 600 3,000
2000.................................................... 11,000 200 2,400
Thereafter.............................................. 55,700 -- 105,100
--------- ------- ----------
Total obligations and commitments....................... $ 151,700 $ 6,100 $ 324,400
========
Amounts representing interest and discounts............. (800) (400)
------- ----------
Carrying value of long-term debt and lease
obligations........................................... $ 5,300 $ 324,000
======= ========
</TABLE>
The net book value of capitalized lease property approximated $2.3 and $3.9
million at December 31, 1994 and 1995, respectively.
NOTE 10: PREFERRED STOCK AND PREFERRED SHARE PURCHASE RIGHTS
No shares of preferred stock are currently outstanding. The company's Board
of Directors is authorized to issue up to 20,000,000 shares of preferred stock
without further stockholder approval. The Board of Directors of the company is
also authorized to determine the voting powers, designations, preferences and
relative, participating, optional or other special rights, with respect to any
series of preferred stock.
Should the Board of Directors elect to exercise its authority to issue any
additional series of preferred stock, the rights, preferences and privileges of
holders of the company's common stock would be made subject to the rights,
preferences and privileges of such additional series.
F-41
<PAGE> 183
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the adoption of its Preferred Share Purchase Rights Plan
(the "Rights Plan"), the company has designated and reserved for issuance upon
exercise of such rights 2,000,000 shares of Series A Junior Participating
Preferred Stock.
The Board of Directors has authorized a Rights Plan in which common
stockholders received a dividend of one preferred share purchase right
(collectively, the "Rights") for each share of common stock held of record. Each
Right entitles the registered holder to purchase from the company one
one-hundredth of a share of Series A Junior Participating Preferred Stock for
$85, subject to adjustment. The Rights will become exercisable (and transferable
apart from the common stock) on the earlier of (1) 10 days following a public
announcement that a person or group has acquired 15% or more of the common stock
or (2) 10 business days following the commencement or announcement of an offer
to acquire 15% or more of the common stock.
If, after the Rights become exercisable, any person or group (the
"Acquirer") acquires 15% or more of the common stock (except pursuant to an
offer for all outstanding shares of common stock that the independent directors
determine to be fair and otherwise in the best interests of the company and its
stockholders), each Right may be exercised for common stock having a value of
$170. In specified circumstances, each Right may be exercised for common stock
of an acquiring entity having a value of $170. All Rights held by the Acquirer
will be null and void. The company may generally redeem the Rights at a price of
$.01 per Right at any time until 10 days following a public announcement that a
person or group has acquired 15% or more of the common stock. The Rights will
expire on November 30, 2002.
NOTE 11: COMMON STOCK
The company 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:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Shares subscribed:
Beginning of year........................................... 744,805 642,028
Subscriptions............................................... 664,035 414,662
Purchases................................................... (614,290) (481,101)
Cancellations............................................... (152,522) (239,207)
------------- -------------
End of year................................................. 642,028 336,382
============= =============
Subscription price per share at end of year................. $10.74-$22.10 $13.80-$22.10
</TABLE>
Expiration dates for outstanding subscriptions extend through 1997. The
weighted average subscription price was $15.90 at December 31, 1995.
The company offers participation in stock option plans to certain employees
and individuals. All of the outstanding options under these plans were granted
at 100% of market value of the stock on the dates of grant. The following table
summarizes stock option transactions for the indicated years:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Options outstanding:
Beginning of year............................................. 9,754,915 9,561,416
Granted....................................................... 805,500 1,849,800
Exercised..................................................... (344,271) (811,981)
Cancelled/expired............................................. (654,728) (1,949,075)
------------ ------------
End of year................................................... 9,561,416 8,650,160
============ ============
Option price per share:
Exercised..................................................... $7.71-$17.25 $6.45-$18.88
Outstanding at end of year.................................... $6.45-$21.88 $6.45-$21.88
</TABLE>
Awarded options typically vest and become exercisable in incremental
installments over five years and expire no later than 10 years and one day from
the date of grant. There were 3,271,574 options exercisable at
F-42
<PAGE> 184
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995. Expiration dates for outstanding options range from 1996 to
2005. The weighted average option price was $14.99 at December 31, 1995. The
company expects to adopt, in 1996, the disclosure requirements of Statement of
Financial Accounting Standards No. 123 -- Accounting for Stock-Based
Compensation.
Under various plans, Caremark has made grants of restricted common stock to
provide incentive compensation to key employees and to provide incentives
related to acquisitions. Restricted stock transactions for the indicated years
are summarized below:
<TABLE>
<CAPTION>
1994 1995
---------- --------
<S> <C> <C>
Restricted stock outstanding:
Beginning of year.................................................. 1,268,319 265,037
Granted............................................................ 14,800 280,784
Cancelled.......................................................... -- (22,167)
Vested (free of restrictions)...................................... (1,018,082) (293,644)
---------- --------
End of year........................................................ 265,037 230,010
========== =========
</TABLE>
The company issued contingent stock rights in connection with a 1992
acquisition that permit holders to receive, upon exercise, a number of shares of
company common stock determined by reference to appreciation in excess of $16.56
in the per share market value of the company common stock. The contingent stock
rights became exercisable on December 31, 1994. As of December 31, 1995, 789,303
rights were outstanding.
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.
The company's Board of Directors has authorized the purchase of common
stock to fund various stock-based compensation programs and for acquisitions.
The company purchased 1,496,666 shares of common stock for $27.2 million in 1995
and has been authorized to purchase up to an additional 1,400,000 shares through
July 31, 1996.
The company's common stock was reserved for issuance as follows at December
31:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Reserved common stock:
Acquisitions..................................................................... 4,091,505
Stock option plans............................................................... 11,416,270
Stock purchase plans............................................................. 200,474
----------
Total shares reserved..................................................... 15,708,249
==========
</TABLE>
Stockholders of record totaled 54,849 at December 31, 1994, versus 49,003
at the end of 1995.
On October 31, 1995, the company's Board of Directors declared a third
annual 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.
NOTE 12: RETIREMENT PROGRAMS
The company sponsors retirement plans for all qualifying domestic employees
and certain employees in other countries. 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. The company'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.
F-43
<PAGE> 185
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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% 7.25% 8.75%
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.
As a result of the disposal of the Home Infusion business (see Note
4 -- Discontinued Operations), the company realized a curtailment gain of $0.9
million related to its pension plan. This gain has been included in the net
gains on sales of discontinued operations in the Consolidated Statements of
Operations.
The following table presents the funded status of the 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 the company for
the benefit of foreign employees has not been significant.
Most U.S. employees are eligible to participate in a qualified 401(k) plan.
Participants may contribute up to 12% of their annual compensation (limited in
1995 to $9,240 per individual) to the plan and the company matches the
participants' contributions up to 3% of compensation. Matching contributions
made by the company were $5.7, $6.0 and $2.8 million in 1993, 1994 and 1995,
respectively.
The company 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. As a result of
the disposal of the Home Infusion business (see Note 4 -- Discontinued
Operations), the company realized a curtailment gain of $1.2 million.
F-44
<PAGE> 186
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This gain has been included in the net gains on sales of discontinued operations
in the Consolidated Statements of Income. In addition, during 1995, Caremark
terminated this plan, resulting in a reduction of the related liability of $2.2
million.
In 1994, the company 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.
NOTE 13: INCOME TAXES
Income tax expense from continuing operations for the indicated years
consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................ $15,800 $19,100 $ 39,100
State and local........................................ 5,200 5,600 7,500
------- ------- --------
Current income tax expense............................... 21,000 24,700 46,600
------- ------- --------
Deferred:
Federal................................................ 10,600 10,100 (29,800)
State and local........................................ 1,800 1,900 (5,500)
------- ------- --------
Deferred income tax expense (benefit).................... 12,400 12,000 (35,300)
------- ------- --------
Income tax expense from continuing operations............ $33,400 $36,700 $ 11,300
======= ======= ========
</TABLE>
Foreign income was not significant in 1993, 1994 and 1995.
Deferred tax assets (liabilities) under FAS 109 are composed of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Bad debt and sales allowances $ 11,800 $ 5,500
Legal settlement costs........................................... -- 26,800
Loss on investments.............................................. -- 33,700
Accrued compensation............................................. 10,100 6,300
Other accrued expenses........................................... 11,400 2,500
Net operating loss carryforwards................................. 2,900 3,300
Valuation allowances............................................. (2,900) (3,300)
-------- --------
Deferred tax assets, net of valuation allowances................. 33,300 74,800
-------- --------
Accelerated depreciation and amortization........................ (23,400) (33,100)
Goodwill......................................................... (16,900) --
Other timing..................................................... (2,400) (4,600)
-------- --------
Deferred tax liabilities......................................... (42,700) (37,700)
-------- --------
Net deferred tax assets (liabilities)............................ $ (9,400) $ 37,100
======== ========
</TABLE>
The company has established valuation allowances for foreign net operating
loss carryforwards. The $0.4 million net change in valuation allowances for 1995
is primarily attributable to the net change in these foreign net operating
losses in the current year.
F-45
<PAGE> 187
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense from continuing operations applicable to pre-tax income
for financial reporting purposes differs from that calculated using the U.S.
federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at statutory rate...................... $28,100 $31,900 $11,000
State and local taxes, net of federal tax benefit......... 4,200 4,600 $ 1,300
Tax rate changes.......................................... (1,000) -- --
Other..................................................... 2,100 200 (1,000)
------- ------- -------
Income tax expense from continuing operations $33,400 $36,700 $11,300
======= ======= =======
</TABLE>
In connection with its 1992 distribution from Baxter International Inc.
("Baxter"), Caremark entered into a tax-sharing agreement with Baxter under
which the company retained responsibility for its portion of federal income tax
returns filed by Baxter for the years after 1987.
Undistributed earnings of certain foreign subsidiaries that the company
expects to be permanently reinvested totaled $6.1 million as of December 31,
1995.
NOTE 14: COMMITMENTS AND CONTINGENT LIABILITIES
In June 1995, Caremark agreed to settle the investigation of the company
with the U.S. Department of Justice, the Office of the Inspector General of the
U.S. Department of Health and Human Services (the "OIG"), the Veterans
Administration, the Federal Employee 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. Under the
terms of the settlement, which covered allegations dating back to 1986, a
subsidiary of Caremark pled guilty to two counts of mail fraud -- one each in
Minnesota and Ohio. The settlement allows Caremark to continue participating in
Medicare, Medicaid and other government health care programs.
Under the settlement, Caremark agreed to make civil payments of $85.3
million to the federal government in installments, $20.0 million of which
remains payable in June 1996, and $44.6 million to the states. The plea
agreement imposed $29.0 million in federal criminal fines. In addition, Caremark
contributed $2.0 million to a grant program set up under the Ryan White
Comprehensive AIDS Resources Emergency (CARE) Act. The company 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. There can be no assurance that the ultimate costs
related to this settlement will not exceed these estimates.
In March 1996, the company agreed to settle all disputes with a number of
private payors. The settlements will result in an after-tax cost of
approximately $42.3 million. These disputes relate to businesses that were
covered by Caremark's settlement with federal and state agencies in June 1995.
In addition, Caremark 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 will be recorded in first quarter 1996 discontinued
operations. Caremark may pay the settlement amounts in 1996 and 1997 or, under
certain circumstances, in semi-annual installments, including interest through
1999. No agreement, contract or other business relationship in existence at the
time of the settlements will be terminated or negatively affected by the
settlement agreements. The parties have also agreed to negotiate in good faith
to maintain or enhance ongoing business relationships. The company's lenders
have waived the impact of these settlements on the financial covenants under its
existing credit facility through September 15, 1996. The company currently
expects to enter into revised credit facilities prior to this date.
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.
F-46
<PAGE> 188
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 investigation discussed above. The complaints seek unspecified damages,
declaratory and equitable relief, and attorneys' fees and expenses. The parties
continue to engage in discovery proceedings. 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 1994 and July 1995, stockholders filed derivative actions on
behalf of Caremark against the company, its directors and certain employees 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, and attorneys' fees and expenses. In
June 1995, the parties to the Delaware derivative action entered into a
memorandum of understanding providing for the terms of settlement of all claims
asserted in that case. Although the proposed settlement does not contemplate the
payment of any damages by any defendant, plaintiffs are expected to seek an
award of attorneys' fees and expenses in conjunction with any approval of the
settlement. The proposed settlement of the Delaware derivative action is subject
to a number of conditions and the Delaware court is expected to consider the
proposed settlement in mid-1996. The Illinois and Cook County courts have
entered stays of all proceedings in those actions pending resolution of the
Delaware derivative action. In the event the proposed settlement of the Delaware
derivative action is approved by the Delaware court, Caremark anticipates that
the Illinois and Cook County derivative actions will be dismissed. If the
proposed settlement is not approved, Caremark intends to defend these cases
vigorously. Management is unable at this time to estimate the impact, if any, of
the ultimate resolutions of these matters.
In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of 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 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. Caremark 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 September 1995, Coram filed a complaint against Caremark International
Inc. and its subsidiary, Caremark Inc., and 50 unnamed individual defendants in
the Superior Court of California in San Francisco. The complaint, which arises
from Caremark's sale to Coram of Caremark's Home Infusion business (see Note
4 -- Discontinued Operations), alleges breach of the Asset Sale and Note
Purchase Agreement and related contracts for the transaction, fraud, negligent
misrepresentation and a right to contractual indemnity. Requested relief
includes specific performance, declaratory and injunctive relief, and damages of
$5.2 billion. In November 1995, Coram also stated that if they prevail in this
litigation, they will cancel any debt it owes the company with respect to the
securities issued for the sale. Although the company cannot predict with
certainty the outcome of these proceedings, based on information currently
available, management believes that the ultimate resolution of this matter is
not likely to have a material adverse effect on Caremark's results of
operations, cash flows or financial position.
F-47
<PAGE> 189
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company intends to defend vigorously the Coram lawsuit. In October
1995, Caremark filed motions in California Superior Court in San Francisco
seeking dismissal of this lawsuit. The San Francisco court subsequently
dismissed the case against Caremark (but not against Caremark Inc.) on the basis
of lack of jurisdiction. Caremark also filed a lawsuit in the U.S. District
Court in Chicago claiming Coram committed securities fraud in its sale of
Caremark's Home Infusion business to Coram. This case, which has been dismissed,
is on appeal and Caremark has filed counterclaims to the suit pending in San
Francisco against Caremark Inc.
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. On
April 21, 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. 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 this matter.
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 or
the Clayton Act or Section 5 of the Federal Trade Commission Act. The specific
nature, scope, timing and outcome of the 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.
Caremark is party to various other commitments, claims and routine
litigation arising in the ordinary course of business. Based on the advice of
counsel, management does not believe that the result of such other commitments,
claims and litigation, individually or in the aggregate, will have a material
effect on the company's business or its results of operations, cash flows or
financial position.
F-48
<PAGE> 190
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------
FIRST SECOND(2) THIRD FOURTH(3)
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1994
Net revenues........................................ $370,200 $ 457,500 $460,400 $ 487,100
Gross profit........................................ $ 59,300 $ 59,500 $ 62,500 $ 73,300
Operating income from continuing operations......... $ 21,300 $ 20,900 $ 24,400 $ 33,100
Income from continuing operations................... $ 11,300 $ 10,400 $ 13,800 $ 19,000
Net income.......................................... $ 4,300 $ 23,200 $ 25,700 $ 27,100
Earnings per share from continuing operations(1)
Primary........................................... $ 0.15 $ 0.14 $ 0.18 $ 0.25
Fully diluted..................................... $ 0.15 $ 0.14 $ 0.18 $ 0.25
Net earnings per share(1)
Primary........................................... $ 0.06 $ 0.32 $ 0.34 $ 0.36
Fully diluted..................................... $ 0.06 $ 0.32 $ 0.34 $ 0.36
Common stock prices:
High.............................................. $ 22.88 $ 20.25 $ 26.75 $ 25.00
Low............................................... $ 17.50 $ 15.75 $ 16.75 $ 16.63
1995
Net revenues........................................ $534,100 $ 586,000 $606,400 $ 647,800
Gross profit........................................ $ 70,700 $ 87,700 $ 97,600 $ 101,900
Operating income from continuing operations......... $ 25,700 $ 29,600 $ 35,300 $ 36,000
Income (loss) from continuing operations............ $ 13,100 $ 17,400 $19 ,400 $ (29,700)
Net income (loss)................................... $ 21,400 $(130,400) $ 13,600 $ (20,900)
Earnings (loss) per share from continuing
operations(1)
Primary........................................... $ 0.18 $ 0.23 $ 0.26 $ (0.39)
Fully diluted..................................... $ 0.18 $ 0.23 $ 0.26 $ (0.39)
Net earnings (loss) per share(1)
Primary........................................... $ 0.29 $ (1.75) $ 0.18 $ (0.28)
Fully diluted..................................... $ 0.29 $ (1.75) $ 0.18 $ (0.28)
Common stock prices:
High.............................................. $ 19.88 $ 21.88 $ 22.75 $ 21.13
Low............................................... $ 16.25 $ 16.88 $ 19.00 $ 17.88
</TABLE>
- ---------------
(1) The sum of quarterly earnings per share amounts may not equal full-year
amounts due to differences in average common and common equivalent shares
outstanding for the respective periods.
(2) Second quarter 1995 net loss reflects a $145.0 million ($1.94 per share)
after-tax charge related to the settlement of the government investigation
described in Note 14.
(3) Fourth quarter 1995 loss from continuing operations includes a special
after-tax charge of $52.0 million ($0.69 per share) to reflect a decline in
value of investments.
F-49
<PAGE> 191
CAREMARK INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
Current assets:
Cash and equivalents....................................................... $ 49,000
Restricted cash............................................................ 14,000
Accounts receivable, net................................................... 376,300
Inventories................................................................ 99,600
Short-term deferred income taxes........................................... 64,200
Prepaid expenses and other current assets.................................. 23,800
----------
Total current assets............................................... 626,900
----------
Property and equipment, net.................................................. 366,700
Goodwill and other intangible assets......................................... 320,500
Other noncurrent assets...................................................... 89,500
Long-term deferred income tax asset.......................................... --
----------
Total assets....................................................... $1,403,600
==========
Current liabilities:
Short-term debt............................................................ $ 289,600
Accounts payable, trade and other.......................................... 377,200
Accrued liabilities........................................................ 146,700
----------
Total current liabilities.......................................... 813,500
----------
Long-term debt and lease obligations......................................... 130,200
Long-term deferred income tax liability...................................... 42,200
Other noncurrent liabilities................................................. 29,700
Contingent liabilities (Note 5)
Stockholders' equity:
Preferred stock, $.01 par value, authorized 20,000,000 shares, none
issued.................................................................. --
Common stock, $1 par value, authorized 200,000,000 shares, issued
82,269,462 shares in 1996............................................... 82,200
Additional contributed capital............................................. 199,600
Shares held in trust, 7,700,000 shares..................................... (150,200)
Retained earnings.......................................................... 256,400
----------
Total stockholders' equity................................................... 388,000
----------
Total liabilities and stockholders' equity................................... $1,403,600
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE> 192
CAREMARK INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------
1995 1996
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenues.......................................................... $1,120,100 $1,569,600
Cost of goods and services sold....................................... 961,800 1,349,600
Marketing and administrative expenses................................. 93,000 132,100
Provision for doubtful accounts....................................... 10,000 14,600
---------- ----------
Operating income from continuing operations........................... 55,300 73,300
Non-operating expense (income):
Interest expense, net............................................... 4,900 9,300
Other............................................................... (400) (400)
---------- ----------
Income from continuing operations before income taxes................. 50,800 64,400
Income tax expense.................................................... 20,300 22,900
---------- ----------
Income from continuing operations..................................... 30,500 41,500
Discontinued operations:
Operating loss from discontinued operations, net of income taxes of
$(57,500) and $(39,500) in 1995 and 1996, respectively........... (146,600) (68,900)
Gain on sale of discontinued operations, net of income taxes of
$4,700 and $1,400 in 1995 and 1996, respectively................. 7,100 2,100
---------- ----------
Income (loss) from discontinued operations.......................... (139,500) (66,800)
---------- ----------
Net income (loss)..................................................... $ (109,000) $ (25,300)
========= =========
Earnings (loss) per common and common equivalent share:
Primary
Income from continuing operations................................ $ 0.41 $ 0.54
Operating income (loss) from discontinued operations............. $ (1.98) $ (0.89)
Gain on sale of discontinued operations.......................... $ 0.10 $ 0.03
Net income (loss)................................................ $ (1.47) $ (0.33)
Fully Diluted
Income from continuing operations................................ $ 0.41 $ 0.54
Operating income (loss) from discontinued operations............. $ (1.98) $ (0.89)
Gain on sale of discontinued operations.......................... $ 0.09 $ 0.03
Net income (loss)................................................ $ (1.47) $ (0.33)
Weighted average common and common equivalent shares outstanding:
Primary............................................................. 74,200 77,400
Fully diluted....................................................... 74,800 77,400
</TABLE>
See accompanying notes to consolidated financial statements.
F-51
<PAGE> 193
CAREMARK INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1995 1996
--------- ---------
(IN THOUSANDS)
BRACKETS DENOTES CASH
OUTFLOWS
<S> <C> <C>
Cash flows from continuing operations:
Income from continuing operations.................................... $ 30,500 $ 41,500
Adjustments for non-cash items:
Provision for doubtful accounts...................................... 10,000 14,600
Depreciation and amortization........................................ 14,400 25,000
Deferred income taxes................................................ 6,500 38,000
Changes in balance sheet items:
Accounts receivable.................................................. (54,500) (26,100)
Inventories.......................................................... 500 14,800
Payables and accrued liabilities..................................... 56,500 (16,100)
Prepaids and other................................................... 1,900 (6,500)
--------- ---------
Cash flows from continuing operations.................................. 65,800 85,200
--------- ---------
Cash flows from investing activities:
Capital expenditures................................................. (33,000) (48,400)
Acquisitions, net of cash received................................... (141,000) (71,600)
--------- ---------
Cash flows from investing activities................................... (174,000) (120,000)
--------- ---------
Cash flows from financing activities:
Net issuances of debt and lease obligations.......................... (52,200) 27,500
Stock issued under employee benefit plans............................ 11,700 19,800
Purchases of treasury stock.......................................... (19,900) --
--------- ---------
Cash flows from financing activities................................... (60,400) 47,300
--------- ---------
Cash flows from discontinued operations, net of divestiture proceeds... 158,000 22,100
--------- ---------
Increase (decrease) in cash and equivalents............................ (10,600) 34,600
Cash and equivalents, beginning of period.............................. 32,100 28,400
--------- ---------
Cash and equivalents, end of period.................................... $ 21,500 $ 63,000
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-52
<PAGE> 194
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
NOTE 1: FINANCIAL INFORMATION
The unaudited interim consolidated financial statements of Caremark
International Inc. and its subsidiaries (the "company" or "Caremark") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the company's 1995
Annual Report to Stockholders.
In the opinion of management, the unaudited interim consolidated financial
statements reflect all normal and recurring adjustments necessary for a fair
presentation of the interim periods. The results of operations for the interim
periods are not necessarily indicative of the results of operations for the full
year.
NOTE 2: INVENTORIES
Inventories of $99.6 million at June 30, 1996 consist primarily of finished
goods.
NOTE 3: DISCONTINUED OPERATIONS
During 1995 Caremark divested its Clozaril Patient Management System, Home
Infusion business, Oncology Management Services business and Caremark Orthopedic
Services, Inc. subsidiary. Effective February 29, 1996, the company 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.
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.
First quarter 1996 discontinued operations also reflects a $65.6 million
after-tax charge related to the settlements with private payors discussed in
Note 5 and a $3.3 million charge for a reduction in the amount expected to be
realized for deferred state income tax net operating loss benefits related to
discontinued operations.
NOTE 4: ACQUISITIONS
In January 1996, Caremark completed its agreement with CIGNA Healthcare of
California, a managed health care 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. The accounting related to
this transaction remains subject to purchase accounting adjustments pending
completion of valuations and analysis to determine the respective fair values of
assets received and liabilities assumed. These valuations are expected to be
completed no later than the fourth quarter of 1996.
NOTE 5: CONTINGENT LIABILITIES
In May 1996, two stockholders, each purporting to represent a class, filed
(but have not yet served) complaints against Caremark and each of its directors
in the Court of Chancery of the State of Delaware alleging breached of the
directors' fiduciary duty in connection with Caremark's proposed merger with
Medpartners/Mullikin, Inc. The complaints seek unspecified damages, injunctive
relief, and attorneys' fees
F-53
<PAGE> 195
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
and expenses. The Company intends, if served, to defend these cases vigorously.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of these matters.
On September 11, 1995, Coram Healthcare Company ("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 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 the company,
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. The company filed motions in October 1995 in the Superior Court of
California seeking (i) to strike certain causes of action due to the speculative
nature of the claims and damages asserted and (ii) dismissal of Coram's lawsuit
on grounds of lack of jurisdiction over Illinois-based Caremark. The Superior
Court of California subsequently dismissed the case against the company (but not
against Caremark Inc.) on the basis of lack of jurisdiction. Caremark also filed
a lawsuit in the U.S. District Court in Chicago claiming that Coram committed
securities fraud in its sale to the company of its securities in connection with
the sale of the company's Home Infusion business to Coram. This case, which has
been dismissed, is on appeal and the company has filed counterclaims to the
lawsuit pending in San Francisco. Coram's lawsuit is currently in the discovery
phase.
Although the company cannot predict with certainty the outcome of these
proceedings, based on information currently available, management believes that
the ultimate resolution of this matter is not likely to have a material adverse
effect on Caremark's results of operations, cash flows or financial position.
The company intends to defend these cases vigorously.
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 statute, the antitrust laws
and of California's unfair business practice statute. The complaint seeks
unspecified treble damages, and attorneys' fees and expenses. Caremark 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 below. The complaints seek unspecified
damages, declaratory and equitable relief, and attorneys' fees and expenses. In
June 1996, the complaint filed 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 will conduct a hearing on August 16, 1996 to
consider the proposed settlement. Although the proposed settlement does not
contemplate the payment of any damages by any defendant, plaintiffs are expected
to seek
F-54
<PAGE> 196
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
an award of attorneys' fees and expenses not in excess of $1.025 million in
conjunction with any approval of the settlement. The Illinois and Cook County
Courts have entered stays of all proceedings in those actions pending resolution
of the Delaware derivative action. In the event the proposed settlement of the
Delaware derivative action is approved by the Delaware court, Caremark
anticipates that the Illinois and Cook County derivative actions will be
dismissed. If the proposed settlement is not approved, Caremark 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 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. Caremark 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. On
April 21, 1995, the Court entered a stay of pre-trial 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. The company intends to defend these cases
vigorously. Management is unable to estimate at this time the impact, if any, of
the ultimate resolution of this matter.
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
F-55
<PAGE> 197
CAREMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 March 1996, the company 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 relate to businesses that were covered by Caremark's
settlement with federal and state agencies in June 1995 discussed below. In
addition, Caremark 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 has been recorded in first quarter 1996 discontinued operations.
Caremark may pay the settlement amounts in 1996 and 1997 or, under certain
circumstances, in semi-annual installments, including interest, through 1999. No
agreement, contract or other business relationship in existence at the time of
the settlements will be terminated or negatively affected by the settlement
agreements. The parties have also agreed to negotiate in good faith to maintain
or enhance ongoing business relationships. The company's lenders have waived the
impact of these settlements on the financial covenants under its existing credit
facility through September 15, 1996. The company currently expects to enter into
revised credit facilities prior to this date.
In June 1995, Caremark agreed to settle an investigation of the company
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"). The
company 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.
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 the settlements will not exceed
these estimates.
Caremark 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 effect on the company's business or
its income, cash flows or financial condition.
NOTE 6: MERGER
On May 13, 1996, Caremark and MedPartners/Mullikin, Inc. ("MedPartners")
signed a definitive agreement to merge. Under the terms of the agreement, which
has been approved by the Boards of Directors of both companies, each Caremark
share will be converted into MedPartners common stock at a fixed ratio of 1.21
shares of MedPartners per Caremark share. The merger is expected to close in the
third quarter of 1996 and is subject to stockholder and regulatory approval.
F-56
<PAGE> 198
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cardinal Healthcare, P.A.
We have audited the accompanying balance sheet of Cardinal Healthcare, P.A.
as of December 31, 1995, and the related statements of operations, changes in
stockholders' deficit and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cardinal Healthcare, P.A. at
December 31, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
June 19, 1996
F-57
<PAGE> 199
CARDINAL HEALTHCARE, P.A.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 1,055,873
Accounts receivable, less allowance for bad debts of $641,018................. 1,998,669
Other current assets.......................................................... 170,496
------------
Total current assets.................................................. 3,225,038
Property and equipment:
Equipment and furniture....................................................... 2,932,567
Leasehold improvements........................................................ 1,180,529
------------
4,113,096
Less accumulated depreciation and amortization................................ (1,819,402)
------------
Net property and equipment...................................................... 2,293,694
Other assets.................................................................... 877,310
------------
Total assets.......................................................... $ 6,396,042
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.............................................................. $ 966,067
Salaries payable and other accrued expenses................................... 2,322,924
Lines of credit............................................................... 1,305,000
Current portion of long-term debt and capital lease........................... 1,578,903
------------
Total current liabilities............................................. 6,172,894
Long-term debt and capital lease, net of current portion........................ 1,799,545
Stockholders' deficit:
Common stock, no par value; 50,000 shares authorized, 46 shares issued
and outstanding............................................................ --
Additional paid-in capital.................................................... 361,167
Accumulated deficit........................................................... (1,937,564)
------------
Total stockholders' deficit........................................... (1,576,397)
------------
Total liabilities and stockholders' deficit........................... $ 6,396,042
==========
</TABLE>
See accompanying notes.
F-58
<PAGE> 200
CARDINAL HEALTHCARE, P.A.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net revenue................................................................... $20,880,751
Operating expenses:
Cost of affiliated physician services....................................... 10,366,446
Clinic salaries, wages and benefits......................................... 6,161,276
Clinic rent and lease expense............................................... 994,987
Clinic supplies............................................................. 1,491,098
Other clinic costs.......................................................... 2,723,231
General corporate expenses.................................................. 1,067,745
Depreciation and amortization............................................... 297,030
Net interest expense........................................................ 144,400
------------
Net operating expenses................................................... 23,246,213
------------
Loss before income taxes...................................................... (2,365,462 )
Deferred income tax benefit................................................... (26,721 )
------------
Net loss...................................................................... $(2,338,741 )
============
</TABLE>
See accompanying notes.
F-59
<PAGE> 201
CARDINAL HEALTHCARE, P.A.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT DEFICIT
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994..................... $ -- $ 54,241 $ 401,177 $ 455,418
Sale of stock................................... -- 306,926 -- 306,926
Net loss........................................ -- -- (2,338,741) (2,338,741)
------ ---------- ----------- -------------
Balances at December 31, 1995..................... $ -- $ 361,167 $(1,937,564) $ (1,576,397)
====== ======== ========== ==========
</TABLE>
See accompanying notes.
F-60
<PAGE> 202
CARDINAL HEALTHCARE, P.A.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
OPERATING ACTIVITIES:
Net loss........................................................................ $ (2,338,741)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 297,030
Deferred income taxes......................................................... (26,721)
Changes in operating assets and liabilities:
Accounts receivable, net................................................... (193,504)
Other assets............................................................... (500,400)
Accounts payable........................................................... 174,809
Salaries payable and other accrued expenses................................ 1,068,414
------------
Net cash used in operating activities.................................... (1,519,113)
INVESTING ACTIVITIES:
Purchase of property and equipment.............................................. (1,629,981)
------------
Net cash used in investing activities.................................... (1,629,981)
FINANCING ACTIVITIES:
Proceeds from long-term debt.................................................... 3,712,261
Payments on long-term debt...................................................... (417,829)
Net proceeds from the issuance of common stock.................................. 14,506
------------
Net cash provided by financing activities................................ 3,308,938
------------
Net increase in cash............................................................ 159,844
Cash at beginning of year....................................................... 896,029
------------
Cash at end of year............................................................. $ 1,055,873
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.......................................... $ 144,400
==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING ACTIVITIES:
Accounts receivable contributed for common stock................................ $ 292,420
==========
</TABLE>
See accompanying notes.
F-61
<PAGE> 203
CARDINAL HEALTHCARE, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ACCOUNTING POLICIES
Description of Business
Cardinal Healthcare, P.A. (Cardinal) is a seventy-five member
multi-specialty physician group which services the Raleigh-Durham area of North
Carolina.
Basis of Presentation
The financial statements have been prepared on the accrual basis of
accounting.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying financial
statements. Actual results could differ from these estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the life of the
related leases. Routine maintenance and repairs are expensed as incurred, while
costs of betterments and renewals are capitalized.
Income Taxes
Cardinal is a corporation taxable under the provisions of the Internal
Revenue Code. Deferred income taxes are provided for temporary differences
between financial and income tax reporting.
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 adjusted in future
periods as final settlements are determined. The Medicare and Medicaid programs
pay physician services based on fee schedules which are determined by the
related government agency. Cardinal has negotiated agreements with managed care
organizations to provide physician services through a combination of discounted
fee for service and capitated arrangements. No individual managed care
organization is material to Cardinal.
Cost of Affiliated Physician Services
Cost of affiliated physician services represents salaries, bonuses and
benefits paid to the affiliated physicians. Physician compensation is generally
determined based on the excess of collections over expenses prior to physician
compensation.
Impairment of Long-Lived Assets
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed Of, which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. SFAS No. 121 also
addresses the accounting for long-lived assets that are
F-62
<PAGE> 204
CARDINAL HEALTHCARE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expected to be disposed of. Management has determined that long-lived assets are
fairly stated in the accompanying balance sheet, and that no indicators of
impairment are present. In accordance with the new rules, the Company's prior
year financial statements have not been restated to reflect the change in
accounting principle.
2. LINES OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE
Cardinal has lines of credit with First Union National Bank of North
Carolina totaling $1,305,000. Interest is at the prime rate (8% at December 31,
1995) payable monthly with principal balances due on April 30, 1996.
Long-term debt and capital lease consisted of the following as of December
31, 1995:
<TABLE>
<S> <C>
Note payable to First Union National Bank of North Carolina, interest
only payable monthly through December 1995, thereafter monthly
installments of $13,803, interest rate at 8.5% through June 1998...... $ 825,000
Note payable to First Union National Bank of North Carolina, due in
installments of $22,270 with a final payment of $20,000, interest rate
at 8.25% through June 1998............................................ 601,299
Note payable to related party, Raleigh Internal Medicine Associates,
interest only payable monthly through August 1996 at prime rate (8% at
December 31, 1995) plus 2%, thereafter monthly installments of $10,000
with a final payment due December 31, 1996............................ 1,068,000
Various notes payable to Raleigh Community Hospital, monthly
installments ranging from $3,705 to $3,788, interest rates ranging
from 7% to 9% through October 1998.................................... 455,266
Note payable to Wake Medical Center, interest rate at 7.75% through
October 2000.......................................................... 134,326
Capital lease obligations............................................... 257,814
Other................................................................... 36,743
------------
3,378,448
Less amounts due within one year........................................ (1,578,903)
------------
$1,799,545
==========
</TABLE>
The amounts recorded above approximate the fair value of the obligations.
At December 31, 1995, substantially all of the assets of Cardinal,
including accounts receivable and property and equipment, were provided as
collateral under the various notes, lines of credit and capital lease
agreements.
The following is a schedule of principal maturities of long-term debt,
excluding the capital lease, as of December 31, 1995:
<TABLE>
<S> <C>
1996......................................................... $1,564,169
1997......................................................... 514,760
1998......................................................... 1,041,705
----------
$3,120,634
=========
</TABLE>
Cardinal is the lessee of certain equipment under a capital lease which
expires in 2001. The related equipment is being amortized over five years and
the related amortization expense is included within depreciation and
amortization expense in the statement of operations.
F-63
<PAGE> 205
CARDINAL HEALTHCARE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of future minimum lease payments under the
capital lease together with the present value of the net minimum lease payments
as of December 31, 1995:
<TABLE>
<S> <C>
1996...................................................................... $ 43,333
1997...................................................................... 65,000
1998...................................................................... 65,000
1999...................................................................... 65,000
2000...................................................................... 65,000
Thereafter................................................................ 21,667
--------
Total minimum lease payments.............................................. 325,000
Less amount representing interest......................................... (67,186)
--------
Obligation under capital lease............................................ 257,814
Less current portion of capital lease obligation.......................... (14,734)
--------
Long-term obligation under capital lease.................................. $243,080
========
</TABLE>
Capitalized equipment leases included in equipment and accumulated
amortization was $257,813 and $25,781, respectively, at December 31, 1995. The
imputed interest rate on the capital lease was 7.1% at December 31, 1995.
3. OPERATING LEASES
Leases that do not meet the criteria for capitalization are classified as
operating leases with related rentals charged to operations as incurred. Total
rental expense in 1995 was $1,215,484. The following is a schedule of future
minimum lease payments under operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996........................................................ $ 1,566,174
1997........................................................ 1,524,936
1998........................................................ 1,404,808
1999........................................................ 1,317,562
2000........................................................ 1,088,178
Thereafter.................................................. 5,294,176
-----------
$12,195,834
==========
</TABLE>
4. RELATED PARTIES
Cardinal rents various office space and equipment from Raleigh Internal
Medicine Associates (RIMA), a partnership owned by stockholders of Cardinal.
Total rental expense paid in 1995 was $574,812. Lease commitments over the next
five years with related parties are included in Note 3. On December 29, 1995,
Cardinal obtained a note payable from RIMA of $1,068,000, due on December 31,
1996, which is included in Note 2.
As of December 31, 1995, a note receivable of approximately $314,000
existed between Cardinal and Cardinal IPA, an independent physician association
of which several partners of Cardinal are members. This amount is included in
other assets.
5. EMPLOYEE BENEFIT PLAN
Cardinal provides a 401(k) plan and a profit sharing plan to all employees
who have completed one year of service and attained age 21. Contributions are
made at the discretion of management. Total cost of contributions was $225,777
for the year ending December 31, 1995.
F-64
<PAGE> 206
CARDINAL HEALTHCARE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. CONTINGENCIES
In addition to the general liability and malpractice insurance carried by
the individual physicians, Cardinal maintains general liability and malpractice
insurance providing coverage of $3,000,000 per incident and $5,000,000 in the
aggregate. As of December 31, 1995, there were no asserted malpractice claims
against Cardinal, accordingly, no amounts for potential losses have been accrued
in the accompanying financial statements. In addition, Cardinal has not accrued
a loss for unreported incidents or for losses in excess of insurance coverage as
the amount, if any, cannot be reasonably estimated and the probability of an
adverse outcome cannot be determined at this time. It is the opinion of
management that the ultimate resolution of any unasserted claims will not have a
material adverse effect on the financial position or operating results of
Cardinal.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Cardinal's deferred tax assets and liabilities as of December 31, 1995 were as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 344,737
Cash to accrual adjustments............................................ 1,185,014
----------
Gross deferred tax assets................................................ 1,529,751
Valuation allowance for deferred tax assets.............................. (592,243)
----------
Net deferred tax assets........................................ 937,508
Deferred tax liabilities:
Depreciable and amortizable assets..................................... 138,040
Cash to accrual adjustments............................................ 799,468
----------
Gross deferred tax liabilities........................................... 937,508
----------
Net deferred tax liabilities................................... $ --
=========
</TABLE>
Income tax benefit for the year ended December 31, 1995 was as follows:
<TABLE>
<S> <C>
Current:
Federal...................................................... $ --
State........................................................ --
--------
--
Deferred:
Federal...................................................... (23,381)
State........................................................ (3,340)
--------
(26,721)
--------
$(26,721)
========
</TABLE>
F-65
<PAGE> 207
CARDINAL HEALTHCARE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the benefit for income taxes and the amount computed
by applying the statutory federal income tax rate to income before taxes was as
follows:
<TABLE>
<S> <C>
Federal taxes at statutory rate.......................................... $(804,256)
Add (deduct):
State income taxes, net of federal tax benefit......................... (2,171)
Valuation allowance.................................................... 904,969
Other.................................................................. (125,263)
---------
$ (26,721)
=========
</TABLE>
At December 31, 1995, Cardinal had cumulative net operating loss
carryforward for income tax purposes of approximately $862,000 available to
reduce future amounts of taxable income. If not utilized to offset future
taxable income, the net operating loss carryforwards will expire at various
dates through 2010. A valuation allowance has been established for the deferred
tax asset until it is more likely than not that some portion, or all of the
deferred tax asset will be realized.
8. PLAN AND AGREEMENT OF MERGER (UNAUDITED)
In July 1996, Cardinal entered into a letter of intent to be acquired by
MedPartners/Mullikin, Inc. in exchange for shares of MedPartners/Mullikin, Inc.
common stock.
F-66
<PAGE> 208
CARDINAL HEALTHCARE, P.A.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 896,029
Accounts receivable, less allowance for bad debts of $480,561................. 1,651,485
Other current assets.......................................................... 51,689
------------
Total current assets.................................................. 2,599,203
Property and equipment:
Equipment and furniture....................................................... 2,121,263
Leasehold improvements........................................................ 369,196
------------
2,490,459
Less accumulated depreciation................................................. 1,522,372
------------
Net property and equipment...................................................... 968,087
Other assets.................................................................... 349,633
------------
Total assets.......................................................... $3,916,923
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 791,258
Salaries payable and other accrued expenses................................... 928,054
Line of credit................................................................ 250,000
Current portion of long-term debt............................................. 302,130
Deferred income taxes......................................................... 353,177
------------
Total current liabilities............................................. 2,624,619
Long-term debt, net of current portion.......................................... 836,886
Stockholders' equity:
Common stock, no par value; 50,000 shares authorized, 29 shares issued and
outstanding................................................................ --
Additional paid-in capital.................................................... 54,241
Retained earnings............................................................. 401,177
------------
Total stockholders' equity............................................ 455,418
------------
Total liabilities and stockholders' equity............................ $3,916,923
==========
</TABLE>
See accompanying notes.
F-67
<PAGE> 209
CARDINAL HEALTHCARE, P.A.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994
----------- -----------
<S> <C> <C>
Net revenue....................................................... $13,529,687 $15,786,906
Operating expenses:
Cost of affiliated physician services........................... 6,424,392 7,152,379
Clinic salaries, wages and benefits............................. 3,722,204 4,232,935
Clinic rent and lease expense................................... 487,789 640,005
Clinic supplies................................................. 731,006 959,119
Other clinic costs.............................................. 1,335,053 1,751,663
General corporate expenses...................................... 523,459 686,805
Depreciation.................................................... 145,618 191,059
Net interest expense............................................ 70,792 92,882
----------- -----------
Net operating expenses....................................... 13,440,313 15,706,847
----------- -----------
Income before income taxes........................................ 89,374 80,059
Deferred income tax (benefit) expense............................. (191,612) 26,148
----------- -----------
Net income........................................................ $ 280,986 $ 53,911
========== ==========
</TABLE>
See accompanying notes.
F-68
<PAGE> 210
CARDINAL HEALTHCARE, P.A.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.......................... $ -- $ 37,921 $ 66,280 $ 104,201
Sale of stock....................................... -- 5,440 -- 5,440
Net income.......................................... -- -- 280,986 280,986
------ ---------- -------- -------------
Balance at December 31, 1993.......................... $ -- $ 43,361 $347,266 $ 390,627
Sale of stock....................................... -- 10,880 -- 10,880
Net income.......................................... -- -- 53,911 53,911
------ ---------- -------- -------------
Balances at December 31, 1994......................... $ -- $ 54,241 $401,177 $ 455,418
====== ======= ======== ==========
</TABLE>
See accompanying notes.
F-69
<PAGE> 211
CARDINAL HEALTHCARE, P.A.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1993 1994
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................ $ 280,986 $ 53,911
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation........................................................ 145,618 191,059
Gain on disposal of assets.......................................... (33,050) --
Deferred income taxes............................................... (191,612) 26,148
Changes in operating assets and liabilities:
Accounts receivable, net......................................... (2,669) (182,108)
Other assets..................................................... 10,987 (230,077)
Accounts payable................................................. 33,695 72,538
Salaries payable and other accrued expenses...................... 462,984 (407,071)
--------- ----------
Net cash provided (used) by operating activities............... 706,939 (475,600)
INVESTING ACTIVITIES:
Purchase of property and equipment.................................... (258,157) (273,318)
Proceeds from disposal of assets...................................... 62,700 --
--------- ----------
Net cash used by investing activities.......................... (195,457) (273,318)
FINANCING ACTIVITIES:
Proceeds from long-term debt.......................................... 383,952 1,070,726
Payments on long-term debt............................................ (518,503) (190,343)
Net proceeds from the issuance of common stock........................ 5,440 10,880
--------- ----------
Net cash (used) provided by financing activities............... (129,111) 891,263
--------- ----------
Increase in cash...................................................... 382,371 142,345
Cash at beginning of year............................................. 371,313 753,684
--------- ----------
Cash at end of year................................................... $ 753,684 $ 896,029
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest................................ $ 70,792 $ 92,882
========= =========
</TABLE>
See accompanying notes.
F-70
<PAGE> 212
CARDINAL HEALTHCARE, P.A.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. ACCOUNTING POLICIES
Description of Business
Cardinal Healthcare, P.A. (Cardinal) is a thirty-five member
multi-specialty physician group which services the Raleigh-Durham area of North
Carolina.
Basis of Presentation
The financial statements have been prepared on the accrual basis of
accounting.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates and
assumptions. Actual results could differ from these estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expenses as
incurred, while costs of betterments and renewals are capitalized.
Income Taxes
Cardinal is a corporation taxable under the provisions of the Internal
Revenue Code. Deferred income taxes are provided for temporary differences
between financial and income tax reporting.
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 adjusted in future
periods as final settlements are determined. The Medicare and Medicaid programs
pay physician services based on fee schedules which are determined by the
related government agency. Cardinal has negotiated agreements with managed care
organizations to provide physician services through a combination of discounted
fee for service and capitated arrangements. No individual managed care
organization is material to Cardinal.
Cost of Affiliated Physician Services
Cost of affiliated physician services represents salaries, bonuses and
benefits paid to the affiliated physicians. Physician compensation generally is
determined based on the excess of collections over expenses prior to physician
compensation.
F-71
<PAGE> 213
CARDINAL HEALTHCARE, P.A.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
2. LINE OF CREDIT AND LONG-TERM DEBT
Cardinal has a line of credit with First Union National Bank of North
Carolina totaling $250,000. Interest is at the prime rate payable monthly with
the principal balance due on April 30, 1995.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Note payable to First Union National Bank of North Carolina, due in
installments of $22,270 with a final payment of $20,000, interest rate
at 8.25% through June 1998............................................ $ 729,016
Various notes payable to Raleigh Community Hospital, monthly
installments ranging from $3,705 to $3,788, interest rates ranging
from 7% to 9% through December 1998................................... 410,000
------------
1,139,016
Less amounts due within one year........................................ (302,130)
------------
$ 836,886
==========
</TABLE>
The amounts recorded above approximate the fair value of the obligations.
The following is a schedule of principal maturities of long-term debt as of
December 31, 1994:
<TABLE>
<S> <C>
1995......................................................... $ 302,130
1996......................................................... 375,135
1997......................................................... 367,198
1998......................................................... 94,553
----------
$1,139,016
=========
</TABLE>
3. OPERATING LEASES
Leases that do not meet the criteria for capitalization are classified as
operating leases with related rentals charged to operations as incurred. Total
rental expense in 1994 and 1993 was approximately $737,505 and $653,184,
respectively. The following is a schedule of future minimum lease payments under
operating leases as of December 31, 1994:
<TABLE>
<S> <C>
1995........................................................ $ 1,215,484
1996........................................................ 1,566,174
1997........................................................ 1,524,936
1998........................................................ 1,404,808
1999........................................................ 1,317,562
Thereafter.................................................. 6,382,354
-----------
$13,411,318
==========
</TABLE>
4. RELATED PARTIES
Cardinal rents various office space and equipment from related parties
owned by stockholders of Cardinal. Total rental expense paid in 1993 and 1994
was approximately $281,942 and $369,923, respectively. Lease commitments over
the next five years with related parties are included in Note 3.
F-72
<PAGE> 214
CARDINAL HEALTHCARE, P.A.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE BENEFIT PLAN
Cardinal had qualified defined contribution plans covering substantially
all employees. Contributions were made at the discretion of management. Total
cost of contributions in 1993 and 1994 was $917,369 and $580,177, respectively.
6. CONTINGENCIES
In addition to the general liability and malpractice insurance carried by
the individual physicians, Cardinal maintains general liability and malpractice
insurance providing Cardinal with coverage of $3,000,000 per incident and
$5,000,000 in the aggregate. As of December 31, 1994, there were no asserted
malpractice claims against Cardinal, accordingly, no amounts for potential
losses have been accrued in the accompanying financial statements. In addition,
Cardinal has not accrued a loss for unreported incidents or for losses in excess
of insurance coverage as the amount, if any, cannot be reasonably estimated and
the probability of an adverse outcome cannot be determined at this time. It is
the opinion of management that the ultimate resolution of any unasserted claims
will not have a material adverse effect on the financial position or operating
results of Cardinal.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Cardinal's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards...................................... $ 13,730
Cash to accrual adjustments........................................... 354,253
------------
Gross deferred tax assets............................................... 367,983
Valuation allowance..................................................... (13,730)
------------
Net deferred tax assets................................................. 354,253
Deferred tax liabilities:
Depreciable assets.................................................... 41,440
Cash to accrual adjustments........................................... 665,990
------------
Gross deferred tax liabilities.......................................... 707,430
------------
Net deferred tax liabilities............................................ $353,177
==========
</TABLE>
F-73
<PAGE> 215
CARDINAL HEALTHCARE, P.A.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax (benefit) expense was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1993 1994
--------- -------
<S> <C> <C>
Current:
Federal...................................................... $ -- $ --
State........................................................ -- --
--------- -------
-- --
Deferred:
Federal...................................................... (167,660) 22,879
State........................................................ (23,952) 3,269
--------- -------
(191,612) 26,148
--------- -------
$(191,612) $26,148
========= =======
</TABLE>
The differences between the (benefit) provision for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1993 1994
--------- --------
<S> <C> <C>
Federal taxes at statutory rate............................... $ 30,573 $ 27,494
Add (deduct):
State income taxes, net of federal tax benefit.............. 6,969 6,267
Other....................................................... (229,154) (59,909)
--------- --------
$(191,612) $ 26,148
========= ========
</TABLE>
At December 31, 1993 and 1994, Cardinal had net operating loss
carryforwards for income tax purposes of approximately $30,000 and $20,000,
respectively, available to reduce future amounts of taxable income. If not
utilized to offset future taxable income, the net operating loss carryforwards
will expire at various dates through 2009. A valuation allowance has been
established for the net operating loss until it is more likely than not that
some portion, or all of the deferred tax assets will be utilized.
F-74
<PAGE> 216
CARDINAL HEALTHCARE, P.A.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 205,820
Accounts receivable, less allowance for bad debts of $749,934................. 3,254,031
Other current assets.......................................................... 21,251
-----------
Total current assets.................................................. 3,481,102
Property and equipment:
Equipment and furniture....................................................... 3,134,338
Leasehold improvements........................................................ 1,334,746
-----------
4,469,084
Less accumulated depreciation and amortization................................ (2,294,085)
-----------
Net property and equipment...................................................... 2,174,999
Other assets.................................................................... 1,067,161
-----------
Total assets.......................................................... $ 6,723,262
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.............................................................. $ 732,918
Salaries payable and other accrued expenses................................... 2,247,117
Line of credit................................................................ 1,367,000
Current portion of long-term debt and capital lease........................... 1,694,429
-----------
Total current liabilities............................................. 6,041,464
Long-term debt and capital lease, net of current portion........................ 1,635,885
Stockholders' deficit:
Common stock, no par value; 50,000 shares authorized, 54 shares issued and
outstanding................................................................ --
Additional paid-in capital.................................................... 566,369
Accumulated deficit........................................................... (1,520,456)
-----------
Total stockholders' deficit........................................... (954,087)
-----------
Total liabilities and stockholders' deficit........................... $ 6,723,262
==========
</TABLE>
See accompanying note.
F-75
<PAGE> 217
CARDINAL HEALTHCARE, P.A.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net revenue......................................................... $ 9,868,779 $17,085,237
Operating expenses:
Cost of affiliated physician services............................. 4,165,301 6,993,744
Clinic salaries, wages and benefits............................... 2,969,246 4,861,274
Clinic rent and lease expense..................................... 471,393 682,416
Clinic supplies................................................... 706,435 1,022,676
Other clinic costs................................................ 1,290,180 1,867,741
General corporate expenses........................................ 493,530 708,358
Depreciation and amortization..................................... 140,723 216,610
Net interest expense.............................................. 68,412 99,037
----------- -----------
Net operating expenses.................................... 10,305,220 16,451,856
----------- -----------
Income before income taxes.......................................... (436,441) 633,381
Deferred income tax expense......................................... 12,335 11,071
----------- -----------
Net income (loss)................................................... $ (448,776) $ 622,310
========== ==========
</TABLE>
See accompanying note.
F-76
<PAGE> 218
CARDINAL HEALTHCARE, P.A.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1995 1996
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income.................................................... $(448,776) $ 622,310
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization...................................... 140,723 216,610
Deferred income taxes.............................................. 12,335 11,071
Changes in operating assets and liabilities:
Accounts receivable, net........................................ (814,366) (1,255,362)
Other assets.................................................... (13,869) (40,606)
Accounts payable................................................ 489,721 (570,676)
Salaries payable and other accrued expenses..................... 382,183 250,649
--------- -----------
Net cash used by operating activities...................... (252,049) (766,004)
INVESTING ACTIVITIES:
Purchase of property and equipment................................... (833,823) (97,915)
--------- -----------
Net cash used by investing activities...................... (833,823) (97,915)
FINANCING ACTIVITIES:
Proceeds from long-term debt......................................... 910,000 62,000
Payments on long-term debt........................................... (392,438) (48,134)
--------- -----------
Net cash provided by financing activities.................. 517,562 13,866
--------- -----------
Decrease in cash..................................................... (568,310) (850,053)
Cash at beginning of period.......................................... 896,029 1,055,873
--------- -----------
Cash at end of period................................................ $ 327,719 $ 205,820
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................. $ 45,727 $ 97,737
========= ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Accounts receivable contributed for common stock..................... $ -- $ 205,202
========= ==========
</TABLE>
See accompanying note.
F-77
<PAGE> 219
CARDINAL HEALTHCARE, P.A.
NOTE TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1996
1. BASIS OF PRESENTATION
The balance sheet as of June 30, 1996, the statements of income and the
statements of cash flows for the six months ended June 30, 1995 and 1996, have
been prepared by Cardinal Healthcare, P.A. (the Company) without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position as of June 30,
1996, and the results of operations and cash flows for the six months ended June
30, 1995 and 1996 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's December 31, 1995 audited financial statements. The results of
operations for the periods ended June 30, 1995 and 1996 are not necessarily
indicative of the operation results for those years.
F-78
<PAGE> 220
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
CHS Management, Inc.
We have audited the accompanying balance sheet of CHS Management, Inc. as
of December 31, 1995 and the related statements of income, stockholders' equity
and cash flows for the period from September 1, 1995 (inception) through
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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CHS Management, Inc. as of
December 31, 1995 and the results of its operations and its cash flows for the
period from September 1, 1995 (inception) through December 31, 1995 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
July 26, 1996
F-79
<PAGE> 221
CHS MANAGEMENT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 719,303
Accounts receivable........................................................... 134,465
Due from affiliates........................................................... 752,362
Prepaid expenses.............................................................. 57,664
Deferred tax asset............................................................ 87,210
------------
Total current assets.................................................. 1,751,004
Property and equipment, net..................................................... 82,367
Deferred tax asset.............................................................. 204,950
Other assets.................................................................... 67,668
------------
Total assets.......................................................... $2,105,989
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 85,601
Accrued expenses.............................................................. 250,859
Accrued compensation and payroll taxes........................................ 398,403
Income taxes payable.......................................................... 76,700
Due to affiliates............................................................. 49,453
Funds held on behalf of others................................................ 493,600
------------
Total current liabilities............................................. 1,354,616
Excess of fair value of assets acquired over liabilities assumed................ 332,588
Stockholders' equity:
Common stock, $.01 par value; 180,000 shares authorized, 48,844 shares issued
and outstanding............................................................ 488
Additional paid-in capital.................................................... 250,162
Retained earnings............................................................. 168,135
------------
Total stockholders' equity............................................ 418,785
------------
Total liabilities and stockholders' equity............................ $2,105,989
==========
</TABLE>
See accompanying notes.
F-80
<PAGE> 222
CHS MANAGEMENT, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
SEPTEMBER 1, 1995
(INCEPTION)
THROUGH
DECEMBER 31,
1995
-----------------
<S> <C>
Revenue:
Management fees -- affiliates.............................................. $ 2,446,541
Management fees -- nonaffiliates........................................... 211,782
-----------------
Total revenue...................................................... 2,658,323
Operating expenses:
Salaries and employee benefits............................................. 1,349,979
Outside professional services.............................................. 170,507
Building and occupancy..................................................... 334,912
Depreciation............................................................... 9,514
Other administrative expenses.............................................. 522,464
-----------------
Total operating expenses........................................... 2,387,376
-----------------
Operating income............................................................. 270,947
Interest income.............................................................. 3,656
-----------------
Income before income taxes................................................... 274,603
Provision for income taxes................................................... 106,468
-----------------
Net income................................................................... $ 168,135
=============
</TABLE>
See accompanying notes.
F-81
<PAGE> 223
CHS MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at September 1, 1995 (inception)........ -- $ -- $ -- $ -- $ --
Common stock exchanged for net assets......... 48,844 488 250,162 -- 250,650
Net income.................................... -- -- -- 168,135 168,135
------ ------ ---------- -------- --------
Balance at December 31, 1995.................... 48,844 $488 $ 250,162 $168,135 $418,785
====== ===== ======== ======== ========
</TABLE>
See accompanying notes.
F-82
<PAGE> 224
CHS MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 1, 1995
(INCEPTION) THROUGH
DECEMBER 31, 1995
-------------------
<S> <C>
OPERATING ACTIVITIES:
Net income................................................................ $ 168,135
Adjustment to reconcile net income to net cash used in operating
activities:
Depreciation........................................................... 9,514
Amortization of negative goodwill...................................... (5,686)
Increase in accounts receivable........................................ (28,031)
Increase in due from affiliate......................................... (165,567)
Decrease in prepaid expenses........................................... 2,503
Decrease in deferred tax asset......................................... 29,769
Increase in other assets............................................... (10)
Decrease in accounts payable and other accrued liabilities............. (310,991)
Increase in due to affiliates.......................................... 49,453
-------------------
Net cash used in operating activities............................. (250,911)
-------------------
INVESTING ACTIVITIES:
Purchase of property and equipment........................................ (31,033)
Acquisition costs......................................................... (20,231)
-------------------
Net cash used in investing activities............................. (51,264)
-------------------
FINANCING ACTIVITIES:
Stockholders' contributions............................................... 527,878
Cash received on behalf of affiliate...................................... 800,000
Cash disbursed on behalf of affiliate..................................... (306,400)
-------------------
Net cash provided by financing activities......................... 1,021,478
-------------------
Net increase in cash.............................................. 719,303
Cash at beginning of period................................................. --
-------------------
Cash at end of period....................................................... $ 719,303
==============
NONCASH TRANSACTIONS -- assets and liabilities transferred from affiliates
see Note 4
</TABLE>
See accompanying notes.
F-83
<PAGE> 225
CHS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
CHS Management, Inc. (CHS) was incorporated in August 1995, and commenced
operations in September 1995. The corporation was formed by Community Medical
Group of the West Valley (CMG) through the contribution of the management
services component of CMG to the new company. Thereafter, CHS acquired certain
assets and liabilities and the operations of Health Source Management Group. CHS
provides administrative management services to CMG and Health Source Medical
Group (HSMG). In addition, CHS provides management services to New Management
(NM), an affiliate of CMG, and other health care organizations. CHS also
negotiates contracts on behalf of health care providers with health maintenance
organizations and other prepaid health insurance plans to provide physician and
related health care services to enrolled members who select physicians in CHS
managed physician groups.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method over the shorter of the estimated useful lives of the
assets or the terms of the underlying leases. Estimated useful lives are three
to seven years for furniture, fixtures and equipment and five to ten years for
leasehold improvements. In accordance with the requirements of APB No. 16,
Business Combinations, the property and equipment acquired from Health Source
Management Group has been reduced to zero carrying value (note 5).
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Fair Value of Financial Instruments
The Company values financial instruments as required by Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," and Statement of Financial Accounting Standards No. 119,
"Disclosures about Derivative Instruments and Fair Value of Financial
Instruments." The carrying amounts of cash, accounts receivable, accounts
payable, accrued expenses (including accrued compensation and payroll), income
taxes and due from affiliate approximate fair value due to their liquidity.
Impairment of Long-Lived Assets
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed of, which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. SFAS No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. Management has determined that-lived assets are fairly stated in the
accompanying balance sheet, and that no indicators of impairment are present. In
accordance with the new rules, the Company's prior year financial statements
have not been restated to reflect the change in accounting principle.
F-84
<PAGE> 226
CHS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. MANAGEMENT SERVICES AGREEMENTS
In 1995, CHS entered into management services agreements with CMG and HSMG
(the Medical Groups) under which CHS provides administrative and operational
services such as contract management, financial reporting, utilization review,
case management, claims processing and payment, and quality assurance.
Pursuant to these agreements, the Medical Groups remit to CHS 12% of
capitation and other Payer revenues except for CMG fee for service revenue which
is based on a lesser percentage.
Pursuant to the NM agreement, NM remits to CHS a management fee based on
12% per dollar per enrolled life under the capitation agreement between CMG, NM
and West Hills Hospital.
CHS' management services agreement with CMG and HSMG expires on September
1, 2015. Thereafter, the agreement renews for two successive ten-year periods
unless notice of intent to terminate the agreement is provided by either party
(note 9).
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 consists of the following:
<TABLE>
<S> <C>
Computer equipment......................................................... $19,289
Furniture and fixtures..................................................... 61,005
Office equipment........................................................... 10,829
Leasehold improvements..................................................... 758
-------
91,881
Less accumulated depreciation and amortization............................. 9,514
-------
$82,367
=======
</TABLE>
4. RELATED PARTY TRANSACTIONS
Due from Affiliate
During 1995, CHS entered into management agreements with CMG, HSMG, and NM,
all affiliated companies, under which CHS provides certain management and
administrative services in exchange for management fee based upon a percentage
of CMG and HSMG revenue and based on enrollment for NM. The total amount of
management fee income received by CHS from CMG, HSMG and NM was $1,038,489,
$1,392,475, and $15,577, respectively, for the period from inception through
December 31, 1995. Amounts due from HSMG and NM amounted to $736,785 and
$15,577, respectively, at December 31, 1995. Amounts due CMG from CHS amounted
to $49,453 at December 31, 1995.
Transfers from CMG and Health Source Management Group
As part of the merger agreement between CHS, CMG and Health Source
Management Group (HSMgmtG), CMG and HSMgmtG were each to contribute certain
assets and liabilities to CHS in exchange for 24,422 shares of common stock.
Assets and liabilities transferred to CHS on September 1, 1995 were as follows:
<TABLE>
<CAPTION>
CMG HSMGMTG TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
Cash............................................... $ -- 1,327,878 1,327,878
Accounts receivable................................ 38,334 68,100 106,434
Due from affiliate................................. 150,000 436,795 586,795
Prepaid expenses................................... -- 60,167 60,167
Property and equipment............................. 60,848 402,845 463,693
Acquisition costs.................................. 239,524 -- 239,524
Other assets....................................... 9,330 58,328 67,658
Accounts payable................................... (372,711) (749,843) (1,122,554)
Funds held on behalf of others..................... -- (800,000) (800,000)
</TABLE>
F-85
<PAGE> 227
CHS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The assets and liabilities transferred from CMG to CHS were recorded at the
predecessor cost basis since they are related parties.
Lease
During 1995, CHS entered into a long-term lease agreement with CMG to lease
certain CMG computer equipment and software. The agreement provided that the
lease agreement would terminate upon settlement of the lawsuit between HSMG and
a medical center. Due to the settlement of the lawsuit on October 31, 1995, the
lease reverted to a month-to-month lease. Rent expense for the computer
operating lease amounted to $129,444.
Funds Held on Behalf of Others
Upon the acquisition of certain assets and liabilities of HSMgmtG by and in
conjunction with the termination of the existing long-term management agreement
between HSMgmtG and HSMG, HSMgmtG agreed to transfer $650,000 into an
irrevocable trust account (designated funds) to be used to pay outstanding
medical claims of HSMG. As part of CHS' acquisition of assets of HSMgmtG, the
designated funds were transferred to CHS on September 1, 1995. As of December
31, 1995, the designated funds had not been transferred to a trust pending final
documentation of the trusts. During the period from September 1, 1995
(inception) through December 31, 1995, the HSMG Board of Directors approved
payments of $156,400 to pay certain outstanding medical claim liabilities of
HSMG from the designated funds. The remaining balance of $493,600 is included in
cash and funds held on behalf of others in the accompanying balance sheet and
were subsequently delivered to the trustee, net of approved payments.
Additionally, HSMgmtG agreed to transfer $150,000 into a revocable trust account
to be used to pay certain legal fees related to a lawsuit with a medical center.
The amounts were fully disbursed during 1995 with the consent of the parties
thereto.
5. FAIR VALUE OF ASSETS ACQUIRED IN EXCESS OF LIABILITIES ASSUMED
In September 1995, HSMgmtG, as part of a tax-free liquidation, transferred
certain assets and liabilities to CHS in exchange for shares of common stock.
The excess value of assets received, over liabilities assumed by CHS after
reducing all noncurrent nonliquid assets acquired to zero value has been
reflected in the accompanying balance sheet as fair value of assets acquired in
excess of liabilities assumed (negative goodwill). A reconciliation of the
excess value of the assets acquired over liabilities assumed follows:
<TABLE>
<S> <C>
Assets acquired:
Cash................................................................... $1,327,878
Accounts receivable.................................................... 68,100
Due to HSMG............................................................ 436,795
Prepaid expenses....................................................... 60,167
Plant and equipment.................................................... 402,845
Other assets........................................................... 58,328
Liabilities assumed
Accounts payable and accrued liabilities............................... (749,843)
Funds held on behalf of others......................................... (800,000)
CHS stock issued to HSMgmtG, at par value.............................. (244)
Additional paid-in capital............................................. (125,081)
----------
Excess of value of assets received over liabilities assumed and
common stock issued and additional paid-in capital
recognized.................................................... $ 678,945
=========
</TABLE>
F-86
<PAGE> 228
CHS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CHS applied the excess value against nonmonetary intangible assets and
noncurrent assets (negative goodwill) as follows:
<TABLE>
<S> <C>
Excess value of assets received over liabilities assumed.................. $678,945
Applied to deferred acquisition costs incurred by CHS..................... 259,755
Applied to plant and equipment............................................ 402,845
--------
Unallocated excess value of assets received over liabilities assumed at
date of merger....................................................... 16,345
Deferred tax asset recognized on future tax deductions transferred
from HSMgmtG............................................................ 321,929
--------
Negative goodwill recorded at date of merger............................ 338,274
Less amount amortized in 1995............................................. 5,686
--------
Excess fair value of assets received over liabilities assumed as
of December 31, 1995........................................... $332,588
========
</TABLE>
The amortization of the excess value of assets received over liabilities
assumed has been reflected in the statement of operations as other revenue.
6. COMMITMENTS
Leases
CHS leases certain office space under noncancelable operating leases
expiring through April 2000. Future minimum rental commitments at December 31,
1995 are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 562,000
1997.............................................................. 540,000
1998.............................................................. 499,000
1999.............................................................. 524,000
2000.............................................................. 177,000
----------
$2,302,000
=========
</TABLE>
Rent expense for operating leases amounted to $200,196 for the period from
September 1, 1995 (inception) through December 31, 1995.
CHS subleases certain office space under a noncancelable sublease which
expires in 1996. The future minimum sublease rental income for 1996 is $19,000.
Sublease rental income received in 1995 was $10,980.
7. INCOME TAXES
Income tax expense for the period from September 1, 1995 (inception)
through December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- ------- --------
<S> <C> <C> <C>
Federal............................................................ $58,700 $24,100 $ 82,800
State.............................................................. 18,000 5,668 23,668
------- ------- --------
Total..................................................... $76,700 $29,768 $106,468
======== ======== =========
</TABLE>
F-87
<PAGE> 229
CHS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the corporate Federal tax rate with the financial
statement effective rates for the period from September 1, 1995 (inception)
through December 31, 1995:
<TABLE>
<S> <C>
Statutory corporate Federal tax expense............................................. $ 93,365
Nondeductible expenses.............................................................. 19,590
Amortization of negative goodwill................................................... (1,933)
State taxes......................................................................... 18,000
Benefit recognized on transfer of future deductible amount from CMG to CHS.......... (25,382)
Other, net.......................................................................... 2,828
--------
$106,468
=========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1995 are presented below:
<TABLE>
<S> <C>
Current deferred tax assets:
Accrued vacation.................................................................. $ 47,827
Accrued severance................................................................. 39,383
--------
Total current deferred tax assets.......................................... 87,210
Noncurrent deferred tax asset -- depreciation....................................... 204,950
--------
Net deferred tax assets.................................................... $292,160
=========
</TABLE>
Management is of the opinion that it is more likely than not that such
deferred tax assets will be realized in the future.
8. EMPLOYEE BENEFIT PLAN
CHS has a noncontributory profit-sharing plan and a contributory 401(k)
Plan (the Plan) for substantially all employees who have completed one year of
service and attained age 21. Employer contributions are at the discretion of
management. Plan expenses for the profit sharing portion for the period from
September 1, 1995 (inception) through December 31, 1995 was $22,618.
9. BUSINESS AND CREDIT CONCENTRATION
CHS had funds on deposit with a bank amounting to $609,959. The funds are
insured up to $100,000 by the Federal Deposit Insurance Corporation.
CMG and HSMG represented individually more than 10% of CHS' 1995 revenue.
CMG and HSMG provided 39% and 52% of CHS' total revenue, respectively. HSMG has
had recurring losses from continuing operations and has negative shareholders
equity. If HSMG failed to pay amounts owed to CHS when they become due or failed
to continue operations, such failures could have a substantial negative impact
on the financial results of CHS. The financial statements of CHS do not reflect
any adjustments that might result from the outcome of this uncertainty.
10. SUBSEQUENT EVENTS
Management Agreement
Effective January 1, 1996, CHS entered into amended management agreements
with CMG and HSMG. The revised terms of the agreements include: assignment of
all capitation revenue generated by the Medical Groups to CHS; the term of the
agreement was revised to twenty years with an automatic renewal for two
successive ten-year periods; and revision of the management fee calculation to
be computed as the sum of (1) all operating and nonoperating expenses and other
costs incurred by CHS; and (2) a percentage of the net revenues of the Medical
Groups subject to certain limitations as defined in the management agreement.
Merger
On March 11, 1996, CHS entered into a letter of intent to be acquired by
MedPartners/Mullikin, Inc., a publicly held physicians practice management
company, in exchange for shares of MedPartners/Mullikin, Inc. common stock.
F-88
<PAGE> 230
CHS MANAGEMENT, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1996
----------
<S> <C>
ASSETS
Current assets:
Cash........................................................................... $2,126,821
Accounts receivable............................................................ 211,345
Due from affiliates............................................................ 728,823
Prepaid expenses............................................................... 181,619
Deferred tax asset............................................................. 96,620
----------
Total current assets................................................... 3,345,228
Property and equipment, net.................................................... 132,829
Deferred tax asset............................................................. 227,071
Other assets................................................................... 67,164
----------
Total assets........................................................... $3,772,292
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable............................................................... $ 74,803
Accrued expenses............................................................... 812,607
Income taxes payable........................................................... --
Due to affiliates.............................................................. 259,377
Notes payable -- current portion............................................... 2,550,228
----------
Total current liabilities.............................................. 3,697,015
Notes payable -- long term..................................................... 41,039
Excess of fair value of assets acquired over liabilities assumed............... 309,569
Stockholders' equity:
Common stock, $0.01 par value; 180,000 shares authorized, 48,844 shares issued
and outstanding............................................................. 488
Additional paid-in capital..................................................... 250,162
Accumulated deficit............................................................ (525,981)
----------
Total stockholders' deficit............................................ (275,331)
----------
Total liabilities and stockholders' deficit............................ $3,772,292
=========
</TABLE>
See accompanying notes.
F-89
<PAGE> 231
CHS MANAGEMENT, INC.
CONDENSED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30, 1996
-----------
<S> <C>
Revenues:
Capitation revenue............................................................ $27,778,958
Other revenues................................................................ 1,717,502
-----------
Total operating revenues.............................................. 29,496,460
Operating expenses:
Transfers to affiliated medical groups........................................ 24,575,480
Salaries and employee benefits................................................ 2,646,914
Legal and accounting.......................................................... 186,448
Rent.......................................................................... 959,365
Merger costs.................................................................. 783,792
Depreciation and amortization................................................. 8,500
Other administrative expenses................................................. 1,067,203
-----------
Total operating expenses.............................................. 30,227,702
-----------
Operating loss.................................................................. (731,242)
Gain on sale of assets.......................................................... 5,506
Interest income................................................................. 1,688
-----------
Loss before income taxes........................................................ (724,048)
Deferred income tax benefit..................................................... 29,932
-----------
Net loss........................................................................ (694,116)
Retained earnings -- beginning of period........................................ 168,135
-----------
Accumulated deficit -- end of period............................................ $ (525,981)
==========
</TABLE>
See accompanying notes.
F-90
<PAGE> 232
CHS MANAGEMENT, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1996
------------
<S> <C>
OPERATING ACTIVITIES:
Net loss...................................................................... $ (694,116)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation............................................................... 16,674
Amortization of negative goodwill.......................................... (8,174)
Gain on sale of property and equipment..................................... (5,506)
Increase in accounts receivable............................................ (76,880)
Increase in prepaid expenses............................................... (123,955)
Decrease in due from affiliates............................................ 23,539
Increase in deferred tax asset............................................. (31,531)
Decrease in other assets................................................... 504
Decrease in accounts payable............................................... (10,799)
Increase in accrued expenses............................................... 148,501
Decrease in taxes payable.................................................. (76,700)
Increase in due to affiliate............................................... 209,924
-----------
Net cash used in operating activities................................. (628,519)
INVESTING ACTIVITIES
Purchases of property and equipment........................................... (13,691)
Proceeds from sale of property and equipment.................................. 5,506
-----------
Net cash used in investing activities......................................... (8,185)
FINANCING ACTIVITIES
Proceeds from notes payable................................................... 2,539,250
Payments on notes payable..................................................... (1,428)
Cash disbursed on behalf of affiliate......................................... (493,600)
-----------
Net cash provided by financing activities....................................... 2,044,222
-----------
Net increase in cash............................................................ 1,407,518
Cash at beginning of period..................................................... 719,303
-----------
Cash at end of period........................................................... $ 2,126,821
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid............................................................. $ 124,800
===========
Accrued vacation donated by affiliates........................................ $ 42,699
===========
Accrued legal fees forgiven................................................... $ 22,381
===========
Purchases of equipment with note payable...................................... $ 53,445
===========
</TABLE>
See accompanying notes.
F-91
<PAGE> 233
CHS MANAGEMENT, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. CONDENSED FINANCIAL STATEMENTS
The Condensed Balance Sheet as of June 30, 1996, the Condensed Statement of
Operations and Accumulated Deficit and the Condensed Statement of Cash Flows for
the six months ended June 30, 1996 have been prepared by CHS Management, Inc.
(the Company) without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at June 30, 1995
and 1996 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's December 31, 1995 audited financial statements. The results of
operations for the period ended June 30, 1996 are not necessarily indicative of
the operation results for the year.
2. SUBSEQUENT EVENT
In June, 1996, the Company entered into a loan agreement with
MedPartners/Mullikin, Inc. Pursuant to that agreement, the Company has borrowed
approximately $2 million. Amounts borrowed under the agreement, which may
increase to $2,539,250, together with interest at prime, are due December 31,
1996. At the option of CHS, the unpaid principal and interest may be offset
against a portion of the fee payable to the Company by MedPartners/Mullikin,
Inc. pursuant to the terms of the Amended and Restated Plan of Agreement of
Merger dated March 11, 1996. The obligations of the Company under the loan have
been guaranteed by Community Medical Group of the West Valley and Health Source
Management Group, Inc.
F-92
<PAGE> 234
REPORT OF INDEPENDENT AUDITORS
The Partners
New Management
We have audited the accompanying balance sheets of New Management (a
California general partnership) (the Partnership) as of December 31, 1994 and
1995, and the related statements of income, partners' deficiency and cash flows
for the years then ended. These financial statements are the responsibility of
the Partnership'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 opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of New Management at December
31, 1994 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
July 26, 1996
F-93
<PAGE> 235
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 55,197 $ 13,445
Administrative capitation fee receivable........................ 267,277 --
Other receivables............................................... 162 162
Due from related parties........................................ 56,827 58,976
----------- -----------
Total assets............................................ $ 379,463 $ 72,583
========== ==========
LIABILITIES AND PARTNERS' DEFICIENCY
Current liabilities:
Current portion of long term debt............................... $ 114,590 $ 123,793
Accounts payable................................................ 4,900 1,113
Due to affiliate................................................ -- 15,577
Deferred income................................................. -- 1,593
Accrued interest payable........................................ 19,023 18,283
----------- -----------
Total current liabilities............................... 138,513 160,359
Long-term debt, net of current portion............................ 2,831,001 2,707,208
Partners' deficiency.............................................. (2,590,051) (2,794,984)
----------- -----------
Total liabilities and partners' deficiency.............. $ 379,463 $ 72,583
========== ==========
</TABLE>
See accompanying notes.
F-94
<PAGE> 236
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Net revenue......................................................... $3,084,648 $2,947,577
---------- ----------
Expenses:
Administrative and executive fees................................. 163,808 189,300
Management fee.................................................... -- 15,577
Accounting and legal.............................................. 55,655 109,042
Interest.......................................................... 232,170 223,590
---------- ----------
Total expenses............................................ 451,633 537,509
---------- ----------
Net income.......................................................... $2,633,015 $2,410,068
========= =========
</TABLE>
See accompanying notes.
F-95
<PAGE> 237
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENTS OF PARTNERS' DEFICIENCY
<TABLE>
<S> <C>
Balance at December 31, 1993.................................................... $(2,902,752)
Net income.................................................................... 2,633,015
Contributions................................................................. 87
Distributions................................................................. (2,320,401)
-----------
Balance at December 31, 1994.................................................... (2,590,051)
Net income.................................................................... 2,410,068
Distributions................................................................. (2,615,001)
-----------
Balance at December 31, 1995.................................................... $(2,794,984)
==========
</TABLE>
See accompanying notes.
F-96
<PAGE> 238
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................ $ 2,633,015 $ 2,410,068
Adjustments to reconcile net income to net cash provided by
operating activities:
Changes in assets and liabilities:
(Increase) decrease in capitation fee receivable............. (150,510) 267,277
(Increase) decrease in due from related parties.............. 439,999 (2,149)
Increase in other receivables................................ (77) --
Increase (decrease) in accounts payable...................... 4,900 (3,787)
Increase in due to affiliate................................. -- 15,577
Increase in deferred income.................................. -- 1,593
Decrease in accrued interest payable......................... (686) (740)
----------- -----------
Net cash provided by operating activities................. 2,926,641 2,687,839
----------- -----------
FINANCING ACTIVITIES:
Principal payments on long-term debt.............................. (106,070) (114,590)
Additional partner contributions.................................. 87 --
Distributions to partners......................................... (2,320,401) (2,615,001)
Decrease in distributions payable................................. (500,000) --
----------- -----------
Net cash used in financing activities..................... (2,926,384) (2,729,591)
----------- -----------
Net increase (decrease) in cash........................... 257 (41,752)
Cash at beginning of year........................................... 54,940 55,197
----------- -----------
Cash at end of year................................................. $ 55,197 $ 13,445
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on borrowings....................................... $ 232,855 $ 224,330
========== ==========
</TABLE>
See accompanying notes.
F-97
<PAGE> 239
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
New Management (NM), a California general partnership, was formed and
commenced operations on July 31, 1992. The partnership was formed for the
purpose of providing management services in connection with the delivery of
health care services to patients who are enrollees of certain health maintenance
organizations which have contracted with West Hills Hospital (Hospital) located
in West Hills, California. Approximately 100% of the organization's revenue was
provided under contract with the hospital.
Partnership income and losses are allocated to the respective partners
based on percentage ownership subject to certain provisions as defined in the
partnership agreement.
Basis of Presentation
The financial statements have been prepared on the accrual basis of
accounting.
Management 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 financial
statements and notes. Actual results could differ from those estimates.
Administrative Capitation Fee
NM contracts with West Hills Hospital under a Managed Care Agreement. Under
the terms of the agreement, NM provides certain administrative services to
enrollees in various health plans that have contracted with West Hills Hospital
in exchange for an administrative fee based upon various components including a
percentage of capitation revenue and utilization results. The contract which
commenced August 10, 1992 has a term of ten years with an automatic five year
renewal. Premiums are due monthly and are recognized as revenue by NM during the
period in which Community Medical Group (CMG), under a management agreement with
NM, and NM are obligated to provide services to the enrollees.
Income Taxes
As a partnership, the income and expenses of the partnership are allocated
to the respective partners; as such, the partnership does not pay federal or
state income taxes. Accordingly, no provision for income taxes has been included
in the accompanying financial statements.
2. ADMINISTRATIVE CAPITATION FEE RECEIVABLE
The capitation fee receivable represents amounts owed to NM from the
Hospital under the terms of the management agreement. The amount, which relates
to the period January 1, 1994 through August 31, 1994, was received in February
1995.
3. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Note payable to Hospital, monthly payments of principal and
interest (7.75%) of $28,238 due through July 1, 1999,
balloon payment of $2,354,530 due on August 1, 1999....... $2,945,591 $2,831,001
Less current portion...................................... 114,590 123,793
---------- ----------
Long-term debt, net of current portion............ $2,831,001 $2,707,208
========= =========
</TABLE>
The amounts recorded above approximate the fair value of the obligation.
On July 7, 1992, NM entered into a managed care agreement with the Hospital
that included the issuance of a $3,000,000 loan to New Management from the
Hospital. The loan is secured by payments owed to NM by the Hospital for
capitation revenue received directly by the Hospital. The individual partners
have
F-98
<PAGE> 240
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
guaranteed the loan pro rata to the extent of two times each partner's
percentage ownership interest in NM at the date of the loan.
As of December 31, 1995, aggregate principal maturities of long-term debt
are as follows:
<TABLE>
<S> <C>
1996..................................................................... $ 123,793
1997..................................................................... 133,735
1998..................................................................... 144,474
1999..................................................................... 2,428,999
----------
$2,831,001
=========
</TABLE>
4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Advances
NM advanced amounts to CMG to cover working capital requirements and tenant
improvements. The balance of these advances is $56,827 as of December 31, 1994
and 1995. The advances are due on demand and do not bear interest.
NM advanced $2,149 to a physician who is also a partner in NM. The advance
is due upon demand and does not bear interest.
General and Administrative Services
NM, in performing its responsibilities under the managed care agreement
with the Hospital, receives certain employee services and facilities usage
without cost from CMG.
CMG's partners are substantially identical to the partners of NM as
required under the terms of both partnership agreements. CMG provides medical
services for enrollees of certain health maintenance organizations.
Management Services
Under an agreement effective September 1, 1995, CHS Management, Inc. (CHS),
an affiliate incorporated in 1995 to perform management services for CMG and
Health Source Medical Group (HSMG), performed certain management services on
behalf of NM. The agreement provides that CHS will receive a monthly management
fee based upon 12% per dollar per enrolled life under the capitation agreement
between NM, CMG and West Hills Hospital. The amount of the management fee
totaled $15,577 for the period from September 1 through December 31, 1995 and
has been accrued on the balance sheet as due to affiliate.
Professional Services
Accounting services are performed for NM by a partnership of which one
partner acts as a financial advisor to the Executive Committee of CMG and also
serves as a board member of CHS Management, Inc. Charges for services rendered
to NM by the partnership amounted to $35,655 and $94,025 for the years ended
December 31, 1994 and 1995, respectively.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
All current assets and current liabilities, are carried at cost, which
approximates fair value due to the short maturity of those instruments.
6. SUBSEQUENT EVENT
On March 11, 1996, NM entered into a letter of intent to be acquired by
MedPartners/Mullikin, Inc., a publicly held physicians practice management
company, in exchange for shares of MedPartners/Mullikin, Inc. common stock.
F-99
<PAGE> 241
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C>
ASSETS
Cash............................................................................ $ 54,940
Administrative capitation fee receivable........................................ 116,767
Due from affiliates............................................................. 496,826
Capital contributions receivable from partners.................................. 85
------------
Total assets.......................................................... $ 668,618
==========
LIABILITIES AND PARTNERS' DEFICIENCY
Current liabilities
Distribution payable.......................................................... $ 500,000
Accrued interest payable...................................................... 19,709
Current portion of long-term debt............................................. 106,070
------------
Total current liabilities............................................. 625,779
Long-term debt, net of current portion........................................ 2,945,591
------------
Partners' deficiency............................................................ (2,902,752)
------------
Total liabilities and partners' deficiency............................ $ 668,618
==========
</TABLE>
See accompanying notes.
F-100
<PAGE> 242
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
------------
<S> <C>
Net revenue..................................................................... $3,109,869
Expenses
Accounting.................................................................... 18,663
Interest expense.............................................................. 238,711
Administrative fee............................................................ 42,000
Executive committee fees...................................................... 24,000
------------
Total expenses........................................................ 323,374
------------
Net income...................................................................... $2,786,495
==========
</TABLE>
See accompanying notes.
F-101
<PAGE> 243
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
------------
<S> <C>
OPERATING ACTIVITIES:
Net Income.................................................................... $ 2,786,495
Adjustments to reconcile net income to net cash provided by operating
activities:
Changes in assets and liabilities:
(Increase) decrease in capitation fee receivable......................... (116,767)
(Increase) decrease in due from related parties.......................... (496,827)
(Increase) decrease in other receivables................................. (85)
(Increase (decrease) in accrued interest payable......................... (74,041)
------------
Net cash provided by operating activities............................. 2,098,775
------------
FINANCING ACTIVITIES:
Increase in long-term debt.................................................... 51,661
Additional partner contributions.............................................. 85
Distributions to partners..................................................... (2,600,037)
Increase in distributions payable............................................. 500,000
------------
Net cash used in financing activities................................. (2,048,291)
------------
Net increase in cash.................................................. 50,484
Cash at beginning of year....................................................... 4,456
------------
Cash at end of year............................................................. $ 54,940
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on borrowing...................................................... $ 238,711
==========
</TABLE>
See accompanying notes.
F-102
<PAGE> 244
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. ORGANIZATION
New Management, a California general partnership (the Partnership), was
formed and commenced operations on July 31, 1992. The Partnership was formed for
the purpose of providing management services in connection with the delivery of
hospital health care services to patients who are enrollees of certain health
maintenance organizations which have contracted with West Hills Hospital and the
Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Policy
The financial statements have been prepared using the accrual method of
accounting.
Income Taxes
Income and expenses represent only the operations of the Partnership and do
not include other activity to be reflected on the individual partners' federal
and state income tax returns. As such, no provision has been made for income
taxes.
3. MANAGED CARE AGREEMENT
The Partnership receives an administrative capitation fee under the terms
of a Managed Care Agreement with West Hills Hospital. Under the terms of the
agreement, New Management has capitated West Hills to provide hospital care
under five contracts with health maintenance organizations. The Partnership
receives income based upon the spread between the average per member per month
capitation received from the HMO's and the contracted sub-capitation rate paid
to West Hills Hospital for providing the hospital services. Under the terms of
the Managed Care Agreement the Partnership is obligated to provide certain
administrative and management services to administer the HMO contracts. The
Managed Care Agreement was entered into in July, 1992 and is effective through
July, 2002.
4. ADMINISTRATIVE CAPITATION FEE RECEIVABLE
The Partnership is owed additional revenue under the terms of the Managed
Care Agreement for 1993 based on a calculation adjustment which has been agreed
on with West Hills Hospital.
5. ADVANCES TO COMMUNITY MEDICAL GROUP (CMG)
The Partnership advanced $455,026 to Community Medical Group of the West
Valley (CMG) (a related party) to be used for working capital. The advance does
not bear interest and is due on demand. The Partnership advanced $41,800 for
tenant improvements at CMG's Simi Valley facility. The advance does not bear
interest and is due on demand.
F-103
<PAGE> 245
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOAN PAYABLE
The Partnership received a $3,000,000 loan from West Hills Hospital on
August 7, 1992. The loan is payable in monthly installments bearing interest at
7.75% as follows:
<TABLE>
<CAPTION>
TIME PERIOD PAYMENTS
---------------------------------------- ----------------------------------------
<S> <C>
September 1, 1992 -- January 31, 1993 Interest Accrued -- No Payments
February 1, 1993 -- July 1, 1993 Interest Only Payments of $19,973
August 1, 1993 -- July 1, 1999 Monthly Payments of $28,238 consisting
of principal and interest, based on a
fifteen year amortization.
</TABLE>
There is a balloon payment of $2,354,529 due on July 1, 1999.
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
----------------------------------------------------------------------- ----------
<S> <C>
1994............................................................ $ 100,071
1995............................................................ 114,590
1996............................................................ 123.792
1997............................................................ 139,735
1998............................................................ 144,475
1999............................................................ 2,428,998
----------
$3,051,661
=========
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Partnership is receiving employee services and facilities in order to
perform their obligations under the Managed Care Agreement (Note 3) without cost
from Community Medical Group of the West Valley, a California general
partnership (CMG). CMG's partners are substantially identical to the partners of
New Management as required under the terms of both partnership agreements. CMG
provides medical services to enrollees of prepaid health plans.
F-104
<PAGE> 246
NEW MANAGEMENT
(A CALIFORNIA PARTNERSHIP)
CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
ASSETS
Current assets
Cash.......................................................................... $ 175,331
Other receivables............................................................. --
Due from related parties...................................................... 58,976
-----------
Total current assets.................................................. 234,307
Other assets.......................................................... 543,467
-----------
Total assets.......................................................... $ 777,774
===========
LIABILITIES AND PARTNERS' DEFICIENCY
Current liabilities
Current portion of long-term debt............................................. $ 128,668
Accounts payable.............................................................. 4,849
Deferred income............................................................... 439
Accrued interest payable...................................................... 17,891
-----------
Total current liabilities............................................. 151,847
Long-term debt, net of current portion.......................................... 2,641,633
Partners' deficiency............................................................ (2,015,706)
-----------
Total liabilities and partners' deficiency............................ $ 777,774
===========
</TABLE>
See accompanying note.
F-105
<PAGE> 247
NEW MANAGEMENT
(A CALIFORNIA PARTNERSHIP)
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Net revenue......................................................... $1,524,490 $1,313,931
Expenses
Administrative and executive fees................................. 95,000 87,260
Management fee.................................................... -- 22,625
Accounting and legal.............................................. 53,495 96,872
Interest.......................................................... 112,908 108,362
---------- ----------
Total expenses............................................ 261,403 315,119
---------- ----------
Net income.......................................................... $1,263,087 $ 998,812
========== ==========
</TABLE>
See accompanying note.
F-106
<PAGE> 248
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------
1995 1996
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................................... $ 1,263,087 $ 998,812
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in administrative capitation fee receivable............ 267,277 --
Decrease in other receivables................................... -- 162
Increase in other assets........................................ -- (543,467)
Increase in accounts payable.................................... -- 3,736
Decrease in due to affiliate.................................... -- (15,577)
Decrease in deferred income..................................... -- (1,154)
Decrease in accrued interest payable............................ (362) (392)
----------- ---------
Net cash provided by operating activities.................. 1,530,002 442,120
----------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term debt............................... (56,189) (60,700)
Increase in distributions payable.................................. 17,580 --
Distributions to partners.......................................... (1,500,001) (219,534)
----------- ---------
Net cash used in financing activities...................... (1,538,610) (280,234)
----------- ---------
Net increase (decrease) in cash............................ (8,608) 161,886
Cash at beginning of period.......................................... 55,197 13,445
----------- ---------
Cash at end of period................................................ $ 46,589 $ 175,331
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on borrowings.......................................... $ 112,417 $ 109,112
========== =========
</TABLE>
See accompanying note.
F-107
<PAGE> 249
NEW MANAGEMENT
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTE TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. CONDENSED FINANCIAL STATEMENTS
The Condensed Balance Sheet as of June 30, 1996, the Condensed Statements
of Income and the Condensed Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 have been prepared by New Management (the Partnership)
without audits. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at June 30, 1996 and 1995 have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's December 31, 1995 audited financial statements. The results of
operations for the period ended June 30, 1996 are not necessarily indicative of
the operation results for the year.
F-108
<PAGE> 250
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Emergency Professional Services, Inc.
We have audited the accompanying balance sheets of Emergency Professional
Services, Inc. as of January 31, 1995 and 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended January 31, 1996. 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 opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Emergency Professional
Services, Inc. at January 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended January 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
July 12, 1996
F-109
<PAGE> 251
EMERGENCY PROFESSIONAL SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $1,481,507 $1,367,330
Accounts receivable, net of allowance for bad debts of $1,370,476
and $1,384,740 in 1995 and 1996, respectively.................... 5,464,122 5,845,157
Prepaid expenses.................................................... 130,098 206,357
---------- ----------
Total current assets........................................ 7,075,727 7,418,844
Property and equipment, net........................................... 76,537 71,625
Deferred income taxes................................................. 1,340,000 1,570,000
Other assets.......................................................... 3,315 6,520
---------- ----------
Total assets................................................ $8,495,579 $9,066,989
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 383,027 $ 408,204
Accrued salaries and other accrued expenses......................... 3,074,620 3,608,245
Deferred income taxes............................................... 1,660,000 1,580,000
Revenue received in advance......................................... 135,000 135,000
---------- ----------
Total current liabilities................................... 5,252,647 5,731,449
Accrued malpractice liability......................................... 650,000 750,000
Deferred compensation payable......................................... 1,855,423 2,260,363
Stockholders' equity:
Common stock, $.01 par value; 500 shares authorized, 248 and 273
shares issued and outstanding in 1995 and 1996, respectively..... 2 3
Additional paid-in capital.......................................... 230,748 260,747
Retained earnings................................................... 506,759 64,427
---------- ----------
Total stockholders' equity.................................. 737,509 325,177
---------- ----------
Total liabilities and stockholders' equity.................. $8,495,579 $9,066,989
========= =========
</TABLE>
See accompanying notes.
F-110
<PAGE> 252
EMERGENCY PROFESSIONAL SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue............................................. $30,258,523 $33,339,865 $35,031,003
Operating expenses:
Cost of affiliated physician services................. 22,634,623 24,852,396 25,961,763
Clinic salaries, wages and benefits................... 1,234,315 1,357,253 1,480,764
Clinic rent and lease expense......................... 109,883 111,083 118,995
Clinic supplies....................................... 35,562 33,737 39,184
Other clinic costs.................................... 5,980,317 6,781,253 6,986,269
General corporate expenses............................ 912,898 955,884 1,124,495
Depreciation.......................................... 42,749 31,020 25,140
----------- ----------- -----------
Net operating expenses........................ 30,950,347 34,122,626 35,736,610
----------- ----------- -----------
Loss before income taxes................................ (691,824) (782,761) (705,607)
Net income tax benefit.................................. 273,000 305,000 270,000
----------- ----------- -----------
Net loss................................................ $ (418,824) $ (477,761) $ (435,607)
========== ========== ==========
</TABLE>
See accompanying notes.
F-111
<PAGE> 253
EMERGENCY PROFESSIONAL SERVICES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at January 31, 1993.................... $ 1 $ 152,749 $1,414,169 $ 1,566,919
Net loss..................................... -- -- (418,824) (418,824)
Issuance of common stock..................... 1 31,200 -- 31,201
Dividends paid............................... -- -- (5,200) (5,200)
--- ---------- ---------- -------------
Balance at January 31, 1994.................... 2 183,949 990,145 1,174,096
Net loss..................................... -- -- (477,761) (477,761)
Issuance of common stock..................... -- 58,799 -- 58,799
Purchase of capital stock.................... -- (12,000) -- (12,000)
Dividends paid............................... -- -- (5,625) (5,625)
--- ---------- ---------- -------------
Balance at January 31, 1995.................... 2 230,748 506,759 737,509
Net loss..................................... -- -- (435,607) (435,607)
Issuance of common stock..................... 1 35,999 -- 36,000
Purchase of common stock..................... -- (6,000) -- (6,000)
Dividends paid............................... -- -- (6,725) (6,725)
--- ---------- ---------- -------------
Balance at January 31, 1996.................... $ 3 $ 260,747 $ 64,427 $ 325,177
=========== ======== ========= ==========
</TABLE>
See accompanying notes.
F-112
<PAGE> 254
EMERGENCY PROFESSIONAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................... $ (418,824) $ (477,761) $ (435,607)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation............................................. 42,749 31,020 25,140
Deferred tax expense..................................... (285,000) (320,000) (310,000)
Changes in operating assets and liabilities:
Accounts receivable, net.............................. 347,580 (90,287) (381,035)
Prepaid expenses and other assets..................... (71,535) 133,107 (79,464)
Accounts payable...................................... (71,618) 219,867 25,177
Accrued salaries and other accrued expenses........... 267,654 (97,440) 533,625
Deferred compensation payable......................... 322,714 422,285 404,940
Accrued malpractice liability......................... 50,000 100,000 100,000
Revenue received in advance........................... -- 135,000 --
---------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 183,720 55,791 (117,224)
INVESTING ACTIVITIES:
Purchases of property and equipment........................ (22,904) (13,208) (20,228)
---------- ---------- ----------
Net cash used in investing activities............ (22,904) (13,208) (20,228)
FINANCING ACTIVITIES:
Purchase of common stock................................... -- (12,000) (6,000)
Issuance of common stock................................... 31,201 58,799 36,000
Payment of dividends....................................... (5,200) (5,625) (6,725)
---------- ---------- ----------
Net cash provided by financing activities........ 26,001 41,174 23,275
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents....... 186,817 83,757 (114,177)
Cash and cash equivalents at beginning of year............. 1,210,933 1,397,750 1,481,507
---------- ---------- ----------
Cash and cash equivalents at end of year................... $1,397,750 $1,481,507 $1,367,330
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest..................... $ -- $ -- $ --
========= ========= =========
Cash paid during the year for income taxes................. $ 15,000 $ 3,000 $ 25,000
========= ========= =========
</TABLE>
See accompanying notes.
F-113
<PAGE> 255
EMERGENCY PROFESSIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Emergency Professional Services, Inc. (the Company) is a professional
corporation formed in 1978 that consists of a group of physicians who contract
to staff emergency rooms, urgent care centers and physician offices. EPS
currently operates in Ohio and Pennsylvania. In addition, EPS staffs a billing
office which processes claims for the hospitals served.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements is as
follows:
Basis of Presentation
The Company's financial statements have been prepared on the accrual basis
of accounting.
Management 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 financial
statements and notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
The carrying amounts of all cash equivalents approximate fair value.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are expensed as incurred,
while costs of betterments and renewals are capitalized.
Income Taxes
The Company is taxable under the provisions of the Internal Revenue Code.
Deferred income taxes are provided for temporary differences between financial
and income tax reporting. The Company files its taxes on the modified cash
basis.
Net Revenue
Net revenue is reported at the established 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 established in the periods the related services are rendered and
are adjusted in future periods as final settlements are determined.
Cost of Affiliated Physician Services
Cost of affiliated physician services represents salaries, bonuses and
benefits paid to the affiliated physician. Physician compensation is generally
determined based on the excess of collections over expenses prior to physician
compensation.
2. PROPERTY AND EQUIPMENT
The following is a summary of the Company's property and equipment as of
January 31, 1995 and 1996:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1995 1996
--------- ---------
<S> <C> <C>
Furniture and fixtures......................................... $ 274,364 $ 281,126
Equipment...................................................... 74,142 79,742
Leasehold improvements......................................... 5,177 5,177
--------- ---------
353,683 366,045
Less: accumulated depreciation................................. (277,146) (294,420)
--------- ---------
$ 76,537 $ 71,625
========= =========
</TABLE>
F-114
<PAGE> 256
EMERGENCY PROFESSIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROFIT-SHARING AND 401K PLAN
The Company has a noncontributory profit-sharing plan and a contributory
401(k) plan (the Plan) for substantially all employees with more than one year
of service and 1,000 hours worked who have attained the age of twenty-one. The
Company, at the discretion of its Board of Directors, will make contributions to
the profit-sharing plan for its eligible employees employed at the last day of
the Plan year. Plan expenses for the years ended January 31, 1994, 1995 and 1996
were $372,031, $518,049 and $556,623, respectively. The Company does not match
employee contributions to the 401(k) plan.
4. PENSION PLAN
The Company has a defined contribution pension plan covering substantially
all employees with more than one year of service who have attained the age of
twenty-one. The Company contributes 10% of each participant's compensation for
the year, as defined, to the plan and makes payments based on the same formula
directly to the full-time physicians. The total contributions to the pension
plan for the years ended January 31, 1994, 1995 and 1996 were $1,162,425,
$910,462 and $975,221, respectively.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustments................................. $1,340,000 $1,570,000
---------- ----------
Gross deferred tax assets..................................... 1,340,000 1,570,000
Deferred tax liabilities:
Cash to accrual adjustments................................. 1,660,000 1,580,000
---------- ----------
Gross deferred tax liabilities................................ 1,660,000 1,580,000
---------- ----------
Net deferred tax liabilities.................................. $ 320,000 $ 10,000
========= =========
</TABLE>
Income tax benefit was as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........................................... $ 10,500 $ 13,125 $ 35,000
State............................................. 1,500 1,875 5,000
--------- --------- ---------
12,000 15,000 40,000
Deferred:
Federal........................................... (249,375) (280,000) (271,250)
State............................................. (35,625) (40,000) (38,750)
--------- --------- ---------
(285,000) (320,000) (310,000)
--------- --------- ---------
$(273,000) $(305,000) $(270,000)
========= ========= =========
</TABLE>
F-115
<PAGE> 257
EMERGENCY PROFESSIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the benefit for income taxes and the amount computed
by applying the statutory federal income tax rate to income before taxes was as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax benefit statutory rate at
statutory rate................................. $(235,220) $(266,139) $(239,906)
Add:
State income taxes, net of federal tax benefit.... (22,523) (25,163) (22,275)
Other............................................. (15,257) (13,698) (7,819)
--------- --------- ---------
$(273,000) $(305,000) $(270,000)
========= ========= =========
</TABLE>
6. OPERATING LEASES
The Company leases its current office facility under an operating lease
agreement which extends through May 31, 1997. The Company also rents storage
space on a month-to-month renewal basis.
Future minimum lease payments for the next two years and in the aggregate
are as follows:
<TABLE>
<S> <C>
1997...................................................................... $ 83,160
1998...................................................................... 27,720
--------
$110,880
========
</TABLE>
Total rent expense under all operating leases for the years ended January
31, 1994, 1995 and 1996 was $109,883, $111,083 and $118,995, respectively.
7. DEFERRED COMPENSATION PLAN AND STOCK BONUS PLAN
Under a deferred compensation plan, the Company is obligated to certain key
employees who have completed five years of service. The units of participation
are based 90% on compensation and length of service, with the remaining 10%
determined at the discretion of the Company. The plan provides a vesting
schedule of 10% at six years and 100% after fifteen years of service. The
overall deferred compensation is limited to 80% of the Company's net realizable
accounts receivable. As of January 31, 1995 and 1996, the aggregate deferred
compensation payable was $1,855,423 and $2,260,363, respectively. Payments
charged to earnings amounted to $322,717, $422,285 and $404,940 for the years
ended January 31, 1994, 1995 and 1996, respectively.
The Company also adopted a stock bonus plan for certain key employees. The
total number of shares awarded as of any anniversary date cannot exceed 25% of
the Company's issued and outstanding shares determined as of the date
immediately preceding the anniversary date at which the shares are awarded. Any
shares which have been awarded under this plan shall be considered issued and
outstanding. During the years ended January 31, 1995, 18 shares of common stock
were issued under the stock bonus plan at a value of $1,200 per share. During
the years ended January 31, 1994 and 1996, no shares of common stock were issued
under the stock bonus plan.
8. PROFESSIONAL LIABILITY INSURANCE
The Company maintains professional liability insurance coverage at each
location of $11 million per claim and $11 million in the aggregate. The Company
is insured against malpractice losses under a claims-made insurance policy. The
Company is currently named as the defendant in various malpractice legal
actions. While the outcome of these lawsuits is not presently determinable, it
is the opinion of management that the ultimate resolution of these claims will
not have a material adverse effect on the financial position or results of
operations of the Company.
9. SUBSEQUENT EVENT
In July 1996, the Company entered into a letter of intent to be acquired by
MedPartners/Mullikin, Inc. in exchange for shares of MedPartners/Mullikin, Inc.
common stock.
F-116
<PAGE> 258
EMERGENCY PROFESSIONAL SERVICES, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30,
1996
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 2,410,960
Accounts receivable, net of allowance for doubtful accounts of $1,303,354..... 5,801,218
Prepaid expenses.............................................................. 181,712
-----------
Total current assets.................................................. 8,393,890
Property and equipment, net..................................................... 65,691
Deferred income taxes........................................................... 1,760,000
Other assets.................................................................... 9,931
-----------
Total assets.......................................................... $10,229,512
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 180,080
Accrued salaries and other accrued expenses................................... 4,550,689
Deferred income taxes......................................................... 1,680,000
Revenue received in advance................................................... 135,000
-----------
Total current liabilities............................................. 6,545,769
Accrued malpractice liability................................................... 750,000
Deferred compensation payable................................................... 2,350,363
Stockholders' equity:
Common stock, $.01 par value, 500 shares authorized, 266 shares
issued and outstanding..................................................... 3
Additional paid-in capital.................................................... 263,547
Retained earnings............................................................. 319,830
-----------
Total stockholders' equity............................................ 583,380
-----------
Total liabilities and stockholders' equity............................ $10,229,512
==========
</TABLE>
See accompanying note.
F-117
<PAGE> 259
EMERGENCY PROFESSIONAL SERVICES, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Net revenue........................................................... $8,181,737 $7,796,192
Operating expenses:
Cost of affiliated physician services............................... 5,912,707 5,987,394
Clinic salaries, wages and benefits................................. 329,918 316,781
Clinic rent and lease expense....................................... 36,829 22,587
Clinic supplies..................................................... 9,091 8,576
Other clinic costs.................................................. 1,588,302 915,744
General corporate expenses.......................................... 252,622 362,809
Depreciation........................................................ 6,694 6,898
---------- ----------
Net operating expenses........................................... 8,136,163 7,620,789
---------- ----------
Income before income taxes............................................ 45,574 175,403
Income tax benefit.................................................... 20,000 70,000
---------- ----------
Net income............................................................ $ 25,574 $ 105,403
========= =========
</TABLE>
See accompanying note.
F-118
<PAGE> 260
EMERGENCY PROFESSIONAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................ $ 25,574 $ 105,403
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 6,694 6,898
Deferred tax expense................................................ 10,000 60,000
Changes in operating assets and liabilities:
Accounts receivable, net......................................... (84,830) 43,939
Prepaid expenses and other current assets........................ (54,124) 21,234
Accounts payable................................................. (276,717) (228,124)
Accrued salaries and other accrued expenses...................... 1,876,630 942,444
Deferred compensation............................................ 75,000 90,000
Malpractice liability............................................ 25,000 --
---------- ----------
Net cash provided by operating activities................... 1,603,227 1,041,794
INVESTING ACTIVITIES:
Purchases of property and equipment................................... (5,580) (964)
---------- ----------
Net cash used in investing activities....................... (5,580) (964)
FINANCING ACTIVITIES:
Purchase of common stock.............................................. -- (10,400)
Issuance of common stock.............................................. 1,200 13,200
---------- ----------
Net cash provided by financing activities................... 1,200 2,800
---------- ----------
Net increase in cash and cash equivalents............................. 1,598,847 1,043,630
Cash and cash equivalents at beginning of period...................... 1,481,507 1,367,330
---------- ----------
Cash and cash equivalents at end of period............................ $3,080,354 $2,410,960
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.............................. $ -- $ --
========= =========
Cash paid during the period for income taxes.......................... $ -- $ --
========= =========
</TABLE>
See accompanying note.
F-119
<PAGE> 261
EMERGENCY PROFESSIONAL SERVICES, INC.
NOTE TO UNAUDITED FINANCIAL STATEMENTS
APRIL 30, 1996
1. BASIS OF PRESENTATION
The balance sheet as of April 30, 1996, the statements of income and
statements of cash flows for the three months ended April 30, 1995 and 1996,
have been prepared by Emergency Professional Services, Inc. (the Company)
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
as of April 30, 1996, and the results of operations and cash flows for the three
months ended April 30, 1995 and 1996 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's January 31, 1996 audited financial statements. The results of
operations for the periods ended April 30, 1995 and 1996 are not necessarily
indicative of the operation results for those years.
F-120
<PAGE> 262
ANNEX A
PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER ("Plan of Merger"), made and entered into as
of the 13th day of May, 1996, by and among MEDPARTNERS/MULLIKIN, INC., a
Delaware corporation ("MedPartners/Mullikin"), PPM MERGER CORPORATION, a
Delaware corporation (the "Subsidiary"), and CAREMARK INTERNATIONAL INC., a
Delaware corporation ("Caremark").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of MedPartners/Mullikin, the
Subsidiary and Caremark have approved the merger of the Subsidiary with and into
Caremark (the "Merger"), upon the terms and conditions set forth in this Plan of
Merger, whereby each share of Common Stock, par value $1.00 per share, of
Caremark (the "Caremark Common Stock"), not owned directly or indirectly by
Caremark, will be converted into the right to receive the merger consideration
provided for herein (the Caremark Common Stock may be sometimes hereinafter
referred to as the "Caremark Shares");
WHEREAS, each of MedPartners/Mullikin, the Subsidiary and Caremark desire
to make certain representations, warranties, covenants and agreements in
connection with the Merger and also to prescribe various conditions to the
Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
(as defined herein) shall qualify as a reorganization under the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests".
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
and agreements contained herein, the parties hereto do hereby agree as follows:
SECTION 1. THE MERGER.
1.1 The Merger. Upon the terms and conditions set forth in this Plan of
Merger, and in accordance with the General Corporation Law of the State of
Delaware (the "DGCL"), the Subsidiary shall be merged with and into Caremark at
the Effective Time (as defined in Section 1.3). Following the Effective Time,
the separate corporate existence of the Subsidiary shall cease and Caremark
shall continue as the surviving corporation (the "Surviving Corporation") as a
business corporation incorporated under the laws of the State of Delaware under
the name "Caremark International Inc." and shall succeed to and assume all the
rights and obligations of the Subsidiary in accordance with the DGCL.
1.2 The Closing. The closing of the Merger (the "Closing") will take place
at 10:00 a.m. Eastern Time ON a date to be specified by the parties (the
"Closing Date"), which shall be no later than the second business day after the
satisfaction or waiver of the conditions set forth in Sections 9.1, 9.2 and 9.3,
at the offices of Wachtell, Lipton, Rosen & Katz, New York, New York, unless
another date or place is agreed to in writing by the parties hereto.
1.3 Effective Time. Subject to the provisions of this Plan of Merger,
Caremark and the Subsidiary shall file a Certificate of Merger (the "Certificate
of Merger") executed in accordance with the relevant provisions of the DGCL and
shall make all other filings or recordings required under the DGCL to effect the
Merger as soon as practicable on or after the Closing Date. The Merger shall
become effective at such time as the Certificate of Merger is duly filed with
the Secretary of State of the State of Delaware, or at such other time as
MedPartners/Mullikin, the Subsidiary and Caremark shall agree should be
specified in the Certificate of Merger (the "Effective Time").
1.4 Effect of the Merger. The Merger shall have the effects set forth in
the DGCL.
<PAGE> 263
SECTION 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES.
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of Caremark Shares:
(a) Cancellation of Treasury Stock. Each share of Caremark Common
Stock that is owned by Caremark, MedPartners/Mullikin or by any subsidiary
of Caremark or MedPartners/Mullikin shall automatically be cancelled and
retired and shall cease to exist, and none of the Common Stock, par value
$.001 per share, of MedPartners/Mullikin ("MedPartners/Mullikin Common
Stock"), cash or other consideration shall be delivered in exchange
therefor.
(b) Subsidiary Common Stock. Each share of Common Stock, par value
$1.00 per share, of the Subsidiary issued and outstanding immediately prior
to the Effective Time shall be converted into one share of Common Stock of
the Surviving Corporation.
(c) Conversion of Caremark Shares. Each Caremark Share (other than
Caremark Shares to be cancelled in accordance with Section 2.1(a)) issued
and outstanding immediately prior to the Effective Time shall be converted
into the right to receive 1.21 shares of MedPartners/Mullikin Common Stock
(the "Exchange Ratio"). All such shares of MedPartners/Mullikin Common
Stock shall be fully paid and nonassessable and are hereinafter sometimes
referred to as the "MedPartners/Mullikin Shares". Upon such conversion, all
such Caremark Shares shall be cancelled and cease to exist, and each holder
thereof shall cease to have any rights with respect thereto other than the
right to receive MedPartners/ Mullikin Shares issued in exchange therefor
and cash in lieu of fractional MedPartners/Mullikin Shares in accordance
with the terms provided herein.
(d) Stock Options. At the Effective Time, all rights with respect to
Caremark Common Stock pursuant to any Caremark stock options which are
outstanding at the Effective Time, whether or not then vested or
exercisable, shall be converted into and become rights with respect to
MedPartners/Mullikin Common Stock, and MedPartners/Mullikin shall assume
each Caremark stock option in accordance with the terms of any stock option
plan under which it was issued and any stock option agreement by which it
is evidenced. It is intended that the foregoing provisions shall be
undertaken in a manner that will not constitute a "modification" as defined
in Section 425 of the Code, as to any stock option which is an "incentive
stock option". Each Caremark Stock option so assumed shall be exercisable
for that number of shares of MedPartners/Mullikin Common Stock equal to the
number of Caremark Shares subject thereto multiplied by the Exchange Ratio,
and shall have an exercise price per share equal to the Caremark exercise
price divided by the Exchange Ratio. All options issued pursuant to
Caremark's 1992 Incentive Compensation Plan and 1992 Stock Option Plan for
Non-Employee Directors shall be fully vested at the Effective Time to the
extent permitted under such Plans.
(e) Anti-Dilution Provisions. If after the date hereof and prior to
the Effective Time MedPartners/ Mullikin shall have declared a stock split
(including a reverse split) of MedPartners/ Mullikin Common Stock or a
dividend payable in MedPartners/Mullikin Common Stock, or any other
distribution of securities or dividend (in cash or otherwise) to holders of
MedPartners/Mullikin Common Stock with respect to their
MedPartners/Mullikin Common Stock (including without limitation such a
distribution or dividend made in connection with a recapitalization,
reclassification, merger, consolidation, reorganization or similar
transaction) then the Exchange Ratio shall be appropriately adjusted to
reflect such stock split, dividend or other distribution of securities.
2.2 Exchange of Certificates. (a) Exchange Agent. Prior to the Effective
Time, MedPartners/ Mullikin shall enter into an agreement with Chemical Mellon
Shareholder Services, L.L.C. (the "Exchange Agent"), which provides that
MedPartners/Mullikin shall deposit with the Exchange Agent as of the Effective
Time, for the benefit of the holders of Caremark Shares, for exchange in
accordance with this Section 2.2, through the Exchange Agent, (i) certificates
representing the shares of MedPartners/ Mullikin Common Stock issuable pursuant
to Section 2.1(b) and (ii) cash in an amount equal to the aggregate amount
required to be paid in lieu of fractional interests of MedPartners/Mullikin
Common Stock pursuant to Section 2.2(e) (such shares of MedPartners/Mullikin
Common Stock, together with any dividends or distributions with respect thereto
with a record date after the Effective Time, and together with the cash referred
to in clause (ii) of this Section 2.2(a), being hereinafter referred to as the
"Exchange Fund") in exchange for outstanding Caremark Shares.
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(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding Caremark Shares (the "Certificates") whose shares were
converted into the right to receive the merger consideration provided for in
Section 2.1, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as MedPartners/Mullikin may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of
MedPartners/Mullikin Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by MedPartners/Mullikin, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of
MedPartners/Mullikin Common Stock and cash which such holder has the right to
receive pursuant to the provisions of Sections 2.1 and 2.2, and the Certificate
so surrendered shall forthwith be cancelled. If any cash or any certificate
representing MedPartners/Mullikin Shares is to be paid to or issued in a name
other than that in which the Certificate surrendered in exchange therefor is
registered, a certificate representing the proper number of shares of
MedPartners/Mullikin Common Stock may be issued to a person other than the
person in whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment shall pay to the Exchange Agent
any transfer or other taxes required by reason of the issuance of shares of
MedPartners/ Mullikin Common Stock to a person other than the registered holder
of such Certificate or establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not applicable. Until surrendered as contemplated
by this Section 2.2, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
certificate representing shares of MedPartners/ Mullikin Common Stock and cash
in lieu of any fractional shares of MedPartners/Mullikin Common Stock as
contemplated by this Section 2.2. No interest will be paid or will accrue on any
cash payable in lieu of any fractional shares of MedPartners/Mullikin Common
Stock. To the extent permitted by law, former stockholders of record of Caremark
shall be entitled to vote after the Effective Time at any meeting of
MedPartners/Mullikin's stockholders the number of whole shares of
MedPartners/Mullikin Common Stock into which their respective Caremark Shares
are converted, regardless of whether such holders have exchanged their
Certificates for certificates representing MedPartners/Mullikin Common Stock in
accordance with this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to MedPartners/Mullikin Common Stock with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of MedPartners/Mullikin
Common Stock represented thereby and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 2.2(e) until the
surrender of such Certificate in accordance with this Section 2.2. Subject to
the effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the holder of the certificates representing whole shares
of MedPartners/Mullikin Common Stock issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of any cash payable in
lieu of a fractional share of MedPartners/Mullikin Common Stock to which such
holder is entitled pursuant to Section 2.2(e) and the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of MedPartners/Mullikin Common Stock, and (ii)
at the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to such surrender and with
a payment date subsequent to such surrender payable with respect to such whole
shares of MedPartners/Mullikin Common Stock. If any holder of converted Caremark
Shares shall be unable to surrender such holder's Certificates because such
Certificates shall have been lost or destroyed, such holder may deliver in lieu
thereof an affidavit and indemnity bond in form and substance and with surety
reasonably satisfactory to MedPartners/Mullikin.
(d) No Further Ownership Rights in Caremark Shares. All shares of
MedPartners/Mullikin Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms of this Section 2 (including any cash
paid pursuant to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the Caremark Shares
theretofore represented by such Certificates. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the
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Exchange Agent for any reason, they shall be cancelled and exchanged as provided
in this Section 2, except as otherwise provided by law.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of MedPartners/ Mullikin Common Stock shall be issued upon the surrender
for exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a stockholder of
MedPartners/ Mullikin. Notwithstanding any other provision of this Plan of
Merger, each holder of Caremark Shares exchanged pursuant to the Merger who
would otherwise have been entitled to receive a fraction of a share of
MedPartners/Mullikin Common Stock (after taking into account all Certificates
delivered by such holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to such fractional part of a share of
MedPartners/Mullikin Common Stock multiplied by the per share closing price on
the New York Stock Exchange Composite Tape of MedPartners/Mullikin Common Stock
on the date of the Effective Time (or, if shares of MedPartners/Mullikin Common
Stock do not trade on the New York Stock Exchange, Inc. (the "NYSE") on such
date, the first date of trading of MedPartners/Mullikin Common Stock on the NYSE
after the Effective Time).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to MedPartners/ Mullikin, upon demand, and
any holders of the Certificates who have not theretofore complied with this
Section 2 shall thereafter look only to MedPartners/Mullikin for payment of
MedPartners/Mullikin Common Stock, any cash in lieu of fractional shares of
MedPartners/Mullikin Common Stock and any dividends or distributions with
respect to MedPartners/Mullikin Common Stock.
(g) No Liability. None of MedPartners/Mullikin, Caremark or the Exchange
Agent shall be liable to any person in respect of any shares of
MedPartners/Mullikin Common Stock (or dividends or distributions with respect
thereto) or cash from the Exchange Fund delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law. If any
Certificates shall not have been surrendered prior to the end of the applicable
period after the Effective Time under escheat laws (or immediately prior to such
earlier date on which any shares of MedPartners/Mullikin Common Stock, any cash
in lieu of fractional shares of MedPartners/Mullikin Common Stock or any
dividends or distributions with respect to MedPartners/ Mullikin Common Stock in
respect of such Certificates would otherwise escheat to or become the property
of any governmental entity), any such shares, cash, dividends or distributions
in respect of such Certificates shall, to the extent permitted by applicable
law, become the property of the Surviving Corporation, free and clear of all
claims or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by MedPartners/Mullikin, on a daily
basis. Any interest and other income resulting from such investments shall be
paid to MedPartners/Mullikin.
2.3 Corporate Name Change. At the Effective Time, the corporate name of
MedPartners/Mullikin shall be changed to "MedPartners, Inc."
2.4 Certificate of Incorporation of Surviving Corporation. The Certificate
of Incorporation of the Subsidiary, effective immediately following the
Effective Time, shall become the Certificate of Incorporation of the Surviving
Corporation from and after the Effective Time and until thereafter amended as
provided by law.
2.5 By-laws of the Surviving Corporation. The By-laws of the Subsidiary
shall be the By-laws of the Surviving Corporation from and after the Effective
Time and until thereafter altered, amended or repealed in accordance with the
DGCL, the Certificate of Incorporation of the Surviving Corporation and the said
By-laws.
2.6 Directors and Officers. (a) The directors and officers of the
Subsidiary immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation, each to hold office in accordance with
the Certificate of Incorporation and By-laws of the Surviving Corporation.
(b) The directors and officers of MedPartners/Mullikin, at the Effective
Time, shall be the directors and officers of MedPartners/Mullikin consistent
with Section 7.8 of this Plan of Merger, each to hold office in accordance with
the Certificate of Incorporation and By-laws and other corporate proceedings and
documentation.
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2.7 Assets, Liabilities, Reserves and Accounts. At the Effective Time, the
assets, liabilities, reserves and accounts of each of the Subsidiary and
Caremark shall be taken up on the books of the Surviving Corporation at the
amounts at which they respectively shall be carried on the books of said
corporations immediately prior to the Effective Time, except as otherwise set
forth in this Plan of Merger and subject to such adjustments, or elimination of
intercompany items, as may be appropriate in giving effect to the Merger in
accordance with generally accepted accounting principles.
2.8 Corporate Acts of the Subsidiary. All corporate acts, plans, policies,
approvals and authorizations of the Subsidiary, its sole stockholder, its Board
of Directors, committees elected or appointed by the Board of Directors, and all
officers and agents, valid immediately prior to the Effective Time, shall be
those of the Surviving Corporation and shall be as effective and binding thereon
as they were with respect to the Subsidiary.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF CAREMARK.
Caremark hereby represents and warrants to MedPartners/Mullikin and the
Subsidiary as follows:
3.1 Organization, Existence and Good Standing. Caremark is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Caremark has all necessary corporate power and authority to
own its properties and assets and to carry on its business as presently
conducted. Caremark is not, and has not been within the two years immediately
preceding the date of this Plan of Merger, a subsidiary or division of another
corporation, nor has Caremark within such time owned, directly or indirectly,
any shares of MedPartners/Mullikin Common Stock.
3.2 Caremark Capital Stock. Caremark's authorized capital consists of
200,000,000 shares of Common Stock, par value $1.00 per share, of which
81,998,104 shares are issued and outstanding as of April 30, 1996 (includes
7,700,000 shares held by Flexitrust), 7,029 shares of which are held in
treasury, and 20,000,000 shares of Preferred Stock, par value $.01 per share
(2,000,000 shares of which have been designated as Series A Junior Participating
Preferred Stock), none of which shares is issued and outstanding as of the date
of this Plan of Merger. All of the issued and outstanding Caremark Shares are
duly and validly issued, fully paid and nonassessable. Except as disclosed in
the Caremark Documents (as herein defined), and except as set forth in Exhibit
3.2 to the Disclosure Schedule delivered to MedPartners/Mullikin by Caremark at
the time of the execution and delivery of this Plan of Merger (the "Caremark
Disclosure Schedule"), there are no options, warrants, or similar rights granted
by Caremark, or outstanding securities convertible into Caremark Common Stock,
or any other agreements to which Caremark is a party providing for the issuance
or sale by it of any additional securities which would remain in effect after
the Effective Time. There is no liability for dividends declared or accumulated
but unpaid with respect to any of the Caremark Shares.
3.3 Subsidiaries or Affiliated Entities. (a) Attached as Exhibit 3.3 to
the Caremark Disclosure Schedule is a list of all subsidiaries of Caremark
(individually, a "Caremark Subsidiary", and collectively, the "Caremark
Subsidiaries") and their states of incorporation and all professional
corporations or professional associations of which Caremark has the right to
control the voting securities and their states of incorporation. Except as set
forth in Exhibit 3.3 to the Caremark Disclosure Schedule, Caremark does not own
stock in and does not control, directly or indirectly, any other corporation,
association, partnership or business organization other than the Caremark
Subsidiaries and the Other Caremark Entities (as defined below).
(b) Also disclosed in Exhibit 3.3 to the Caremark Disclosure Schedule is a
list of all general or limited partnerships in which a general partner is
Caremark, a Caremark Subsidiary or another partnership directly or indirectly
controlled by Caremark (individually, a "Caremark Partnership" and collectively,
the "Caremark Partnerships"), and all limited liability companies in which
Caremark, a Caremark Subsidiary or a Caremark Partnership is a member
(individually, a "Caremark LLC" and collectively, the "Caremark LLCs") (the
Caremark Partnerships and the Caremark LLCs being collectively called the "Other
Caremark Entities"), and their states of organization.
(c) Except as set forth in Exhibit 3.3 to the Caremark Disclosure Schedule,
neither Caremark nor any Caremark Subsidiary owns an equity interest in, nor
does such entity control, directly or indirectly, any other joint venture or
partnership.
(d) Although the financial results of the medical groups affiliated with
Caremark's physician practice management business are consolidated for
accounting purposes on the Caremark Balance Sheet, the terms "Caremark
Subsidiary" and "Other Caremark Entity" do not include any affiliated medical
groups.
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3.4 Organization, Existence and Good Standing of Caremark Subsidiaries and
Other Caremark Entities. (a) Each Caremark Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of its
respective state of incorporation. Each Caremark Subsidiary has all necessary
corporate power to own its properties and assets and to carry on its business as
presently conducted.
(b) Each Caremark Partnership that is a limited partnership is validly
formed, each Caremark Partnership that is a general partnership has been duly
organized, and each Caremark Partnership is in good standing under the laws of
its respective state of organization. Each Caremark Partnership has all
necessary power to own its property and assets and to carry on its business as
presently conducted.
(c) Each Caremark LLC is a limited liability company validly formed and in
good standing under the laws of its respective state of organization. Each
Caremark LLC has all necessary power to own its property and assets to carry on
its business as presently conducted.
3.5 Foreign Qualifications. Caremark, each Caremark Subsidiary and each
Other Caremark Entity that is not a general partnership is qualified to do
business as a foreign corporation, foreign limited partnership or foreign
limited liability company, as the case may be, and is in good standing in each
jurisdiction where the nature or character of the property owned, leased or
operated by it or the nature of the business transacted by it makes such
qualification necessary, except where the failure to so qualify would not have a
material adverse effect on Caremark.
3.6 Power and Authority. Subject to the satisfaction of the conditions
precedent set forth herein, Caremark has the corporate power to execute, deliver
and perform this Plan of Merger and all agreements and other documents executed
and delivered or to be executed and delivered by it pursuant to this Plan of
Merger, and, subject to the satisfaction of the conditions precedent set forth
herein has taken all action required by its Certificate of Incorporation,
By-laws or otherwise, to authorize the execution, delivery and performance of
this Plan of Merger and such related documents. Except as set forth in Exhibit
3.6 to the Caremark Disclosure Schedule, the execution and delivery of this Plan
of Merger does not and, subject to the receipt of required stockholder and
regulatory approvals and any other required third-party consents or approvals,
the consummation of the Merger will not, violate any provisions of the
Certificate of Incorporation or By-laws of Caremark or any provisions of, or
result in the acceleration of any obligation under, any mortgage, lien, lease,
agreement, instrument, order, arbitration award, judgment or decree, to which
Caremark, any Caremark Subsidiary or any Other Caremark Entity is a party, or by
which it is bound, or violate any restrictions of any kind to which it is
subject which, if violated or accelerated would have a material adverse effect
on Caremark, provided, however, nothing contained herein is intended to
constitute a representation or warranty with respect to any conflict or
violation or other impact upon the Certificate of Incorporation, By-laws,
mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment
or decree to which MedPartners/Mullikin or any of its subsidiaries is a party or
to which any such parties are bound. The execution and delivery of this Plan of
Merger has been approved by the Board of Directors of Caremark.
3.7 Caremark Public Information. Caremark has heretofore made available to
MedPartners/Mullikin a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by it with the
Securities and Exchange Commission (the "SEC") (as any such documents have since
the time of their original filing been amended, the "Caremark Documents") since
January 1, 1994, which are all the documents (other than preliminary material)
that it was required to file with the SEC since such date. As of their
respective dates, the Caremark Documents did not contain any untrue statements
of material facts or omit to state material facts required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. As of their respective dates, the Caremark
Documents complied in all material respects with the applicable requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated under such statutes. The financial statements
contained in the Caremark Documents, together with the notes thereto, have been
prepared in accordance with generally accepted accounting principles
consistently followed throughout the periods indicated (except as may be
indicated in the notes thereto, or, in the case of the unaudited financial
statements, as permitted by Form 10-Q), reflect all known liabilities of
Caremark and its consolidated subsidiaries, fixed or contingent, required to be
stated therein, and present fairly the financial condition of Caremark and its
consolidated subsidiaries at said dates and the consolidated results of
operations and cash flows of Caremark and its consolidated subsidiaries for the
periods then ended. The consolidated balance sheet of Caremark at
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December 31, 1995, included in the Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 of Caremark is herein sometimes referred to as the
"Caremark Balance Sheet".
3.8 Contracts, etc. (a) All material contracts, leases, agreements and
arrangements to which Caremark or any of the Caremark Subsidiaries or Other
Caremark Entities is a party are legally valid and binding in accordance with
their terms and in full force and effect. Except as disclosed in Exhibits 3.8
and 3.10 to the Caremark Disclosure Schedule, to the knowledge of Caremark, all
parties to such contracts, leases, agreements and arrangements have complied
with the provisions of such contracts, leases, agreements and arrangements, and
to the knowledge of Caremark, no party is in default thereunder, and no event
has occurred which, but for the passage of time or the giving of notice or both,
would constitute a default thereunder, except, in each case, where the
invalidity of the lease, contract, agreement or arrangement or the default or
breach thereunder or thereof would not, individually or in the aggregate, have a
material adverse effect on Caremark.
(b) Except as set forth in Exhibit 3.8 to the Caremark Disclosure Schedule,
no material contract or agreement to which Caremark or any Caremark Subsidiary
is a party will, by its terms, terminate as a result of the transactions
contemplated hereby or require any consent from any obligor thereto in order to
remain in full force and effect immediately after the Effective Time, except for
contracts or agreements which, if terminated, would not have a material adverse
effect on Caremark.
(c) Except as set forth in Exhibit 3.8 to the Caremark Disclosure Schedule,
none of Caremark or any Caremark Subsidiary has granted any right of first
refusal or similar right in favor of any third party with respect to any
material portion of its properties or assets (excluding liens described in
Section 3.9) or entered into any noncompetition agreement or similar agreement
restricting its ability to engage in any business in any location.
3.9 Properties and Assets. Caremark (including, as applicable, the
Caremark Subsidiaries or Other Caremark Entities) owns all of the real and
personal property included in the Caremark Balance Sheet (except assets recorded
under capital lease obligations and such property as has been disposed of during
the ordinary course of Caremark's business since the date of the Caremark
Balance Sheet), free and clear of any liens, claims, charges, exceptions or
encumbrances, except for those (i) if any, which in the aggregate are not
material and which do not materially affect continued use of such property, or
(ii) which are set forth in Exhibit 3.9 to the Caremark Disclosure Schedule or
in the Caremark Documents.
3.10 Legal Proceedings. Except as disclosed in the Caremark Documents or
as listed in Exhibit 3.10 to the Caremark Disclosure Schedule, there are no
actions, suits or proceedings pending or, to the knowledge of Caremark,
threatened against Caremark, at law or in equity, relating to or affecting
Caremark, any Caremark Subsidiary or any Other Caremark Entity, including the
Merger, which individually or in the aggregate, could reasonably be expected to
have a material effect on Caremark or a material adverse effect on the ability
of Caremark to consummate the transactions contemplated hereby. Except as
disclosed in the Caremark Documents or as listed in Exhibit 3.10 to the Caremark
Disclosure Schedule, Caremark does not know or have any reasonable grounds to
believe that any such action, suit or proceeding has merit. In connection with
the execution and delivery of this Plan of Merger, Caremark has made available
to MedPartners/Mullikin and its representatives all material documents (except
those which may be privileged, subject to protective orders or confidentiality
agreements) related to the legal proceedings described in the Caremark Documents
which would be required to enable MedPartners/Mullikin and its representatives
to understand the nature and scope of such litigation and its possible affect on
Caremark, the Caremark Subsidiaries and the Other Caremark Entities.
3.11 Subsequent Events. Except as disclosed in the Caremark Documents or
as set forth in Exhibit 3.11 to the Caremark Disclosure Schedule, Caremark has
not, since the date of the Caremark Balance Sheet:
(a) Incurred any material adverse change.
(b) Discharged or satisfied any material lien or encumbrance, or paid
or satisfied any material obligation or liability (absolute, accrued,
contingent or otherwise) which discharge or satisfaction would have a
material adverse effect on Caremark, other than (i) liabilities shown or
reflected on the Caremark Balance Sheet or (ii) liabilities incurred since
the date of the Caremark Balance Sheet in the ordinary course of business.
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(c) Incurred any funded indebtedness or increased or established any
reserve for taxes or any other liability on its books or otherwise provided
therefor which would have a material adverse effect on Caremark, except as
may have been required due to income or operations of Caremark since the
date of the Caremark Balance Sheet.
(d) Mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, which assets are
material to the consolidated business or financial condition of Caremark.
(e) Sold or transferred any of the assets material to the consolidated
business of Caremark International, cancelled any material debts or claims
or waived any material rights, except in the ordinary course of business.
(f) Granted any general or uniform increase in the rates of pay of
employees or any material increase in salary payable or to become payable
by Caremark to any officer or employee, consultant or agent (other than
normal merit increases), or by means of any bonus or pension plan, contract
or other commitment, increased in a material respect the compensation of
any officer, employee, consultant or agent.
(g) Except for this Plan of Merger and any other agreement executed
and delivered pursuant to this Plan of Merger, entered into any material
transaction other than in the ordinary course of business or permitted
under this Plan of Merger.
(h) Issued any stock, bonds or other securities or any options or
rights to purchase any of its securities (other than stock issued upon the
exercise of outstanding options under Caremark's stock option plans or
stock purchase plans).
3.12 Accounts Receivable. (a) Since the date of the Caremark Balance
Sheet, Caremark has not changed any principle or practice with respect to the
recordation of accounts receivable or the calculation of reserves therefor, or
any material collection, discount or write-off policy or procedure. Caremark
(including the Caremark Subsidiaries and Other Caremark Entities) is in
compliance with the terms and conditions of all third-party payor arrangements
relating to its accounts receivable, except to the extent that such
noncompliance would not have a material adverse effect on Caremark.
(b) Without limiting the generality of the foregoing, Caremark and each
Caremark Subsidiary is in compliance with all Medicare and Medicaid provider
agreements to which it is a party, except to the extent that such noncompliance
would not have a material adverse effect on Caremark.
3.13 Tax Returns. Caremark has filed all tax returns required to be filed
by it or requests for extensions to file such returns or reports have been
timely filed and granted and have not expired, except to the extent that such
failures to file, taken together, do not have a material adverse effect on
Caremark. Caremark has made all payments shown as due on such returns. Except as
reflected in Exhibit 3.13 to the Caremark Disclosure Schedule, Caremark has not
been notified that any tax returns of Caremark are currently under audit by the
Internal Revenue Service or any state or local tax agency. No agreements have
been made by Caremark for the extension of time or the waiver of the statute of
limitations for the assessment or payment of any federal, state or local taxes.
3.14 Employee Benefit Plans; Employment Matters. (a) Except as disclosed
in the Caremark Documents or as set forth in Exhibit 3.14(a) to the Caremark
Disclosure Schedule, Caremark has neither established nor maintains nor is
obligated to make contributions to or under or otherwise participate in (i) any
bonus or other type of incentive compensation plan, program, agreement, policy,
commitment, contract or arrangement (whether or not set forth in a written
document), (ii) any pension, profit-sharing, retirement or other plan, program
or arrangement, or (iii) any other employee benefit plan, fund or program,
including, but not limited to, those described in Section 3(3) of ERISA. All
such plans disclosed in the Caremark Documents or listed in Exhibit 3.14(a)
(individually, a "Caremark Plan" and collectively, the "Caremark Plans") have to
the knowledge of Caremark during the Relevant Period, and except as set forth in
Exhibit 3.14(a) been operated and administered in all material respects in
accordance with, as applicable, ERISA, the Code, Title VII of the Civil Rights
Act of 1964, as amended, the Equal Pay Act of 1967, as amended, the Age
Discrimination in Employment Act of 1967, as amended, and the related rules and
regulations adopted by those federal agencies responsible for the administration
of such laws. No act or failure to act by Caremark has resulted in a "prohibited
transaction" (as defined in ERISA) with respect to the
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Caremark Plans during the Relevant Period that is not subject to a statutory or
regulatory exception. No "reportable event" (as defined in ERISA) has occurred
with respect to any of the Caremark Plans which is subject to Title IV of ERISA
during the Relevant Period except as set forth in Exhibit 3.14(a). Caremark has
not previously made, is not currently making, and is not obligated in any way to
make, any contributions to any multi-employer plan within the meaning of the
Multi-Employer Pension Plan Amendments Act of 1980. For purposes of this Section
3.14, the term "Relevant Period" shall mean November 30, 1992 with regard to
Caremark and the affiliation date with regard to Caremark's management relations
with affiliated medical group practices.
(b) Except as disclosed in the Caremark Documents or as set forth in
Exhibit 3.14(b) to the Caremark Disclosure Schedule, Caremark is not a party to
any oral or written (i) union, guild or collective bargaining agreement which
agreement covers employees in the United States (nor is it aware of any union
organizing activity currently being conducted in respect to any of its
employees), (ii) agreement with any executive officer or other key employee the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction of the nature contemplated by this Plan of
Merger and which provides for the payment of in excess of $25,000, or (iii)
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of which
will be increased, or the vesting the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Plan of Merger or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Plan of Merger.
3.15 Compliance with Laws. Except as disclosed in the Caremark Documents
or as set forth in Exhibit 3.15 to the Caremark Disclosure Schedule, Caremark
has not received any notices of material violations of any federal, state and
local laws, regulations and ordinances relating to its business and operations,
including, without limitation, the Occupational Safety and Health Act, the
Americans with Disabilities Act, the applicable Medicare or Medicaid statutes
and regulations and any Environmental Laws, and no notice of any pending
inspection or violation of any such law, regulation or ordinance has been
received by Caremark which, if it were determined that a violation had occurred,
would have a material adverse effect on Caremark.
3.16 Regulatory Approvals. Except as disclosed in the Caremark Documents
or in Exhibit 3.16 to the Caremark Disclosure Schedule, Caremark and each
Caremark Subsidiary or Other Caremark Entity, as applicable, holds all licenses,
certificates of need and other regulatory approvals required or necessary to be
applied for or obtained in connection with its business as presently conducted
or as proposed to be conducted, except where the failure to obtain such license,
certificate of need or regulatory approval would not have a material adverse
effect on Caremark. All such licenses, certificates of need and other regulatory
approvals relating to the business, operations and facilities of Caremark and
each Caremark Subsidiary or Other Caremark Entity are in full force and effect,
except where any failure of such license, certificate of need or regulatory
approval to be in full force and effect would not have a material adverse effect
on Caremark. Any and all past litigation concerning such licenses, certificates
of need and regulatory approvals, and all claims and causes of action raised
therein, has been finally adjudicated. No such license, certificate of need or
regulatory approval has been revoked, conditioned (except as may be customary)
or restricted, and no action (equitable, legal or administrative), arbitration
or other process is pending, or to the best knowledge of Caremark, threatened,
which in any way challenges the validity of, or seeks to revoke, condition or
restrict any such license, certificate of need, or regulatory approval. Subject
to compliance with applicable securities laws and the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR Act"), the consummation of
the Merger will not violate any law or restriction to which Caremark is subject
which, if violated, would have a material adverse effect on Caremark.
3.17 Commissions and Fees. Except for fees payable to CS First Boston
pursuant to the engagement letter, dated March 19, 1996, there are no valid
claims for brokerage commissions or finder's or similar fees in connection with
the transactions contemplated by this Plan of Merger which may be now or
hereafter asserted against MedPartners/Mullikin or Caremark or any subsidiary or
other controlled entity of MedPartners/ Mullikin or Caremark resulting from any
action taken by Caremark or its officers, directors or agents, or any of them.
3.18 Vote Required. The affirmative vote of the holders of a majority of
the outstanding Caremark Shares entitled to vote thereon is the only vote of the
holders of any class or series of Caremark capital stock necessary to approve
this Plan of Merger, the Merger and the transactions contemplated hereby.
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3.19 No Untrue Representations. No representation or warranty by Caremark
in this Plan of Merger, and no Exhibit or certificate issued by Caremark and
furnished or to be furnished to MedPartners/Mullikin pursuant hereto, or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact, or omits or will omit to state a
material fact necessary to make the statements or facts contained therein not
misleading in light of all of the circumstances then prevailing.
3.20 Accounting Matters. To the best knowledge of Caremark, neither
Caremark nor any of its affiliates has taken or agreed to take any action that
(without giving effect to any actions taken or agreed to be taken by
MedPartners/Mullikin or any of its affiliates) would prevent
MedPartners/Mullikin from accounting for the business combination to be effected
by the Merger as a pooling-of-interests for financial reporting purposes.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF MEDPARTNERS/MULLIKIN AND THE
SUBSIDIARY RELATED TO THE SUBSIDIARY.
The Subsidiary and MedPartners/Mullikin, jointly and severally, hereby
represent and warrant to Caremark as follows:
4.1 Organization, Existence, Good Standing and Capital Stock. The
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The Subsidiary's
authorized capital consists of 1,000 shares of Common Stock, par value
$1.00 per share, all of which shares are issued and registered in the name
of MedPartners/Mullikin. The Subsidiary has not, within the two years
immediately preceding the date of this Plan of Merger, owned, directly or
indirectly, any Caremark Shares.
4.2 Power and Authority. The Subsidiary has the corporate power to
execute, deliver and perform this Plan of Merger and all agreements and
other documents executed and delivered, or to be executed and delivered, by
it pursuant to this Plan of Merger, and, subject to the satisfaction of the
conditions precedent set forth herein, has taken all actions required by
law, its Certificate of Incorporation, its By-laws or otherwise, to
authorize the execution and delivery of this Plan of Merger and such
related documents. The execution and delivery of this Plan of Merger does
not and, subject to the receipt of required regulatory approvals and any
other required third-party consents or approvals, the consummation of the
Merger contemplated hereby will not, violate any provisions of the
Certificate of Incorporation or By-laws of the Subsidiary, or any
agreement, instrument, order, judgment or decree to which the Subsidiary is
a party or by which it is bound, violate any restrictions of any kind to
which the Subsidiary is subject, or result in the creation of any lien,
charge or encumbrance upon any of the property or assets of the Subsidiary.
4.3 Commissions and Fees. There are no claims for brokerage
commissions, investment bankers' fees or finder's fees in connection with
the transaction contemplated by this Plan of Merger resulting from any
action taken by the Subsidiary or any of its officers, directors or agents.
4.4 No Subsidiaries. The Subsidiary does not own stock in, and does
not control directly or indirectly, any other corporation, association or
business organization. The Subsidiary is not a party to any joint venture
or partnership.
4.5 Legal Proceedings. There are no actions, suits or proceedings
pending or threatened against the Subsidiary, at law or in equity, relating
to or affecting the Subsidiary, including the Merger. The Subsidiary does
not know or have any reasonable grounds to know of any justification for
any such action, suit or proceeding.
4.6 No Contracts or Liabilities. Other than the obligations created
under this Plan of Merger, the Subsidiary has no obligations or liabilities
(contingent or otherwise) under any contracts, claims, leases, loans or
otherwise.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF MEDPARTNERS/MULLIKIN.
MedPartners/Mullikin hereby represents and warrants to Caremark as follows:
5.1 Organization, Existence and Good Standing. MedPartners/Mullikin
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. MedPartners/ Mullikin has all
necessary corporate power to own its properties and assets and to carry on
its business as presently conducted. MedPartners/Mullikin is not, and has
not been within the two years immediately
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preceding the date of this Plan of Merger, a subsidiary or division of
another corporation, nor has MedPartners/Mullikin within such time owned,
directly or indirectly, any Caremark Shares.
5.2 MedPartners/Mullikin Capital Stock. MedPartners/Mullikin's
authorized capital consists of 9,500,000 shares of Preferred Stock, par
value $.001 per share, of which no shares are issued and outstanding, and
no shares are held in treasury, 500,000 shares of Series C Junior
Participating Preferred Stock, par value $.001 per share, of which no
shares are issued and outstanding and no shares are held on treasury and
200,000,000 shares of Common Stock, par value $.001 per share, of which
50,786,775 shares were issued and outstanding at May 1, 1996, and no shares
are held in treasury. All of the issued and outstanding shares of
MedPartners/Mullikin Common Stock have been duly and validly issued and are
fully paid and nonassessable. Except as disclosed in the
MedPartners/Mullikin Documents (as herein defined), and except as described
in Exhibit 5.2 to the MedPartners/Mullikin Disclosure Schedule delivered to
Caremark by MedPartners/Mullikin at the time of the execution and delivery
of this Plan of Merger (the "MedPartners/Mullikin Disclosure Schedule"),
there are no options, warrants or similar rights granted by
MedPartners/Mullikin or any other agreements to which MedPartners/Mullikin
is a party providing for the issuance or sale by it of any additional
securities. There is no liability for dividends declared or accumulated but
unpaid with respect to any shares of MedPartners/Mullikin Common Stock.
5.3 MedPartners/Mullikin Common Stock. On the Closing Date,
MedPartners/Mullikin will have a sufficient number of authorized but
unissued and/or treasury shares of its Common Stock available for issuance
to the holders of Caremark Shares in accordance with the provisions of this
Plan of Merger. The MedPartners/Mullikin Common Stock to be issued pursuant
to this Plan of Merger will, when so delivered, be (i) duly and validly
issued, fully paid and nonassessable, and (ii) listed on the NYSE, upon
official notice of issuance.
5.4 Subsidiaries and Affiliated Entities. (a) Attached as Exhibit 5.4
to the MedPartners/Mullikin Disclosure Schedule is a list of all
subsidiaries of MedPartners/Mullikin (individually, a "MedPartners/
Mullikin Subsidiary", and collectively, the "MedPartners/Mullikin
Subsidiaries") and their states of incorporation and all professional
corporations or professional associations of which MedPartners/ Mullikin
has control and their states of incorporation. Except as set forth in
Exhibit 5.4 to the MedPartners/ Mullikin Disclosure Schedule,
MedPartners/Mullikin does not own stock in and does not control, directly
or indirectly, any other corporation, association, partnership or business
organization.
(b) Also disclosed in Exhibit 5.4 to the Medpartners/Mullikin
Disclosure Schedule is a list of all general or limited partnerships in
which a general partner is MedPartners/Mullikin, a MedPartners/ Mullikin
Subsidiary or another partnership controlled by MedPartners/Mullikin
(individually a "MedPartners/Mullikin Partnership" and collectively, the
"MedPartners/Mullikin Partnerships"), and all limited liability companies
in which MedPartners/Mullikin, a MedPartners/Mullikin Subsidiary is a
member (individually, a "MedPartners/Mullikin LLC", the
MedPartners/Mullikin Professional Corporations and the MedPartners/Mullikin
LLCs being collectively called the "Other MedPartners/Mullikin Entities"),
and their states of organization. Except as set forth in Exhibit 5.4 to the
MedPartners/ Mullikin Disclosure Schedule, neither MedPartners/Mullikin nor
any MedPartners/Mullikin Subsidiary owns an equity interest in, nor does
such entity control, directly or indirectly, any other joint venture,
limited liability company or partnership.
(c) Except as set forth in Exhibit 5.4, neither MedPartners/Mullikin
nor any MedPartners/ Mullikin Subsidiary owns an equity interest in, nor
does such entity control, directly or indirectly, any other joint venture
or partnership.
(d) Although the financial results of the medical groups affiliated
with MedPartners/Mullikin physician practice management business are
consolidated for accounting purposes on the MedPartners/ Mullikin Balance
Sheet, the terms "MedPartners/Mullikin Subsidiary" and "Other MedPartners/
Mullikin Entity" do not include any affiliated medical groups.
5.5 Organization, Existence and Good Standing of MedPartners/Mullikin
Subsidiaries and Other MedPartners/Mullikin Entities. (a) Each
MedPartners/Mullikin Subsidiary and each MedPartners/ Mullikin Entity is a
corporation duly organized, validly existing and in good standing under the
laws of its respective state of incorporation. Each MedPartners/Mullikin
Subsidiary and each MedPartners/ Mullikin Professional Corporation has all
necessary corporate power to own its properties and assets and to carry on
its business as presently conducted.
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(b) Each MedPartners/Mullikin Partnership that is a limited
partnership is validly formed, each MedPartners/Mullikin Partnership that
is a general partnership has been duly organized, and each
MedPartners/Mullikin Partnership is in good standing under the laws of its
respective state of organization. Each MedPartners/Mullikin Partnership has
all necessary power to own its property and assets and to carry on its
business as presently conducted.
(c) Each MedPartners/Mullikin LLC that is a limited company validly
formed and in good standing under the laws of its respective state of
organization. Each MedPartners/Mullikin LLC has all necessary power to own
its property and assets and to carry on its business as presently
conducted.
5.6 Foreign Qualifications. MedPartners/Mullikin, each
MedPartners/Mullikin Subsidiary and each Other MedPartners/Mullikin Entity
that is not a general partnership is qualified to do business as a foreign
corporation, foreign limited partnership or foreign limited liability
company, as the case may be, and is in good standing in each jurisdiction
where the nature or character of the property owned, leased or operated by
it or the nature of the business transacted by it makes such qualification
necessary, except where the failure to so qualify would not have a material
adverse effect on MedPartners/Mullikin.
5.7 Power and Authority. Subject to the satisfaction of the
conditions precedent set forth herein, MedPartners/Mullikin has corporate
power to execute, deliver and perform this Plan of Merger and all
agreements and other documents executed and delivered, or to be executed
and delivered, by it pursuant to this Plan of Merger, and, subject to the
satisfaction of the conditions precedent set forth herein has taken all
actions required by law, its Certificate of Incorporation, its By-laws or
otherwise, to authorize the execution and delivery of this Plan of Merger
and such related documents. The execution and delivery of this Plan of
Merger does not and, subject to the receipt of required stockholder and
regulatory approvals and any other required third-party consents or
approvals, the consummation of the Merger contemplated hereby will not,
violate any provisions of the Certificate of Incorporation or By-laws of
MedPartners/Mullikin, or any provision of, or result in the acceleration of
any obligation under, any mortgage, lien, lease, agreement, instrument,
order, arbitration award, judgment or decree to which MedPartners/Mullikin
is a party or by which it is bound, or violate any restrictions of any kind
to which MedPartners/Mullikin is subject which, if violated or accelerated,
would have a material adverse effect on MedPartners/Mullikin. The execution
and delivery of this Plan of Merger has been approved by the Board of
Directors of MedPartners/Mullikin.
5.8 MedPartners/Mullikin Public Information. MedPartners/Mullikin has
heretofore made available to Caremark a true and complete copy of each
report, schedule, registration statement and definitive proxy statement
filed by it or its predecessor, MedPartners, Inc., with the SEC (as any
such documents have since the time of their original filing been amended,
the "MedPartners/Mullikin Documents") since February 21, 1995, which are
all the documents (other than preliminary material) that it was required to
file with the SEC since such date. As of their respective dates, the
MedPartners/Mullikin Documents did not contain any untrue statements of
material facts or omit to state material facts required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their
respective dates, the MedPartners/Mullikin Documents complied in all
material respects with the applicable requirements of the Securities Act
and the Exchange Act, and the rules and regulations promulgated under such
statutes. The financial statements contained in the MedPartners/Mullikin
Documents, together with the notes thereto, have been prepared in
accordance with generally accepted accounting principles consistently
followed throughout the periods indicated (except as may be indicated in
the notes thereto, or, in the case of the unaudited financial statements,
as permitted by Form 10-Q), reflect all known liabilities of
MedPartners/Mullikin, fixed or contingent, required to be stated therein,
and present fairly the financial condition of MedPartners/Mullikin at said
dates and the consolidated results of operations and cash flows of
MedPartners/Mullikin for the periods then ended. The consolidated balance
sheet of MedPartners/Mullikin at December 31, 1995, included in the Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 of
MedPartners/Mullikin is herein sometimes referred to as the
"MedPartners/Mullikin Balance Sheet".
5.9 Contracts, etc. (a) All material contracts, leases, agreements
and arrangements to which MedPartners/Mullikin or any of the
MedPartners/Mullikin Subsidiaries is a party are legally valid and binding
in accordance with their terms and in full force and effect. To the
knowledge of MedPartners/ Mullikin, all parties to such contracts, leases,
agreements and arrangements have complied with the provisions of such
contracts, leases, agreements and arrangements, and to the knowledge of
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MedPartners/Mullikin, no party is in default thereunder, and no event has
occurred which, but for the passage of time or the giving of notice or
both, would constitute a default thereunder, except, in each case, where
the invalidity of the lease, contract, agreement or arrangement or the
default or breach thereunder or thereof would not, individually or in the
aggregate, have a material adverse effect on MedPartners/Mullikin.
(b) Except as set forth in Exhibit 5.9 to the MedPartners/Mullikin
Disclosure Schedule, no contract or agreement to which MedPartners/Mullikin
or any MedPartners/Mullikin Subsidiary is a party will, by its terms,
terminate as a result of the transactions contemplated hereby or require
any consent from any obligor thereto in order to remain in full force and
effect immediately after the Effective Time, except for contracts or
agreements which, if terminated, would not have a material adverse effect
on MedPartners/Mullikin.
(c) Except as set forth in Exhibit 5.9 to the MedPartners/Mullikin
Disclosure Schedule, none of MedPartners/Mullikin, or any
MedPartners/Mullikin Subsidiary has granted any right of first refusal or
similar right in favor of any third party with respect to any material
portion of its properties or assets (excluding liens described in Section
5.10) or entered into any non-competition agreement or similar agreement
restricting its ability to engage in any business in any location.
5.10 Properties and Assets. MedPartners/Mullikin (including, as
applicable, the MedPartners/ Mullikin Subsidiaries) owns all of the real
and personal property included in the MedPartners/Mullikin Balance Sheet
(except assets recorded under capital lease obligations and such property
as has been disposed of during the ordinary course of
MedPartners/Mullikin's business since the date of the MedPartners/Mullikin
Balance Sheet), free and clear of any liens, claims, charges, exceptions or
encumbrances, except for those (i) if any, which in the aggregate are not
material and which do not materially affect continued use of such property,
or (ii) which are set forth in Exhibit 5.10 to the MedPartners/Mullikin
Disclosure Schedule or in the MedPartners/Mullikin Documents.
5.11 Legal Proceedings. Except as listed in Exhibit 5.11 to the
MedPartners/Mullikin Disclosure Schedule, there are no actions, suits or
proceedings pending or, to the knowledge of MedPartners/ Mullikin,
threatened against MedPartners/Mullikin, at law or in equity, relating to
or affecting MedPartners/Mullikin or any MedPartners/Mullikin Subsidiary,
including the Merger, which individually or in the aggregate, could
reasonably be expected to have a material effect on MedPartners/Mullikin,
or a material adverse effect on the ability of MedPartners/Mullikin to
consummate the transactions contemplated hereby. Except as listed in
Exhibit 5.11 to the MedPartners/Mullikin Disclosure Schedule,
MedPartners/Mullikin does not know or have any reasonable grounds to
believe that any such action, suit or proceeding has merit.
5.12 Subsequent Events. Except as set forth on Exhibit 5.12 to the
MedPartners/Mullikin Disclosure Schedule, MedPartners/Mullikin has not,
since the date of the MedPartners/Mullikin Balance Sheet:
(a) Incurred any material adverse change.
(b) Discharged or satisfied any material lien or encumbrance, or
paid or satisfied any material obligation or liability (absolute,
accrued, contingent or otherwise) which discharge or satisfaction would
have a material adverse effect on MedPartners/Mullikin, other than (i)
liabilities shown or reflected on the MedPartners/Mullikin Balance Sheet
or (ii) liabilities incurred since the date of the MedPartners/Mullikin
Balance Sheet in the ordinary course of business.
(c) Incurred any funded Indebtedness or increased or established
any reserve for taxes or any other liability on its books or otherwise
provided therefor which would have a material adverse effect on
MedPartners/Mullikin, except as may have been required due to income or
operations of MedPartners/Mullikin since the date of the
MedPartners/Mullikin Balance Sheet.
(d) Mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, which assets are
material to the consolidated business or financial condition of
MedPartners/Mullikin.
(e) Sold or transferred any of the assets material to the
consolidated business of MedPartners/ Mullikin, cancelled any material
debts or claims or waived any material rights, except in the ordinary
course of business.
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(f) Granted any general or uniform increase in the rates of pay of
employees or any material increase in salary payable or to become
payable by MedPartners/Mullikin to any officer or employee, consultant
or agent (other than normal merit increases), or by means of any bonus
or pension plan, contract or other commitment, increased in a material
respect the compensation of any officer, employee, consultant or agent.
(g) Except for this Plan of Merger and any other agreement executed
and delivered pursuant to this Plan of Merger, entered into any material
transaction other than in the ordinary course of business or permitted
under other Sections of this Plan of Merger.
(h) Issued any stock, bonds or other securities or any options or
rights to purchase any of its securities (other than stock issued upon
the exercise of outstanding options under MedPartners/ Mullikin's stock
option plans.
5.13 Accounts Receivable. (a) Since the date of the
MedPartners/Mullikin Balance Sheet, MedPartners/Mullikin has not changed
any principle or practice with respect to the recordation of accounts
receivable or the calculation of reserves therefor, or any material
collection, discount or write-off policy or procedure. MedPartners/Mullikin
(including the MedPartners/Mullikin Subsidiaries and Other
MedPartners/Mullikin Entities) is in compliance with the terms and
conditions of all third-party payor arrangements relating to its accounts
receivable, except to the extent that such noncompliance would not have a
material adverse effect on MedPartners/Mullikin.
(b) Without limiting the generality of the foregoing,
MedPartners/Mullikin and each MedPartners/Mullikin Subsidiary is in
compliance with all Medicare and Medicaid provider agreements to which it
is a party, except to the extent that such noncompliance would not have a
material adverse effect on MedPartners/Mullikin.
5.14 Tax Returns. MedPartners/Mullikin has filed all tax returns
required to be filed by it or requests for extensions to file such returns
or reports have been timely filed and granted and have not expired, except
to the extent that such failures to file, taken together, do not have a
material adverse effect on MedPartners/Mullikin. MedPartners/Mullikin has
made all payments shown as due on such returns. MedPartners/Mullikin has
not been notified that any tax returns of MedPartners/Mullikin are
currently under audit by the Internal Revenue Service or any state or local
tax agency. No agreements have been made by MedPartners/Mullikin for the
extension of time or the waiver of the statute of limitations for the
assessment or payment of any federal, state or local taxes.
5.15 Employee Benefit Plans; Employment Matters. (a) Except as
disclosed in the MedPartners/ Mullikin Documents or as set forth in Exhibit
5.15(a) to the MedPartners/Mullikin Disclosure Schedule,
MedPartners/Mullikin has neither established nor maintains nor is obligated
to make contributions to or under or otherwise participate in (i) any bonus
or other type of incentive compensation plan, program, agreement, policy,
commitment, contract or arrangement (whether or not set forth in a written
document), (ii) any pension, profit-sharing, retirement or other plan,
program or arrangement, or (iii) any other employee benefit plan, fund or
program, including, but not limited to, those described in Section 3(3) of
ERISA. All such plans listed in Exhibit 5.15(a) (individually, a
"MedPartners/Mullikin Plan" and collectively, the "MedPartners/Mullikin
Plans") have been operated and administered in all material respects in
accordance with, as applicable, ERISA, the Code, Title VII of the Civil
Rights Act of 1964, as amended, the Equal Pay Act of 1967, as amended, the
Age Discrimination in Employment Act of 1967, as amended, and the related
rules and regulations adopted by those federal agencies responsible for the
administration of such laws. No act or failure to act by
MedPartners/Mullikin has resulted in a "prohibited transaction" (as defined
in ERISA) with respect to the MedPartners/Mullikin Plans that is not
subject to a statutory or regulatory exception. No "reportable event" (as
defined in ERISA) has occurred with respect to any of the
MedPartners/Mullikin Plans which is subject to Title IV of ERISA.
MedPartners/Mullikin has not previously made, is not currently making, and
is not obligated in any way to make, any contributions to any
multi-employer plan within the meaning of the Multi-Employer Pension Plan
Amendments Act of 1980.
(b) Except as disclosed in the MedPartners/Mullikin Documents or as
set forth in Exhibit 5.15(b) to the MedPartners/Mullikin Disclosure
Schedule, MedPartners/Mullikin is not a party to any oral or written (i)
union, guild or collective bargaining agreement which agreement covers
employees in the United States (nor is it aware of any union organizing
activity currently being conducted in respect
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to any of its employees), (ii) agreement with any executive officer or
other key employee the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction of the
nature contemplated by this Plan of Merger and which provides for the
payment of in excess of $25,000, or (iii) agreement or plan, including any
stock option plan, stock appreciation rights plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be increased, or the
vesting the benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Plan of Merger or the value of any
of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Plan of Merger.
5.16 Compliance with Laws. Except as disclosed in the
MedPartners/Mullikin Documents or as set forth in Exhibit 5.16 to the
MedPartners/Mullikin Disclosure Schedule, MedPartners/Mullikin has not
received any notices of material violations of any federal, state and local
laws, regulations and ordinances relating to its business and operations,
including, without limitation, the Occupational Safety and Health Act, the
Americans with Disabilities Act, the Medicare or applicable Medicaid
statutes and regulations and any Environmental Laws, and no notice of any
pending inspection or violation of any such law, regulation or ordinance
has been received by MedPartners/Mullikin which, if it were determined that
a violation had occurred, would have a material adverse effect on
MedPartners/Mullikin.
5.17 Regulatory Approvals. Except as disclosed in the
MedPartners/Mullikin Documents or in Exhibit 5.17 to the
MedPartners/Mullikin Disclosure Schedule, MedPartners/Mullikin and each
MedPartners/Mullikin Subsidiary or Other MedPartners/Mullikin Entity, as
applicable, holds all licenses, certificates of need and other regulatory
approvals required or necessary to be applied for or obtained in connection
with its business as presently conducted or as proposed to be conducted,
except where the failure to obtain such license, certificate of need or
regulatory approval would not have a material adverse effect on
MedPartners/Mullikin. All such licenses, certificates of need and other
regulatory approvals relating to the business, operations and facilities of
MedPartners/Mullikin and each MedPartners/Mullikin Subsidiary or Other
MedPartners/Mullikin Entity are in full force and effect, except where any
failure of such license, certificate of need or regulatory approval to be
in full force and effect would not have a material adverse effect on
MedPartners/Mullikin. Any and all past litigation concerning such licenses,
certificates of need and regulatory approvals, and all claims and causes of
action raised therein, has been finally adjudicated. No such license,
certificate of need or regulatory approval has been revoked, conditioned
(except as may be customary) or restricted, and no action (equitable, legal
or administrative), arbitration or other process is pending, or to the best
knowledge of MedPartners/ Mullikin, threatened, which in any way challenges
the validity of, or seeks to revoke, condition or restrict any such
license, certificate of need, or regulatory approval. Subject to compliance
with applicable securities laws and the HSR Act, the consummation of the
Merger will not violate any law or restriction to which
MedPartners/Mullikin is subject which, if violated, would have a material
adverse effect on MedPartners/Mullikin.
5.18 Investment Intent. MedPartners/Mullikin is acquiring the
Caremark Shares hereunder for its own account and not with a view to the
distribution or sale thereof, and MedPartners/Mullikin has no
understanding, agreement or arrangement to sell, distribute, partition or
otherwise transfer or assign all or any part of the Caremark Shares to any
other person, firm or corporation.
5.19 Commissions and Fees. Except for the fee payable to Smith Barney
Inc., pursuant to the engagement letter, dated March 15, 1996, there are no
valid claims for brokerage commissions, finder's fees or similar fees in
connection with the transactions contemplated by this Plan of Merger which
may be now or hereafter asserted against MedPartners/Mullikin or Caremark
or any subsidiary or other controlled entity of MedPartners/Mullikin or
Caremark resulting from any action taken by MedPartners/ Mullikin or any of
its officers, directors or agents or any of them.
5.20 Vote Required. The affirmative vote of the holders of a majority
of the outstanding MedPartners/Mullikin Shares entitled to vote thereon is
the only vote of the holders of any class or series of MedPartners/Mullikin
capital stock necessary to approve this Plan of Merger, the Merger and the
transactions contemplated hereby.
5.21 Accounting Matters. To the best knowledge of
MedPartners/Mullikin, neither MedPartners/ Mullikin nor any of its
affiliates has taken or agreed to taken any action that (without giving
effect to any actions taken or agreed to be taken by Caremark or any of its
affiliates) would prevent Caremark from
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accounting for the business combination to be effected by the Merger as a
pooling-of-interests for financial reporting purposes.
5.22 No Untrue Representations. No representation or warranty by
MedPartners/Mullikin in this Plan of Merger, and no Exhibit or certificate
issued by MedPartners/Mullikin and furnished or to be furnished to
MedPartners/Mullikin pursuant hereto, or in connection with the
transactions contemplated hereby, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements or facts contained therein not misleading
in light of all of the circumstances then prevailing.
5.23 Payor Settlements. MedPartners/Mullikin acknowledges that it is
aware of Caremark's obligations pursuant to that certain settlement
agreement between Caremark and certain insurance companies, dated March 17,
1996 and that following the Effective Time, MedPartners/Mullikin will make
sufficient funds available to the Surviving Corporation to pay this
obligation.
SECTION 6. ACCESS TO INFORMATION AND DOCUMENTS.
6.1 Access to Information. (a) Between the date hereof and the Closing
Date, each of Caremark and MedPartners/Mullikin will give to the other party and
its counsel, accountants and other representatives full access to all the
properties, documents, contracts, personnel files and other records of such
party and shall furnish the other party with copies of such documents and with
such information with respect to the affairs of such party as the other party
may from time to time reasonably request. Each party will disclose and make
available to the other party and its representatives all books, contracts,
accounts, personnel records, letters of intent, papers, records, communications
with regulatory authorities and other documents relating to the business and
operations of such party. In addition, Caremark shall make available to
MedPartners/Mullikin all such banking, investment and financial information as
shall be necessary to allow for the efficient integration of Caremark's banking,
investment and financial arrangements with those of MedPartners/ Mullikin at the
Effective Time.
(b) In connection with the obtaining of the MedPartners/Mullikin's Required
Lenders (as defined in the Revolving Credit and Reimbursement Agreement, dated
as of November 21, 1995, among MedPartners/ Mullikin and NationsBank of Georgia,
N.A.) consent to the Merger, Caremark hereby agrees that it shall provide, and
use its reasonable efforts to cause and to provide MedPartners/Mullikin with
such information and documentation as MedPartners/Mullikin's Required Lenders or
MedPartners/Mullikin shall request in order to obtain such consent.
6.2 Return of Records. If the transactions contemplated hereby are not
consummated and this Plan of Merger terminates, each party agrees to promptly
return all documents, contracts, records or properties of the other party and
all copies thereof furnished pursuant to this Section 6 or otherwise. All
information disclosed by any party or any affiliate or representative of any
party shall be deemed to be "Evaluation Material" under the terms of the
respective Confidentiality Agreements, dated March 1, 1996, and March 20, 1996,
respectively, between Caremark and MedPartners/Mullikin (together, the
"Confidentiality Agreement").
6.3 Effect of Access. (a) Nothing contained in this Section 6 shall be
deemed to create any duty or responsibility on the part of either party to
investigate or evaluate the value, validity or enforceability of any contract,
lease or other asset included in the assets of the other party.
(b) With respect to matters as to which any party has made express
representations or warranties herein, the parties shall be entitled to rely upon
such express representations and warranties irrespective of any investigations
made by such parties, except to the extent that such investigations result in
actual knowledge of the inaccuracy or falsehood of particular representations
and warranties.
SECTION 7. COVENANTS.
7.1 Preservation of Business. Except as contemplated by this Plan of
Merger, each of Caremark and MedPartners/Mullikin will use its reasonable best
efforts to preserve its business organization intact, to keep available to
MedPartners/Mullikin and the Surviving Corporation the services of their present
employees, and to preserve for MedPartners/Mullikin and the Surviving
Corporation the goodwill of the suppliers, customers and others having business
relations with them and their respective subsidiaries.
7.2 Material Transactions. Except as contemplated by this Plan of Merger,
prior to the Effective Time, neither Caremark nor any Caremark Subsidiary or
Other Caremark Entity will (other than as required
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pursuant to the terms of this Plan of Merger and the related documents, and
other than with respect to transactions for which binding commitments have been
entered into prior to the date hereof and transactions described in Exhibit 7.2
to the Caremark Disclosure Schedule which do not vary materially from the terms
set forth on such Exhibit 7.2), without first obtaining the written consent of
MedPartners/Mullikin:
(a) Encumber any asset or enter into any transaction or make any
contract or commitment relating to the properties, assets and business of
Caremark or the Caremark Subsidiaries or Other Caremark Entities, other
than in the ordinary course of business or as otherwise disclosed herein.
(b) Enter into any employment contract or similar agreement, in which
the cash compensation is in excess of $150,000, or the term is greater than
one year, which is not terminable upon notice of 30 days or less, at will,
and without penalty to Caremark or such Caremark Subsidiary or Other
Caremark Entity, except as provided herein.
(c) Enter into any contract or agreement (i) which cannot be performed
within three months or less, or (ii) which involves the expenditure of over
$5,000,000, other than in the ordinary course of business.
(d) Issue or sell, or agree to issue or sell, any shares of capital
stock or other securities of Caremark or such Caremark Subsidiary or Other
Caremark Entity, except upon exercise of currently outstanding stock
options or pursuant to stock purchase plans.
(e) Make any payment or distribution to the trustee under any bonus,
pension, profitsharing or retirement plan or incur any obligation to make
any such payment or contribution which is not in accordance with Caremark's
usual past practice, or make any payment or contributions or incur any
obligation pursuant to or in respect of any other plan or contract or
arrangement providing for bonuses, executive incentive compensation,
pensions, deferred compensation, retirement payments, profit-sharing or the
like, establish or enter into any such plan, contract or arrangement, or
terminate any plan.
(f) Extend credit to anyone, except in the ordinary course of business
consistent with prior practices.
(g) Guarantee the obligation of any person, firm or corporation,
except in the ordinary course of business consistent with prior practices.
(h) Amend its Certificate or Articles of Incorporation or By-laws.
(i) Take any action of a character described in Section 3.11(a) to
3.11(h), inclusive.
7.3 Meetings of Stockholders. Each of MedPartners/Mullikin and Caremark
will take all steps necessary in accordance with their respective Certificates
of Incorporation and By-laws to call, give notice of, convene and hold meetings
of their respective stockholders (the "Stockholder Meetings") as soon as
practicable after the effectiveness of the Registration Statement (as defined in
Section 7.4 hereof), for the purpose of approving and adopting this Plan of
Merger and the transactions contemplated hereby and for such other purposes as
may be necessary. Unless this Plan of Merger shall have been validly terminated
as provided herein, the Boards of Directors of MedPartners/Mullikin and Caremark
will (i) recommend to their respective stockholders the approval and adoption of
this Plan of Merger, the transactions contemplated hereby and any other matters
to be submitted to the stockholders in connection therewith, to the extent that
such approval is required by applicable law in order to consummate the Merger,
and (ii) use their respective reasonable, good faith efforts to obtain the
approval by their respective stockholders of this Plan of Merger and the
transactions contemplated hereby.
7.4 Registration Statement. (a) MedPartners/Mullikin shall prepare and
file with the SEC and any other applicable regulatory bodies, as soon as
reasonably practicable, a Registration Statement on Form S-4 with respect to the
shares of MedPartners/Mullikin Common Stock to be issued in the Merger (the
"Registration Statement"), and will otherwise proceed promptly to satisfy the
requirements of the Securities Act, including Rule 145 thereunder. Such
Registration Statement shall contain a joint proxy statement of
MedPartners/Mullikin and Caremark containing the information required by the
Exchange Act (the "Proxy Statement"). MedPartners/Mullikin shall take all
reasonable steps to cause the Registration Statement to be declared effective
and to maintain such effectiveness until all of the shares of
MedPartners/Mullikin Common Stock covered thereby have been distributed.
MedPartners/Mullikin shall promptly amend or supplement the Registration
Statement to the extent necessary in order to make the statements therein not
misleading or to correct any misstatements which have become false or
misleading. MedPartners/Mullikin shall use its
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reasonable, good faith efforts to have the Proxy Statement approved by the SEC
under the provisions of the Exchange Act. MedPartners/Mullikin shall provide
Caremark with copies of all filings made pursuant to this Section 7.4 and shall
consult with Caremark on responses to any comments made by the Staff of the SEC
with respect thereto.
(b) The information specifically designated as being supplied by Caremark
for inclusion in the Registration Statement shall not, at the time the
Registration Statement is declared effective, at the time the Proxy Statement is
first mailed to holders of Caremark Common Stock and holders of
MedPartners/Mullikin Common Stock, at the time of the Stockholder Meetings and
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, not misleading. The information specifically
designated as being supplied by Caremark for inclusion in the Proxy Statement
shall not, at the date the Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to holders of Caremark Common Stock and
holders of MedPartners/Mullikin Common Stock, at the time of the Stockholder
Meetings and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time, any event or circumstance relating to Caremark, or its
officers or directors, should be discovered by Caremark which should be set
forth in an amendment to the Registration Statement or a supplement to the Proxy
Statement, Caremark shall promptly inform MedPartners/Mullikin. All documents,
if any, that Caremark is responsible for filing with the SEC in connection with
the transactions contemplated hereby will comply as to form and substance in all
material respects with the applicable requirements of the Securities Act and the
rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(c) The information specifically designated as being supplied by
MedPartners/Mullikin for inclusion in the Registration Statement shall not, at
the time the Registration Statement is declared effective, at the time the Proxy
Statement is first mailed to holders of Caremark Common Stock and holders of
MedPartners/ Mullikin Common Stock, at the time of the Stockholder Meetings and
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, not misleading. The information specifically
designated as being supplied by MedPartners/Mullikin for inclusion in the Proxy
Statement in connection with the Stockholder Meetings shall not, at the date the
Proxy Statement (or any amendment thereof or supplement thereto) is first mailed
to holders of Caremark Common Stock and holders of MedPartners/Mullikin Common
Stock, at the time of the Stockholder Meetings or at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, not misleading. If at any time prior to the Effective Time any event or
circumstance relating to MedPartners/Mullikin or its officers or Directors,
should be discovered by MedPartners/Mullikin which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
MedPartners/Mullikin shall promptly inform Caremark and shall promptly file such
amendment to the Registration Statement. All documents that MedPartners/Mullikin
is responsible for filing with the SEC in connection with the transactions
contemplated herein will comply as to form and substance in all material
respects with the applicable requirements of the Securities Act and the rules
and regulations thereunder and the Exchange Act and the rules and regulations
thereunder.
(d) Prior to the Closing Date, MedPartners/Mullikin shall use its
reasonable, good faith efforts to cause the shares of MedPartners/Mullikin
Common Stock to be issued pursuant to the Merger to be registered or qualified
under all applicable securities or Blue Sky laws of each of the states and
territories of the United States, and to take any other actions which may be
necessary to enable the Common Stock to be issued pursuant to the Merger to be
distributed in each such jurisdiction.
(e) Prior to the Closing Date, MedPartners/Mullikin shall file a Subsequent
Listing Application with the NYSE relating to the shares of MedPartners/Mullikin
Common Stock to be issued in connection with the Merger, and shall cause such
shares of MedPartners/Mullikin Common Stock to be listed on the NYSE, upon
official notice of issuance, prior to the Closing Date.
(f) Caremark shall furnish all information to MedPartners/Mullikin with
respect to Caremark and the Caremark Subsidiaries as MedPartners/Mullikin may
reasonably request for inclusion in the Registration Statement, the Proxy
Statement and shall otherwise cooperate with MedPartners/Mullikin in the
preparation and filing of such documents.
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7.5 Exemption from State Takeover Laws. Caremark shall take all reasonable
steps necessary to exempt the Merger from the requirements of any state takeover
statute or other similar state law which would prevent or impede the
consummation of the transactions contemplated hereby, by action of Caremark's
Board of Directors or otherwise.
7.6 HSR Act Compliance. MedPartners/Mullikin and Caremark shall promptly
make their respective filings, and shall thereafter use their reasonable best
efforts to promptly make any required submissions, under the HSR Act with
respect to the Merger and the transactions contemplated hereby.
MedPartners/Mullikin and Caremark will use their respective reasonable best
efforts to obtain all other permits, authorizations, consents and approvals from
third parties and governmental authorities necessary to consummate the Merger
and the transactions contemplated hereby.
7.7 Public Disclosures. MedPartners/Mullikin and Caremark will consult
with each other before issuing any press release or otherwise making any public
statement with respect to the transactions contemplated by this Plan of Merger,
and shall not issue any such press release or make any such public statement
prior to such consultation except as may be required by applicable law or
requirements of the NYSE. The parties shall issue a joint press release,
mutually acceptable to MedPartners/Mullikin and Caremark, promptly upon
execution and delivery of this Plan of Merger.
7.8 Transition Planning/Reorganization. (a) C.A. Lance Piccolo and Larry
R. House, as Chairmen of Caremark and MedPartners/Mullikin, respectively,
jointly shall be responsible for coordinating all aspects of transition planning
and implementation relating to the Merger contemplated hereby. If either such
person ceases to be a Chairman of his respective company for any reason, such
person's successor as Chairman shall assume his predecessor's responsibilities
under this Section 7.8
(b) Immediately prior to the Effective Time, MedPartners/Mullikin shall
take all necessary action to (i) cause Larry R. House to be appointed as the
Chairman, President and Chief Executive Officer of MedPartners/Mullikin and C.A.
Lance Piccolo to be appointed as the Vice Chairman of the Board of Directors of
MedPartners/Mullikin and (ii) cause the Board of Directors of
MedPartners/Mullikin to consist of 13 members, 9 of which shall be designated by
MedPartners/Mullikin, and 4 of which shall be designated by Caremark (the "New
Board"), such that each class of Directors of the New Board contains a number of
directors designated by Caremark as nearly equal in number as is reasonably
possible. Each committee of the New Board shall contain at least one member that
is a Caremark designated director. If at any time prior to the third anniversary
of the Effective Time, the number of directors designated by Caremark serving,
or that would be serving following the next stockholders' meeting at which
directors are to be elected, as directors of MedPartners/Mullikin or as members
of any committee of the New Board, would not be in proportion to the initial
designation of the New Board as set forth above, then the New Board shall
nominate for election at the next MedPartners/Mullikin stockholders' meeting at
which directors are to be elected, such person or persons as may be requested by
the remaining directors designated by Caremark to ensure that there shall be a
number of directors designated by Caremark (or the remaining directors
designated by Caremark) in proportion to the initial designation of the New
Board as set forth above.
(c) Immediately prior to the Effective Time, MedPartners/Mullikin shall and
shall cause the Surviving Corporation to elect as officers of
MedPartners/Mullikin or the Surviving Corporation, as applicable, each of the
persons specified in the letter dated May 13, 1996 from Larry R. House to C.A.
Lance Piccolo (the "Letter") to the offices and positions specified in the
Letter; provided, however, that no person so named in the Letter shall be
required to accept the office or position so specified.
(d) MedPartners/Mullikin shall take such action as shall be necessary to
give effect to the provisions set forth in this section, including but not
limited to incorporating such provisions in the Certificate of Incorporation or
By-laws of MedPartners/Mullikin in effect immediately prior to and after the
Effective Time.
7.9 No Solicitations. Either MedPartners/Mullikin or Caremark may,
directly or indirectly, furnish information and access, in response to
unsolicited requests therefor, to the same extent permitted by Section 6.1, to
any corporation, partnership, person or other entity or group, pursuant to
appropriate confidentiality agreements, and may participate in discussions and
negotiate with such corporation, partnership, person or other entity or group
concerning any proposal to acquire such party upon a merger, purchase of assets,
purchase of or tender offer for shares of its Common Stock or similar
transaction (an "Acquisition Transaction"), if the Board of Directors of
MedPartners/Mullikin or Caremark, as the case may be, determines in its good
faith judgment in the exercise of its fiduciary duties or the exercise of its
duties under
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Rule 14e-2 under the Exchange Act, after consultation with legal counsel and its
financial advisors, that such action is appropriate in furtherance of the best
interest of its stockholders. Except as set forth above, MedPartners/Mullikin or
Caremark shall not, and will direct each officer, director, employee,
representative and agent of such party not to, directly or indirectly,
encourage, solicit, participate in or initiate discussions or negotiations with
or provide any information to any corporation, partnership, person or other
entity or group (other than Caremark or an affiliate or associate or agent of
Caremark, or other than MedPartners/Mullikin or an affiliate or associate or
agent of MedPartners/Mullikin, respectively) concerning any merger, sale of
assets, sale of or tender offer for its shares or similar transactions involving
such party. Such party shall promptly notify the other party if it shall, on or
after the date hereof, have entered into a confidentiality agreement with any
third party in response to any unsolicited request for information and access in
connection with a possible Acquisition Transaction involving such party, such
notification to include the identity of such third party and the proposed terms
of such possible Acquisition Transaction.
7.10 Other Actions. None of Caremark, MedPartners/Mullikin and the
Subsidiary shall knowingly or intentionally take any action, or omit to take any
action, if such action or omission would, or reasonably might be expected to,
result in any of its representations and warranties set forth herein being or
becoming untrue in any material respect, or in any of the conditions to the
Merger set forth in this Plan of Merger not being satisfied, or (unless such
action is required by applicable law) which would materially adversely affect
the ability of Caremark or MedPartners/Mullikin to obtain any consents or
approvals required for the consummation of the Merger without imposition of a
condition or restriction which would have a material adverse effect on the
Surviving Corporation or which would otherwise materially impair the ability of
Caremark or MedPartners/Mullikin to consummate the Merger in accordance with the
terms of this Plan of Merger or materially delay such consummation.
7.11 Accounting Methods. Neither MedPartners/Mullikin nor Caremark shall
change, in any material respect, its methods of accounting in effect at its most
recent fiscal year end, except as required by changes in generally accepted
accounting principles as concurred by such parties' independent accountants.
7.12 Pooling and Tax-Free Reorganization Treatment. Neither
MedPartners/Mullikin nor Caremark shall intentionally take or cause to be taken
any action, whether on or before the Effective Time, which would disqualify the
Merger as a "pooling of interests" for accounting purposes or as a
"reorganization" within the meaning of Section 368(a) of the Code.
7.13 Affiliate and Pooling Agreements. MedPartners/Mullikin and Caremark
will each use their respective reasonable best efforts to cause each of their
respective directors and executive officers and each of their respective
"affiliates" (within the meaning of Rule 145 under the Securities Act) to
execute and deliver to MedPartners/Mullikin as soon as practicable an agreement
in the form attached hereto as Exhibit 7.13 relating to the disposition of
shares of Caremark Common Stock and shares of MedPartners/Mullikin Common Stock
held by such person and the shares of MedPartners/Mullikin Common Stock issuable
pursuant to this Plan of Merger.
7.14 Cooperation. (a) MedPartners/Mullikin and Caremark shall together, or
pursuant to an allocation of responsibility agreed to between them, (i)
cooperate with one another in determining whether any filings required to be
made or consents required to be obtained in any jurisdiction prior to the
Effective Time in connection with the consummation of the transactions
contemplated hereby and cooperate in making any such filings promptly and in
seeking to obtain timely any such consents, (ii) use their respective best
efforts to cause to be lifted any injunction prohibiting the Merger, or any part
thereof, or the other transactions contemplated hereby, and (iii) furnish to one
another and to one another's counsel all such information as may be required to
effect the foregoing actions.
(b) Subject to the terms and conditions herein provided, and unless this
Plan of Merger shall have been validly terminated as provided herein, each of
MedPartners/Mullikin and Caremark shall use all reasonable efforts (i) to take,
or cause to be taken, all actions necessary to comply promptly with all legal
requirements which may be imposed on such party (or any subsidiaries or
affiliates of such party) with respect to the Plan of Merger and to consummate
the transactions contemplated hereby, subject to the votes of its stockholders
described above, and (ii) to obtain (and to cooperate with the other party to
obtain) any consent, authorization, order or approval of, or any exemption by,
any governmental entity and/or any other public or private third party which is
required to be obtained or made by such party or any of its subsidiaries or
affiliates in connection with this Plan of Merger and the transactions
contemplated hereby. Each of MedPartners/
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Mullikin and Caremark will promptly cooperate with and furnish information to
the other in connection with any such burden suffered by, or requirement imposed
upon, either of them or any of their subsidiaries or affiliates in connection
with the foregoing.
7.15 Caremark Stock Options. (a) As soon as reasonably practicable after
the Effective Time, MedPartners/Mullikin shall deliver to the holders of
Caremark stock options appropriate notices setting forth such holders' rights
pursuant to any stock option plans under which such Caremark stock options were
issued and any stock option agreements evidencing such options which shall
continue in full force and effect on the same terms and conditions (subject to
the adjustments required by Section 2.1(d) or this Section 7.15 after giving
effect to the Merger and the assumption of such options by MedPartners/Mullikin
as set forth herein) as in effect immediately prior to the Effective Time.
MedPartners/Mullikin shall comply with the terms of the stock option plans, and
the stock option agreements as so adjusted, and shall use its reasonable best
efforts to ensure, to the extent required by, and subject to the provisions of,
such plans or agreements, that the Caremark stock options which qualified as
incentive stock options prior to the Effective Time shall continue to qualify as
incentive stock options after the Effective Time.
(b) MedPartners/Mullikin shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of MedPartners/Mullikin
Common Stock for delivery upon exercise of the Caremark stock options assumed by
MedPartners/Mullikin in accordance with Section 2.1(d). As soon as practicable
after the Effective Time, MedPartners/Mullikin shall file with the SEC a
registration statement on Form S-8 with respect to shares of MedPartners/
Mullikin Common Stock subject to such assumed Caremark stock options and shall
use its best efforts to maintain the effectiveness of a registration statement
or registration statements covering such options (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
Caremark stock options remain outstanding. MedPartners/Mullikin shall administer
the plans assumed pursuant to Section 2.1(d) hereof in a manner that complies
with Rule 16b-3 promulgated under the Exchange Act to the extent the applicable
plan complied with such rule prior to the Merger.
(c) Except to the extent otherwise agreed to by the parties, all
restrictions or limitations on transfer and vesting with respect to the Caremark
stock options awarded under any plan, program, or arrangement of Caremark or any
of its subsidiaries, to the extent that such restrictions or limitations shall
not have already lapsed, shall remain in full force and effect with respect to
such options after giving effect to the Merger and the assumption by
MedPartners/Mullikin as set forth above.
7.16 Publication of Combined Results. MedPartners/Mullikin agrees that
after the end of the first full calendar month after the Effective Time,
MedPartners/Mullikin shall cause publication of the combined results of
operations of MedPartners/Mullikin and Caremark in the First Quarterly Report on
Form 10-Q which shall be filed after such period. For purposes of this Section
7.16, the term "publication" shall have the meaning provided in SEC Accounting
Series Release No. 135.
7.17 Tax Opinions. Counsel for each of MedPartners/Mullikin and Caremark
shall render opinions as to the federal income tax consequences of the Merger,
which opinions shall be filed as Exhibits to the Registration Statement. Each of
MedPartners/Mullikin and Caremark agrees that it shall provide certificates
containing reasonable representations to such counsel in connection with the
rendering of such opinions.
7.18 Consents; Amendments, Etc. (a) MedPartners/Mullikin, the Subsidiary
and Caremark shall use their best efforts to obtain all material consents,
approvals and authorizations of third parties with respect to all material
agreements to which such parties are parties, which consents, approvals and
authorizations are required of such third parties by such documents, in form and
substance acceptable to MedPartners/Mullikin or Caremark, as the case may be,
except where the failure to obtain such consent, approval or authorization would
not have a material effect on the business of the Surviving Corporation.
(b) MedPartners/Mullikin, the Subsidiary and Caremark shall use their best
efforts to obtain, or obtain the transfer of, any licenses and other regulatory
approvals necessary to allow the Surviving Corporation to operate Caremark's
business, unless the failure to obtain such transfer or approval would not have
a material adverse effect on Caremark.
7.19 Change in Control. MedPartners/Mullikin acknowledges and agrees that
the consummation of the Merger shall constitute a "Change in Control" or "Change
of Control" of Caremark for all purposes within the meaning of all Caremark
Plans and compensation plans or compensation agreements of Caremark.
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7.20 Employee Retention. MedPartners/Mullikin and Caremark acknowledge
that retaining the services and loyalty of Caremark employees is important to
the success of the Surviving Corporation. MedPartners/Mullikin agrees that
Caremark may expend up to a total of $2,000,000 in incentive payments to retain
the services and ensure the loyalty of key employees of Caremark for up to six
months immediately subsequent to the Effective Time provided however that no
such incentive payment may be granted to any Caremark employee (i) that is party
to a severance compensation agreement with Caremark, or (ii) in an amount in
excess of one-half of such employee's annual base salary as of the date hereof.
7.21 Litigation Cooperation. Caremark shall use its best efforts to obtain
the agreement of all persons with whom Caremark has severance or employment
agreements, and Caremark will obtain the agreement in the future of any person
with whom Caremark enters into a severance or employment agreement to cooperate
with Caremark in defending its litigation to substantially the following effect:
"I understand that following the termination of my employment with
Caremark, I may be contacted by Caremark or its legal counsel concerning
various lawsuits or other legal matters about which I may have
knowledge. I agree to cooperate with all reasonable requests for
assistance from Caremark in this regard. I further agree to notify
Caremark if I am served with a subpoena or other legal process, or
otherwise contacted by or asked to provide information to, any other
party (including government agencies) concerning investigations,
lawsuits or other legal proceedings involving Caremark. Caremark agrees
to reimburse me for all reasonable expenses incurred by me in fulfilling
these obligations. These obligations are subject to any and all personal
rights and privileges that I may have concerning any of these matters."
7.22 Consulting Agreements. MedPartners/Mullikin and Caremark shall offer
consulting agreements to each of C.A. Lance Piccolo, Diane Munson and Tom
Hodson, respectively, as of the Effective Time which contain terms and
conditions substantially similar to those agreed to by the parties at the
signing of this Plan of Merger.
SECTION 8. TERMINATION, AMENDMENT AND WAIVER.
8.1 Termination. This Plan of Merger may be terminated at any time prior
to the Effective Time, whether before or after approval of matters presented in
connection with the Merger by the holders of Caremark Common Stock and the
holders of MedPartners/Mullikin Common Stock:
(a) by mutual written consent of MedPartners/Mullikin, the Subsidiary
and Caremark;
(b) by either MedPartners/Mullikin or Caremark;
(i) if, upon a vote at a duly held meeting of stockholders or any
adjournment thereof, any required approval of the holders of Caremark
Common Stock or the holders of MedPartners/ Mullikin Common Stock shall
not have been obtained;
(ii) if the Merger shall not have been consummated on or before
December 31, 1996, unless the failure to consummate the Merger is the
result of a willful and material breach of this Plan of Merger by the
party seeking to terminate this Plan of Merger; provided, however, that
the passage of such period shall be tolled for any part thereof (but not
exceeding 60 days in the aggregate) during which any party shall be
subject to a nonfinal order, decree, ruling or action restraining,
enjoining or otherwise prohibiting the consummation of the Merger or the
calling or holding of a meeting of stockholders;
(iii) if any court of competent jurisdiction or other governmental
entity shall have issued an order, decree or ruling or taken any other
action permanently enjoining, restraining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become
final and nonappealable; or
(iv) in the event of a material breach by the other party of any
representation, warranty, covenant or other agreement contained in this
Plan of Merger which (A) would give rise to the failure of a condition
set forth in Section 9.2(a) or (b) or Section 9.3(a) or (b), as
applicable, and (B) cannot be or has not been cured within 30 days after
the occurrence or discovery of such breach by the breaching party,
whichever is later (a "Material Breach") (provided that the terminating
party is not then in Material Breach of any representation, warranty,
covenant or other agreement contained in this Plan of Merger);
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(c) by either MedPartners/Mullikin or Caremark in the event that (i)
all of the conditions to the obligation of such party to effect the Merger
set forth in Section 9.1 shall have been satisfied and (ii) any condition
to the obligation of such party to effect the Merger set forth in Section
9.2 (in the case of MedPartners/Mullikin) or Section 9.3 (in the case of
Caremark) is not capable of being satisfied prior to the end of the period
referred to in Section 8.1(b)(ii);
8.2 Effect of Termination. In the event of termination of this Plan of
Merger as provided in Section 8.1, this Plan of Merger shall forthwith become
void and have no effect, without any liability or obligation on the part of any
party, other than the provisions of Sections 6.2, 8.2 and 8.6, and except to the
extent that such termination results from the willful and material breach by a
party of any of its representations, warranties, covenants or other agreements
set forth in this Plan of Merger.
8.3 Amendment. This Plan of Merger may be amended by the parties at any
time before or after any required approval of matters presented in connection
with the Merger by the holders of Caremark Shares or holders of shares of
MedPartners/Mullikin Common Stock; provided, however, that after any such
approval, there shall be made no amendment that pursuant to Section 251(d) of
the DGCL requires further approval by such stockholders. This Plan of Merger may
not be amended except by an instrument in writing signed on behalf of each of
the parties.
8.4 Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Plan of Merger or in any
document delivered pursuant to this Plan of Merger or (c) subject to the proviso
of Section 8.3, waive compliance with any of the agreements or conditions
contained in this Plan of Merger. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this Plan of
Merger to assert any of its rights under this Plan of Merger or otherwise shall
not constitute a waiver of such rights.
8.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Plan of Merger pursuant to Section 8.1, an amendment of this
Plan of Merger pursuant to Section 8.3, or an extension or waiver pursuant to
Section 8.4 shall, in order to be effective, require in the case of each of
MedPartners/ Mullikin, the Subsidiary and Caremark, action by its Board of
Directors or the duly authorized designee of the Board of Directors.
8.6 Expenses; Breakup Fees. (a) All costs and expenses incurred in
connection with this Plan of Merger and the transactions contemplated hereby
shall be paid by the party incurring such expense, except that expenses (other
than legal, accounting and investment banking costs, which shall be paid by the
party incurring such expenses) incurred in connection with preparing, filing,
printing and mailing the Proxy Statements and the Registration Statement shall
be shared equally by MedPartners/Mullikin and Caremark.
(b) (i) If this Plan of Merger is terminated pursuant to Section 8.1(b) and
within one year after the effective date of such termination such terminating
party is the subject of a Third Party Acquisition Event with any Person (as
defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) (other than a
party hereto), then at the time of consummation of such a Third Party
Acquisition Event, such terminating party shall pay to the non-terminating party
a break-up fee of $100,000,000 in immediately available funds, which fee
represents the parties' best estimates of the out-of-pocket costs incurred by
each of the parties and the value of management time, overhead, opportunity
costs and other unallocated cots incurred by or on behalf of each party in
connection with this Plan of Merger. Neither party shall enter into any
agreement with respect to any Third Party Acquisition Event which does not, as a
condition precedent to the consummation of such Third Party Acquisition Event,
require such break-up fee to be paid to the non-terminating party upon such
consummation.
(ii) As used herein, the term "Third Party Acquisition Event" shall mean
either of the following:
(A) either Caremark or MedPartners/Mullikin, as the case may be, shall
agree to, consummate, or announce its intention to enter into any
Acquisition Transaction (as defined in Section 7.9); or
(B) any person (other than a party hereto or its affiliates) shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act) or the right to acquire beneficial ownership of, or
a new group has been formed which beneficially owns or has the right to
acquire beneficial ownership of, 10% or more of the outstanding Caremark
Common Stock or MedPartners/
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Mullikin Common Stock or purchase, lease or otherwise acquire 10% of the
assets of Caremark or MedPartners/Mullikin, as the case may be.
(c) Each of MedPartners/Mullikin and Caremark acknowledges that the
provisions for the payment of breakup fees and allocation of expenses contained
in this Section 8.6 are an integral part of the transactions contemplated by
this Plan of Merger and that, without these provisions, MedPartners/Mullikin and
Caremark and the other constituent entities would not have entered into the Plan
of Merger. Accordingly, if a breakup fee shall become due and payable by either
party, and such party shall fail to pay such amount when due pursuant to this
Section, and, in order to obtain such payment, suit is commenced which results
in a judgment against such party therefor, the terminating party shall pay the
non-terminating party's reasonable costs and expenses (including reasonable
attorneys' fees) in connection with such suit, together with interest computed
or any amounts determined to be due pursuant to this Section (computed from the
date upon which such amounts were due and payable pursuant to this Section) and
such costs (computed from the dates incurred) at the prime rate of interest
announced from time to time by NationsBank of Georgia, National Association. The
obligations of MedPartners/Mullikin and Caremark under this Section 8.6 shall
survive any termination of this Plan of Merger.
In the event of an event which shall give rise to the payment of the
breakup fee pursuant to this Section 8.6 of this Plan of Merger, the payment of
any such breakup fee shall be the sole and exclusive remedy of the party
receiving such fee.
SECTION 9. CONDITIONS TO CLOSING.
9.1 Mutual Conditions. The respective obligations of each party to effect
the Merger shall be subject to the satisfaction, at or prior to the Closing
Date, of the following conditions (any of which may be waived in writing by
MedPartners/Mullikin, the Subsidiary and Caremark):
(a) None of MedPartners/Mullikin, the Subsidiary or Caremark nor any
of their respective subsidiaries shall be subject to any order, decree or
injunction by a court of competent jurisdiction which (i) prevents the
consummation of the Merger or (ii) would impose any material limitation on
the ability of MedPartners/Mullikin effectively to exercise full rights of
ownership of the Common Stock of the Surviving Corporation or any material
portion of the assets or business of Caremark and the Caremark Subsidiaries
and Other Caremark Entities, taken as a whole.
(b) No statute, rule or regulation shall have been enacted by the
government (or any governmental agency) of the United States or any state,
municipality or other political subdivision thereof that makes the
consummation of the Merger and any other transaction contemplated hereby
illegal.
(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) The holders of shares of Caremark Common Stock and the holders of
shares of MedPartners/ Mullikin Common Stock shall have approved the
adoption of this Plan of Merger and any other matters submitted to them for
the purpose of approving the transactions contemplated hereby.
(e) The shares of MedPartners/Mullikin Common Stock to be issued in
connection with the Merger shall have been listed on the NYSE, upon
official notice of issuance, and shall have been issued in transactions
qualified or exempt from registration under applicable securities or Blue
Sky laws of such states and territories of the United States as may be
required.
(f) The Merger shall qualify for "pooling of interests" accounting
treatment, and MedPartners/ Mullikin and Caremark shall each have received
a letter, dated the Closing Date, from Ernst & Young LLP as to their
concurrence with management of MedPartners/Mullikin and Caremark to that
effect if the Merger is consummated in accordance with the terms and
provisions of this Plan of Merger.
(g) The Registration Statement shall have been declared effective and
no stop order with respect to the Registration Statement shall be in
effect.
9.2 Conditions to Obligations of MedPartners/Mullikin. The obligations of
MedPartners/Mullikin to consummate the Merger and the other transactions
contemplated hereby shall be subject to the satisfaction, at
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or prior to the Closing Date, of the following conditions (any of which may be
waived by MedPartners/ Mullikin):
(a) Each of the agreements of Caremark to be performed at or prior to
the Closing Date pursuant to the terms hereof shall have been duly
performed in all material respects, and Caremark shall have performed, in
all material respects, all of the acts required to be performed by it at or
prior to the Closing Date by the terms hereof.
(b) The representations and warranties of Caremark set forth in
Section 3.11(a) shall be true and correct as of the date of this Plan of
Merger and as of the Closing Date as described in the next sentence. The
representations and warranties of Caremark set forth in this Plan of Merger
that are qualified as to materiality shall be true and correct, and those
that are not so qualified shall be true and correct in all material
respects, as of the date of this Plan of Merger and as of the Closing as
though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, as of such earlier
date); provided, however, that Caremark shall not be deemed to be in breach
of any such representations or warranties by taking any action permitted
(or approved by MedPartners/Mullikin) under this Agreement.
MedPartners/Mullikin and the Subsidiary shall have been furnished with a
certificate, executed by a duly authorized officer of Caremark, dated the
Closing Date, certifying as to the fulfillment of the foregoing conditions.
(c) MedPartners/Mullikin shall have received an opinion from Haskell
Slaughter & Young, L.L.C., to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, which
opinion may be based upon reasonable representations of fact provided by
officers of MedPartners/Mullikin, Caremark and the Subsidiary.
(d) MedPartners/Mullikin shall have received an opinion from Wachtell,
Lipton, Rosen & Katz substantially to the effect set forth in Exhibit
9.2(d) hereto.
(e) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required to execute, deliver and perform this Plan of
Merger shall have been obtained or made, except for filings in connection
with the Merger and any other documents required to be filed after the
Effective Time.
9.3 Conditions to Obligations of Caremark. The obligations of Caremark to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions (any of which may be waived by Caremark):
(a) Each of the agreements of MedPartners/Mullikin and the Subsidiary
to be performed at or prior to the Closing Date pursuant to the terms
hereof shall have been duly performed, in all material respects, and
MedPartners/Mullikin and the Subsidiaries shall have performed, in all
material respects, all of the acts required to be performed by them at or
prior to the Closing Date by the terms hereof.
(b) The representations and warranties of MedPartners/Mullikin set
forth in Section 5.13(a) shall be true and correct as of the date of the
Plan of Merger and as of the Closing Date as described in the next
sentence. The representations and warranties of MedPartners/Mullikin and
the Subsidiary set forth in this Plan of Merger that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, as of the date of this
Plan of Merger and as of the Closing as though made at and as of such time,
except to the extent such representations and warranties expressly relate
to an earlier date (in which case such representations and warranties that
are qualified as to materiality shall be true and correct, and those that
are not so qualified shall be true and correct in all material respects, as
of such earlier date). Caremark shall have been furnished with a
certificate, executed by duly authorized officers of MedPartners/Mullikin
and the Subsidiary, dated the Closing Date, certifying in such detail as
Caremark may reasonably request as to the fulfillment of the foregoing
conditions.
(c) Caremark shall have received an opinion from Wachtell, Lipton,
Rosen & Katz to the effect that the Merger will constitute a reorganization
with the meaning of Section 368(a) of the Code which
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opinion may be based upon reasonable representations of fact provided by
officers of MedPartners/ Mullikin, Caremark and the Subsidiary.
(d) Caremark shall have received an opinion from Haskell Slaughter &
Young, L.L.C., substantially to the effect set forth in Exhibit 9.3(d)
hereto.
(e) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Plan of Merger shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time.
SECTION 10. MISCELLANEOUS.
10.1 Nonsurvival of Representations and Warranties. Unless expressly
provided otherwise, none of the representations and warranties in this Plan of
Merger or in any instrument delivered pursuant to this Plan of Merger shall
survive the Effective Time.
10.2 Notices. Any communications required or desired to be given hereunder
shall be deemed to have been properly given if sent by hand delivery or by
facsimile and overnight courier to the parties hereto at the following
addresses, or at such other address as either party may advise the other in
writing from time to time:
If to MedPartners/Mullikin:
MedPartners/Mullikin, Inc.
3000 Galleria Tower, Suite 1000
Birmingham, Alabama 35244
Facsimile: (205) 733-9780
Attn: J. Brooke Johnston, Jr.
Senior Vice President and General Counsel
with a copy to:
F. Hampton McFadden, Jr., Esq.
Haskell, Slaughter & Young, L.L.C.
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
Facsimile: (205) 324-1133
If to Caremark:
Caremark International Inc.
2211 Sanders Road
Northbrook, Illinois 60062
Facsimile: (847) 559-4790
Attn: General Counsel
with a copy to:
Edward D. Herlihy
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Facsimile: (212) 403-2000
All such communications shall be deemed to have been delivered on the date of
hand delivery or on the next business day following the deposit of such
communications with the overnight courier.
10.3 Further Assurances. Each party hereby agrees to perform any further
acts and to execute and deliver any documents which may be reasonably necessary
to carry out the provisions of this Plan of Merger.
10.4 Insurance; Indemnification; Benefits. (a) MedPartners/Mullikin shall
cause the Surviving Corporation to maintain in effect for not less than three
years after the Effective Time the current policies of directors' and officers'
liability insurance maintained by Caremark with respect to matters occurring
prior to the Effective Time; provided, however, that (i) MedPartners/Mullikin
may substitute therefor policies of at
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least the same coverage containing terms and conditions which are no less
advantageous to the covered officers and directors and (ii) MedPartners/Mullikin
shall not be required to pay an annual premium for such insurance in excess of
two times the last annual premium paid prior to the date hereof, but in such
case shall purchase as much coverage as possible for such amount.
(b) From and after the Effective Time, MedPartners/Mullikin shall cause the
Surviving Corporation to indemnify and hold harmless to the fullest extent
permitted under applicable law each person who is now, or has been at any time
prior to the date hereof, an officer, director, employee, trustee or agent of
Caremark (or any Caremark Subsidiary or Other Caremark Entity), including,
without limitation, each person controlling any of the foregoing persons
(together with such person's heirs and representatives, individually, an
"Indemnified Party" and collectively, the "Indemnified Parties"), against all
losses, claims, damages, liabilities, costs or expenses (including attorneys'
fees), judgments, fines, penalties and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in their
capacities as such, whether commenced, asserted or claimed before or after the
Effective Time and including, without limitation, liabilities arising under the
Securities Act, the Exchange Act and state corporation laws, in connection with
the Merger. MedPartners/Mullikin shall cause the Surviving Corporation to keep
in effect Caremark's current provisions in its certificate of incorporation and
by-laws providing for exculpation of director and officer liability and
indemnification of the Indemnified Parties to the fullest extent permitted under
the DGCL, which provisions shall not be amended except as required by applicable
law or except to make changes permitted by law that would enlarge the
Indemnified Parties' right of indemnification. In the event of any actual or
threatened claim, action, suit, proceeding or investigation in respect of such
acts or omissions, (i) MedPartners/Mullikin shall cause the Surviving
Corporation to pay the reasonable fees and expenses of counsel selected by the
Indemnified Party in advance of the final disposition of any such action to the
full extent permitted by applicable law, upon receipt of any undertaking
required by applicable law, and (ii) MedPartners/Mullikin shall cause the
Surviving Corporation to cooperate in the defense of any such matter.
(c) MedPartners/Mullikin covenants and agrees that, following the Effective
Time, (i) it will, or it will cause the Surviving Corporation to, provide for
the benefit of employees of Caremark who become employees of the Surviving
Corporation, an effective and complete employee benefit program which is
competitive in the industries in which it competes, which benefits shall be no
less advantageous than those benefits offered to similarly situated
MedPartners/Mullikin employees, (ii) it will, or it will cause the Surviving
Corporation to, (A) honor in accordance with their terms all benefits accrued or
vested under the Caremark Plans as of the Effective Time, (B) honor in
accordance with their terms all contracts, arrangements, commitments, or
understandings described in Exhibit 3.14(b) to the Caremark Disclosure Schedule,
(C) vest the benefits of any employee terminated within 12 months of the Closing
Date under the 401 CARE Retirement Savings Plan and Caremark International Inc.
Pension Plan, and (D) maintain and honor in accordance with its terms,
Caremark's Severance Pay and Benefits Plan for 6 months from and after the
Effective Time.
(d) The provisions of this Section 10.4 and Sections 7.8, 7.15 and 7.19
shall survive the Merger, and are intended to be for the benefit of, and shall
be enforceable by, any officer, director, employee, trustee or agent of Caremark
(or any Caremark Subsidiary or Other Caremark Entity), and such person's heirs
or representatives, that is the subject of such Section as the case may be (the
expenses, including reasonable attorneys' fees, that may be incurred thereby in
enforcing such provisions to be paid by MedPartners/ Mullikin).
10.5 Governing Law. This Plan of Merger shall be interpreted, construed
and enforced in accordance with the laws of the State of Delaware, applied
without giving effect to any conflicts-of-law principles.
10.6 "Including". The word "including", when following any general
statement, term or matter, shall not be construed to limit such statement, term
or matter to the specific terms or matters as provided immediately following the
word "including" or to similar items or matters, whether or not non-limiting
language (such as "without limitation", "but not limited to", or words of
similar import) is used with reference to the word "including" or the similar
items or matters, but rather shall be deemed to refer to all other items or
matters that could reasonably fall within the broadest possible scope of the
general statement, term or matter.
10.7 "Knowledge". "To the knowledge", "to the best knowledge, information
and belief", or any similar phrase shall be deemed to refer to the knowledge of
the Chairman of the Board, Chief Executive
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Officer or Chief Financial Officer of a party and to include the assurance that
such knowledge is based upon a reasonable investigation, unless otherwise
expressly provided.
10.8 "Material adverse change" or "material adverse effect". "Material
adverse change" or "material adverse effect" means, when used in connection with
Caremark or MedPartners/Mullikin, any change, effect, event or occurrence that
has, or is reasonably likely to have, individually or in the aggregate, a
material adverse impact on the business or financial position of such party and
its subsidiaries and other controlled entities identified herein or in any
Exhibit or Disclosure Schedule delivered pursuant to this Plan of Merger,
including the subsidiaries and other entities, taken as a whole; provided,
however, that "material adverse change" and "material adverse effect" shall be
deemed to exclude the impact of (i) changes in generally accepted accounting
principles, (ii) changes in applicable law, and (iii) any changes resulting from
any restructuring or other similar charges or write-offs taken by Caremark with
the consent of MedPartners/Mullikin; provided, however, that no such charges or
write-offs will be taken if such would adversely affect pooling-of-interests
accounting treatment for the Merger.
10.9 "Hazardous Materials". The term "Hazardous Materials" means any
material which has been determined by any applicable governmental authority to
be harmful to the health or safety of human or animal life or vegetation,
regardless of whether such material is found on or below the surface of the
ground, in any surface or underground water, airborne in ambient air or in the
air inside any structure built or located upon or below the surface of the
ground or in building materials or in improvements of any structures, or in any
personal property located or used in any such structure, including, but not
limited to, all hazardous substances, imminently hazardous substances, hazardous
wastes, toxic substances, infectious wastes, pollutants and contaminants from
time to time defined, listed, identified, designated or classified as such under
any Environmental Laws (as defined in Section 10.10) regardless of the quantity
of any such material.
10.10 Environmental Laws. The term "Environmental Laws" means any federal,
state or local statute, regulation, rule or ordinance, and any judicial or
administrative interpretation thereof, regulating the use, generation, handling,
storage, transportation, discharge, emission, spillage or other release of
Hazardous Materials or relating to the protection of the environment.
10.11 Captions. The captions or headings in this Plan of Merger are made
for convenience and general reference only and shall not be construed to
describe, define or limit the scope or intent of the provisions of this Plan of
Merger.
10.12 Integration of Exhibits. All Exhibits and Appendices attached to
this Plan of Merger are integral parts of this Plan of Merger as if fully set
forth herein.
10.13 Entire Agreement. This instrument, including all Exhibits and
Appendices attached hereto and the Confidentiality Agreement contain the entire
agreement of the parties and supersedes any and all prior or contemporaneous
agreements between the parties, written or oral, with respect to the
transactions contemplated hereby. Such agreement may not be changed or
terminated orally, but may only be changed by an agreement in writing signed by
the party or parties against whom enforcement of any waiver, change,
modification, extension, discharge or termination is sought.
10.14 Counterparts. This Plan of Merger may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
10.16 Binding Effect. This Plan of Merger shall be binding on, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Plan of Merger. No party may assign any right or obligation hereunder
without the prior written consent of the other parties.
10.16 No Rule of Construction. The parties acknowledge that this Plan of
Merger was initially prepared by MedPartners/Mullikin, and that all parties have
read and negotiated the language used in this Plan of Merger. The parties agree
that, because all parties participated in negotiating and drafting this Plan of
Merger, no rule of construction shall apply to this Plan of Merger which
construes ambiguous language in favor of or against any party by reason of that
party's role in drafting this Plan of Merger.
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IN WITNESS WHEREOF, MedPartners/Mullikin, the Subsidiary and Caremark have
caused this Plan and Agreement of Merger to be executed by their respective duly
authorized officers, all as of the day and year first above written.
MEDPARTNERS/MULLIKIN, INC.
By /s/ LARRY R. HOUSE
------------------------------------
Larry R. House,
Chairman of the Board, President
and MedPartners/Mullikin Executive
Officer
PPM MERGER CORPORATION
By /s/ LARRY R. HOUSE
------------------------------------
Larry R. House
President
CAREMARK INTERNATIONAL INC.
By /s/ C.A. LANCE PICCOLO
------------------------------------
C.A. Lance Piccolo
Chairman of the Board
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SmithBarney
- -----------
A Member of TravelersGroup
May 13, 1996
The Board of Directors
MedPartners/Mullikin, Inc.
3000 Galleria Tower
Birmingham, Alabama 35244
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to MedPartners/Mullikin, Inc. ("MPMI") of the
consideration to be paid by MPMI pursuant to the terms and subject to
the conditions set forth in the Plan and Agreement of Merger, dated as
of May 13, 1996 (the "Merger Agreement"), by and among MPMI, PPM Merger
Corporation, a wholly owned subsidiary of MPMI ("Subsidiary"), and
Caremark International Inc. ("Caremark"). As more fully described in
the Merger Agreement, (i) Subsidiary will be merged with and into
Caremark (the "Merger") and (ii) each outstanding share of the common
stock, par value $1.00 per share, of Caremark (the "Caremark Common
Stock") will be converted into the right to receive 1.21 (the "Exchange
Ratio") shares of the common stock, par value $0.001 per share, of MPMI
(the "MPMI Common Stock").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other
representatives and advisors of MPMI and certain senior officers and
other representatives and advisors of Caremark concerning the
businesses, operations and prospects of MPMI and Caremark. We
examined certain publicly available business and financial information
relating to MPMI and Caremark as well as certain financial forecasts
and other information and data for MPMI and Caremark which were
provided to or otherwise discussed with us by the respective
managements of MPMI and Caremark, including information relating to
certain strategic implications and operational benefits anticipated
from the Merger. We reviewed the financial terms of the Merger as set
forth in the Merger Agreement in relation to, among other things:
current and historical market prices and trading volumes of MPMI
Common Stock and Caremark Common Stock; the historical and projected
earnings and other operating data of MPMI and Caremark; and the
capitalization and financial condition of MPMI and Caremark. We
considered, to the extent publicly available, the financial terms of
similar transactions recently effected which we considered relevant in
evaluating the Merger and analyzed certain financial, stock market and
other publicly available information relating to the businesses of
other companies whose operations we considered relevant in evaluating
those of MPMI and Caremark. We also evaluated the potential pro forma
financial impact of the Merger on MPMI. In addition to the foregoing,
we conducted such other analyses and examinations and considered such
other financial, economic and market criteria as we deemed appropriate
in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without
independent verification, upon the accuracy and completeness of all
financial and other information and data publicly available or
furnished to or otherwise reviewed by or discussed with us. With
respect to financial forecasts and other information and data provided
to or otherwise reviewed by or discussed with us, we have been advised
by the managements of MPMI and Caremark that such forecasts and other
information and data were prepared on bases reflecting reasonable
estimates and judgments as to the future financial performance of MPMI
and Caremark and the strategic implications and operational benefits
anticipated
SMITH BARNEY INC. 388 Greenwich Street, New York, NY 10013 212-816-2200
<PAGE> 292
The Board of Directors
MedPartners/Mullikin, Inc.
May 13, 1996
Page 2
from the Merger. We also have assumed, with your consent, that the Merger will
be treated as a pooling of interests in accordance with generally accepted
accounting principles and as a tax-free reorganization for federal income tax
purposes. Our opinion, as set forth herein, relates to the relative values of
MPMI and Caremark. We are not expressing any opinion as to what the value of
the MPMI Common Stock actually will be when issued to Caremark stockholders
pursuant to the Merger or the price at which the MPMI Common Stock will trade
subsequent to the Merger. We have not made or been provided with an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of MPMI or Caremark nor have we made any physical inspection of the
properties or assets of MPMI or Caremark. With respect to outstanding
litigation and other proceedings involving Caremark, we have assumed and
relied, with your consent, upon the judgment of the management of MPMI and its
advisors that the outcome of such litigation and proceedings is not expected,
individually or in the aggregate, to have a material adverse effect on the
financial condition or results of operations of Caremark. We have not been
asked to consider, and our opinion does not address, the relative merits of the
Merger as compared to any alternative business strategies that might exist for
MPMI or the effect of any other transaction in which MPMI might engage. Our
opinion is necessarily based upon information available to us, and financial,
stock market and other conditions and circumstances existing and disclosed
to us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to MPMI in
connection with the Merger and will receive a fee for such services, a
significant portion of which is contingent upon the consummation of the Merger.
We also will receive a fee upon the delivery of this opinion. In the ordinary
course of our business, we and our affiliates may actively trade or hold the
securities of MPMI and Caremark for our own account or for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities. We have in the past provided financial advisory and
investment banking services to MPMI unrelated to the Merger, for which services
we have received compensation. In addition, we and our affiliates (including
Travelers Group Inc. and its affiliates) may maintain relationships with MPMI
and Caremark.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of MPMI in its evaluation of the proposed
Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger. Our opinion may not be published or otherwise used or
referred to, nor shall any public reference to Smith Barney be made, without
our prior written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to MPMI.
Very truly yours,
/s/ Smith Barney Inc.
SMITH BARNEY INC.
<PAGE> 293
ANNEX C
May 13, 1996
Board of Directors
Caremark International Inc.
2215 Sanders Road
Northbrook, Illinois 60062
Members of the Board:
You have asked us to advise you with respect to the fairness to holders of
common stock of Caremark International Inc. ("Caremark") from a financial point
of view of the consideration to be received by such holders pursuant to the
terms of the Plan and Agreement of Merger, dated as of May 13, 1996 (the "Merger
Agreement"), among Caremark, MedPartners/Mullikin, Inc. ("MedPartners") and PPM
Merger Corporation, a wholly owned subsidiary of MedPartners ("Sub"). The Merger
Agreement provides for, among other things, the merger of Sub with and into
Caremark (the "Merger"), and the conversion of each outstanding share of common
stock, par value $1.00 per share, of Caremark ("Caremark Common Stock") into the
right to receive 1.21 (the "Exchange Ratio") shares of common stock, par value
$.001 per share, of MedPartners ("MedPartners Common Stock"). We understand that
the Merger is intended to be accounted for as a pooling of interests in
accordance with generally accepted accounting principles as described in
Accounting Principles Board Opinion Number 16.
In arriving at our opinion, we have reviewed the Merger Agreement and
certain related documents and certain publicly available business and financial
information relating to Caremark and MedPartners. We also have reviewed certain
other information, including financial forecasts, provided to us by Caremark and
MedPartners, and have met with the respective managements of Caremark and
MedPartners to discuss the businesses of Caremark and MedPartners.
We also have considered certain financial and stock market data of Caremark
and MedPartners, and we have compared that data with similar data for other
publicly held companies in businesses similar to those of Caremark and
MedPartners and we have considered, to the extent publicly available, the
financial terms of certain other business combinations and other transactions
that have recently been effected. We also considered such other information,
financial studies, analyses and investigations and financial, economic and
market criteria that we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied
upon its being complete and accurate in all material respects. With respect to
the financial forecasts, we have assumed that such forecasts have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the managements of Caremark and MedPartners as to the future
financial performance of Caremark and MedPartners, as the case may be. We
express no view as to such forecasts or the assumptions on which they are based.
We have not made nor assumed any responsibility for making an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Caremark or MedPartners, nor have we been furnished with any such evaluations
or appraisals. We also have assumed, with your consent, that in the course of
obtaining the necessary regulatory and third party consents for the Merger, no
restriction will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger or the transactions contemplated thereby.
Our opinion is necessarily based upon information available to us and financial,
stock market and other conditions as they exist and can be evaluated as of the
date hereof. Our opinion does not address Caremark's underlying business
decision to effect the Merger. We are not expressing any opinion as to what the
value of the MedPartners Common Stock actually will be when issued to the
holders of Caremark Common Stock pursuant to the Merger or the prices at which
such MedPartners Common Stock will trade subsequent to the Merger, which may
vary depending upon, among other factors, changes in interest rates, dividend
rates, market conditions, general economic conditions and other factors that
generally influence the price of securities.
<PAGE> 294
We have acted as financial advisor to Caremark in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. In the ordinary course of our
business, CS First Boston and its affiliates may actively trade the debt and
equity securities of Caremark and MedPartners for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Caremark in connection with its evaluation of the Merger and is not
intended to be and shall not be deemed to constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to the Merger.
This letter is not to be quoted or referred to, in whole or in part, in any
registration statement, prospectus or proxy statement, or in any other document
used in connection with the offering or sale of securities, nor shall this
letter be used for any other purposes, without CS First Boston's prior written
consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to the holders of Caremark Common Stock
from a financial point of view.
Very truly yours,
CS FIRST BOSTON CORPORATION
<PAGE> 295
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
MEDPARTNERS/MULLIKIN, INC.
Section 102(b)(7) of the DGCL grants corporations the right to limit or
eliminate the personal liability of their directors in certain circumstances in
accordance with provisions therein set forth. MedPartners/ Mullikin's Restated
Certificate of Incorporation contains a provision eliminating or limiting
director liability to MedPartners/Mullikin and its stockholders for monetary
damages arising from acts or omissions in the director's capacity as a director.
The provision does not, however, eliminate or limit the personal liability of a
director (i) for any breach of such director's duty of loyalty to
MedPartners/Mullikin or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under the Delaware statutory provision making directors personally liable,
under a negligence standard, for unlawful dividends or unlawful stock purchases
or redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the Board
of Directors of MedPartners/Mullikin protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above). As a result of this provision, the ability of MedPartners/ Mullikin or a
stockholder thereof to successfully prosecute an action against a director for a
breach of his duty of care is limited. However, the provision does not affect
the availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The SEC has taken the position
that the provision will have no effect on claims arising under the federal
securities laws.
Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. MedPartners/Mullikin's Amended and Restated By-laws provide
for mandatory indemnification rights, subject to limited exceptions, to any
director, officer, employee, or agent of MedPartners/Mullikin who, by reason of
the fact that he or she is a director, officer, employee, or agent of
MedPartners/Mullikin, is involved in a legal proceeding of any nature. Such
indemnification rights include reimbursement for expenses incurred by such
director, officer, employee, or agent in advance of the final disposition of
such proceeding in accordance with the applicable provisions of the DGCL.
MedPartners/Mullikin has entered into agreements with all of its directors
and its executive officers pursuant to which MedPartners/Mullikin has agreed to
indemnify such directors and executive officers against liability incurred by
them by reason of their services of a director to the fullest extent allowable
under applicable law. In addition, MedPartners/Mullikin has purchased insurance
containing customary terms and conditions as permitted by Delaware law on behalf
of its directors and officers, which may cover liabilities under the Securities
Act of 1933.
See Item 22 of this Registration Statement on Form S-4.
CAREMARK
Section 102(b)(7) of the DGCL grants corporations the right to limit or
eliminate the personal liability of their directors certain circumstances in
accordance with provisions therein set forth. Caremark's Certificate of
Incorporation contains a provision eliminating or limiting director liability to
Caremark and its stockholders for monetary damages arising from acts or
omissions in the director's capacity as a director. The provision does not,
however, eliminate or limit the personal liability of a director(i) for any
breach of such director's duty of loyalty to Caremark or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under the Delaware statutory provision
making directors personally liable, under a negligence standard, for unlawful
dividends or unlawful stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision offers persons who serve on the Board of Directors of Caremark
protection against awards of monetary damages resulting from breaches of their
duty of care (except as indicated above). As a result of this provision, the
ability of Caremark or a stockholder thereof to successfully prosecute an action
against a director for a breach of the director's duty of care is limited.
However, the provision does not affect the availability of equitable remedies
such as an injunction or rescission based upon a breach of a director's duty of
care. The SEC has taken the position that the provision will have no effect on
claims arising under the federal securities laws.
Caremark has entered into indemnification agreements with its directors and
corporate officers pursuant to which Caremark provides the indemnification
authorized under its Certificate of Incorporation and rights of
II-1
<PAGE> 296
contribution in the event that the indemnification against expenses incurred in
connection with any indemnified action is unenforceable or insufficient to hold
the officer or director harmless. In addition, Caremark has purchased insurance
containing customary terms and conditions as permitted by Delaware law on behalf
of its directors and officers, which may cover liabilities under the Securities
Act of 1933.
Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. Caremark's Certificate of Incorporation provides for
mandatory indemnification rights, subject to limited exceptions, to any director
or officer of Caremark or a subsidiary of Caremark and each person who serves at
the request of Caremark as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, who, by
reason of serving in such capacity he or she is involved in a legal proceeding
of any nature, except with respect to an action commenced by such director or
officer against Caremark or by such director or officer as a derivative action
by or in the right of Caremark. Such indemnification rights include
reimbursement for expenses incurred by such director, officer, employee, or
agent in advance of the final disposition of such proceeding in accordance with
the applicable provisions of the DGCL.
See Item 22 of this Registration Statement on Form S-4. See "Operations and
Management of MedPartners/Mullikin After the Merger".
ITEM 21. EXHIBITS.
Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ---------------------------------------------------------------------------------
<C> <C> <S>
(2)-1 -- Plan and Agreement of Merger, dated as of May 16, 1996, among
MedPartners/Mullikin, Inc., PPM Merger Corporation and Caremark International
Inc., attached to this Registration Statement as Annex A to the Prospectus-Joint
Proxy Statement is hereby incorporated herein by reference.
List of Exhibits to Plan and Agreement of Merger.*
(3)-1 -- MedPartners/Mullikin, Inc. Second Amended and Restated Certificate of
Incorporation.*
(3)-2 -- MedPartners/Mullikin, Inc. Amended and Restated By-laws, filed as Exhibit (3)-2
to MedPartners/Mullikin's Registration Statement on Form S-4 (Registration No.
333-00774) are hereby incorporated herein by reference.
(4)-1 -- MedPartners/Mullikin, Inc. Stockholders' Rights Plan, filed as Exhibit (4)-1 to
MedPartners/ Mullikin's Registration Statement on Form S-4 (Registration No.
333-00774) is hereby incorporated herein by reference.
(5) -- Opinion of Haskell Slaughter & Young, L.L.C., as to the legality of the shares of
MedPartners/Mullikin Common Stock being registered.*
(8)-1 -- Opinion of Haskell Slaughter & Young, L.L.C., as to certain federal income tax
consequences of the Merger.*
(8)-2 -- Opinion of Wachtell Lipton Rosen & Katz, as to certain federal income tax
consequences of the Merger.*
(10)-1 -- Form of Consulting Agreement by and among Caremark, MedPartners/Mullikin and C.
A. Lance Piccolo.*
(10)-2 -- Form of Consulting Agreement by and among Caremark, MedPartners/Mullikin and
Thomas W. Hodson.*
(10)-3 -- Form of Consulting Agreement by and among Caremark, MedPartners/Mullikin and
Diane L. Munson.*
(11) -- Statement re: Computation of Per Share Earnings.*
(21) -- Subsidiaries of MedPartners/Mullikin.*
(23)-1 -- Consent of Ernst & Young LLP. See pages immediately following signature pages to
the Registration Statement.
(23)-2 -- Consent of Price Waterhouse LLP. See pages immediately following signature pages
to the Registration Statement.
(23)-3 -- Consent of Haskell Slaughter & Young, L.L.C. (included in the opinion filed as
Exhibits (5) and (8)-1).*
(23)-4 -- Consent of Wachtell Lipton Rosen & Katz (included in the opinion filed as Exhibit
(8)-2).*
(24) -- Powers of Attorney. See the signature page to the original filing of this
Registration Statement on Form S-4.
(99)-1 -- MedPartners/Mullikin Proxy.*
(99)-1A -- MedPartners/Mullikin Proxy.*
</TABLE>
II-2
<PAGE> 297
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ---------------------------------------------------------------------------------
<C> <C> <S>
(99)-1B -- MedPartners/Mullikin Proxy.*
(99)-2 -- Caremark Proxy.*
(99)-3 -- Consent of Smith Barney Inc.*
(99)-4 -- Consent of CS First Boston Corporation*
(99)-5 -- Consent of Harry M. Jansen Kraemer, Jr.*
(99)-6 -- Consent of C. A. Lance Piccolo*
(99)-7 -- Consent of Thomas W. Hodson*
(99)-8 -- Consent of Roger L. Headrick*
</TABLE>
- ---------------
* Filed with the original filing of the Registration Statement.
ITEM 22. UNDERTAKINGS.
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) The undersigned Registrant hereby undertakes as follows: that prior to
any public re-offering of the securities registered hereunder through use of a
prospectus which is part of the registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such re-offering prospectus will contain the information called
for by the applicable registration form with respect to re-offerings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(3) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(4) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not subject of and included in
the Registration Statement when it became effective.
(5) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
II-3
<PAGE> 298
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Birmingham,
State of Alabama, on August 16, 1996.
MEDPARTNERS/MULLIKIN, INC.
By /s/ LARRY R. HOUSE
------------------------------------
Larry R. House
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- ------------------------------- ----------------
<C> <S> <C>
/s/ LARRY R. HOUSE Chairman of the Board, August 16, 1996
- --------------------------------------------- President and Chief Executive
Larry R. House Officer and Director
* Executive Vice President and August 16, 1996
- --------------------------------------------- Chief Financial Officer
Harold O. Knight, Jr. (Principal Financial and
Accounting Officer)
* Director August 16, 1996
- ---------------------------------------------
Richard M. Scrushy
* Director August 16, 1996
- ---------------------------------------------
Larry D. Striplin, Jr.
* Director August 16, 1996
- ---------------------------------------------
Charles W. Newhall III
* Director August 16, 1996
- ---------------------------------------------
Scott F. Meadow
* Director August 16, 1996
- ---------------------------------------------
Ted H. McCourtney, Jr.
* Director August 16, 1996
- ---------------------------------------------
Walter T. Mullikin, M.D.
* Director August 16, 1996
- ---------------------------------------------
John S. McDonald, J.D.
* Director August 16, 1996
- ---------------------------------------------
Richard J. Kramer
* Director August 16, 1996
- ---------------------------------------------
Rosalio J. Lopez, M.D.
*By: /s/ LARRY R. HOUSE August 16, 1996
- ---------------------------------------------
Larry R. House
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 299
EXHIBIT (23)-1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and to
the use of our reports on the entities and dated as listed below in the
Registration Statement (Form S-4, No. 333-09767) and the related
Prospectus -- Joint Proxy Statement of MedPartners/Mullikin, Inc. for the
registration of its Common Stock:
MedPartners/Mullikin, Inc. February 22, 1996
CHS Management, Inc. July 26, 1996
Cardinal Healthcare, P.A. June 19, 1996
New Management July 26, 1996
Emergency Professional Services, Inc. July 12, 1996
ERNST & YOUNG LLP
Birmingham, Alabama
August 16, 1996
<PAGE> 300
EXHIBIT (23)-2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of MedPartners/Mullikin, Inc. of our report
dated January 24, 1996, except as to the third paragraph of Note 14, which is
dated as of March 19, 1996, relating to the financial statements of Caremark
International Inc., which appears in such Prospectus. We also consent to the
references to us under the headings "Experts" and "Selected Financial and
Operating Data - Caremark" in such Prospectus. However, it should be noted that
Price Waterhouse LLP has not prepared or certified such "Selected Financial and
Operating Data - Caremark."
PRICE WATERHOUSE LLP
Chicago, IL
August 16, 1996
<PAGE> 301
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
<C> <C> <S> <C>
(2)-1 -- Plan and Agreement of Merger, dated as of May 16, 1996, among
MedPartners/ Mullikin, Inc., PPM Merger Corporation and Caremark
International Inc., attached to this Registration Statement as Annex A
to the Prospectus-Joint Proxy Statement is hereby incorporated herein
by reference.
List of Exhibits to Plan and Agreement of Merger.
(3)-1 -- MedPartners/Mullikin, Inc. Second Amended and Restated Certificate of
Incorporation.
(3)-2 -- MedPartners/Mullikin, Inc. Amended and Restated By-laws, filed as
Exhibit (3)-2 to MedPartners/Mullikin's Registration Statement on Form
S-4 (Registration No. 333-00774) are hereby incorporated herein by
reference.
(4)-1 -- MedPartners/Mullikin, Inc. Stockholders' Rights Plan, filed as Exhibit
(4)-1 to MedPartners/Mullikin's Registration Statement on Form S-4
(Registration No. 333-00774) is hereby incorporated herein by
reference.
(5) -- Opinion of Haskell Slaughter & Young, L.L.C., as to the legality of the
shares of MedPartners/Mullikin Common Stock being registered.
(8)-1 -- Opinion of Haskell Slaughter & Young, L.L.C., as to certain federal
income tax consequences of the Merger.
(8)-2 -- Opinion of Wachtell Lipton Rosen & Katz as to certain federal income
tax consequences of the Merger.
(10)-1 -- Form of Consulting Agreement by and among Caremark,
MedPartners/Mullikin and C. A. Lance Piccolo.
(10)-2 -- Form of Consulting Agreement by and among Caremark,
MedPartners/Mullikin and Thomas W. Hodson.
(10)-3 -- Form of Consulting Agreement by and among Caremark,
MedPartners/Mullikin and Diane L. Munson
(11) -- Statement re: Computation of Per Share Earnings.
(21) -- Subsidiaries of MedPartners/Mullikin.
(23)-1 -- Consent of Ernst & Young LLP. See pages immediately following signature
pages to the Registration Statement.
(23)-2 -- Consent of Price Waterhouse LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-3 -- Consent of Haskell Slaughter & Young, L.L.C. (included in the opinion
filed as Exhibits (5) and (8)-1).
(23)-4 -- Consent of Wachtell Lipton Rosen & Katz (included in the opinion filed
as Exhibit (8)-2).
(24) -- Powers of Attorney. See the signature page to the original filing of
this Registration Statement on Form S-4.
(99)-1 -- MedPartners/Mullikin Proxy.
(99)-1A -- MedPartners/Mullikin Proxy
(99)-1B -- MedPartners/Mullikin Proxy
(99)-2 -- Caremark Proxy.
(99)-3 -- Consent of Smith Barney Inc.
(99)-4 -- Consent of CS First Boston Corporation
(99)-5 -- Consent of Harry M. Jansen Kraemer, Jr.
(99)-6 -- Consent of C. A. Lance Piccolo
(99)-7 -- Consent of Thomas W. Hodson
(99)-8 -- Consent of Roger L. Headrick
</TABLE>
