<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------- -----------------
COMMISSION FILE NUMBER: 0-27276
--------------------------
MEDPARTNERS/MULLIKIN, INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-1151076
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205)733-8996
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
As of August 9, 1996 52,689,312 shares of the Registrant's Common Stock
par value $.001 per share, were outstanding.
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
MEDPARTNERS/MULLIKIN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,328 $ 56,221
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,567 -
Accounts receivable, less allowances for bad debts of $29,777,000
and $39,574,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,176 165,105
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,779 11,087
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 977 4,139
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 19,214 23,839
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 256,041 260,391
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 155,376 167,502
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,971 139,169
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,002 34,285
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,343 16,837
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $576,733 $618,184
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,158 $ 29,084
Payable to physician groups . . . . . . . . . . . . . . . . . . . . . . . . 31,810 28,616
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,949 19,165
Accrued medical claims payable . . . . . . . . . . . . . . . . . . . . . . 43,433 44,235
Other accrued expenses and liabilities . . . . . . . . . . . . . . . . . . 31,650 30,605
Current portion of long-term liabilities . . . . . . . . . . . . . . . . . 9,149 7,648
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 164,149 159,353
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . 200,814 35,080
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 9,053 9,140
Stockholders' equity:
Common stock, $.001 par value; 200,000,000 shares authorized; issued
42,508,000 in 1995 and 52,311,000 in 1996 . . . . . . . . . . . . . . . . 42 52
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 214,422 435,618
Notes receivable from stockholders . . . . . . . . . . . . . . . . . . . . (1,930) (1,818)
Unrealized loss on marketable equity securities, net of deferred taxes . . (7) -
Unamortized deferred compensation . . . . . . . . . . . . . . . . . . . . . (2,682) -
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,128) (19,241)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 202,717 414,611
-------- --------
Total liabilities and stockholders' equity . . . . . . . . . . . . . $576,733 $618,184
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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MEDPARTNERS/MULLIKIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------
1995 1996
---------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . $287,700 $360,398
Operating expenses:
Cost of affiliated physician services . . . . . . . . . . . . . . 125,953 152,618
Clinic salaries, wages and benefits . . . . . . . . . . . . . . . 54,563 59,838
Outside referral expense . . . . . . . . . . . . . . . . . . . . 28,171 47,849
Clinic rent and lease expense . . . . . . . . . . . . . . . . . . 10,027 12,121
Clinic supplies . . . . . . . . . . . . . . . . . . . . . . . . . 11,536 15,938
Other clinic costs . . . . . . . . . . . . . . . . . . . . . . . 23,065 27,868
General corporate expenses . . . . . . . . . . . . . . . . . . . 16,464 20,126
Depreciation and amortization . . . . . . . . . . . . . . . . . . 7,357 8,308
Net interest expense (income) . . . . . . . . . . . . . . . . . . 1,482 (421)
Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,051 -
-------- --------
Net operating expenses . . . . . . . . . . . . . . . . . 279,669 344,245
-------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . . 8,031 16,153
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . 2,235 6,129
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,796 $ 10,024
======== ========
Net income per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.13 $ 0.19
======== ========
Weighted average common and common equivalent shares outstanding . 43,556 52,836
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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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 referral 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 expense . . . . . . . . . . . . . . . . . . . . . . . . . 1,051 34,448
-------- --------
Net operating expenses . . . . . . . . . . . . . . . . . 532,308 708,598
-------- --------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . 15,142 (4,915)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . 4,411 360
-------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,731 $ (5,275)
======== ========
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . $ 0.26 $ (0.11)
======== ========
Weighted average common and common equivalent shares outstanding . 41,867 50,034
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
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:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,731 $ (5,275)
Adjustments to reconcile net income (loss) to net cash and cash
equivalents provided by 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
======== ========
Non-cash investing activities:
</TABLE>
During the six months ended June 30, 1996 the Company issued 316,000 common
shares with a market value of $5,920,000, as consideration for acquisitions
accounted for as purchases.
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
MEDPARTNERS/MULLIKIN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 financials 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).
FISCAL YEAR
At January 1, 1996 PPSI changed its fiscal year-end from July 31 to
December 31. Amounts consolidated for PPSI prior to January 1, 1996 were based
on an October 31 year-end. As a result, the consolidated financial statements
for the six months ending June 30, 1995 include the six months ending
April 30, 1995 for PPSI.
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.
6
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MEDPARTNERS/MULLIKIN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
During 1996 the number of shares covered under the 1995 Stock Option
Plan (the Plan) was increased by 1,325,000 at a special meeting of
stockholders on February 22, 1996 and by 1,200,000 shares at the Annual Meeting
of Stockholders on April 25, 1996. As of April 25, 1996, a maximum of
7,099,150 shares of Common Stock was 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.
7
<PAGE> 8
MEDPARTNERS/MULLIKIN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ACQUISITIONS (CONTINUED)
Prior to its merger with the Company, PPSI reported on a fiscal year
ending on July 31. The restated financial statements for all periods prior to
and including December 31, 1995 are based on a combination of the Company's
results for its December 31 fiscal year and an October 31 fiscal year for PPSI.
Beginning January 1, 1996, PPSI adopted a December 31 fiscal year end;
accordingly, all consolidated financial statements for periods after December
31, 1995 are based on a consolidation of all of the Company's subsidiaries on a
December 31 year end. PPSI's historical results of operations for the two
months ending December 31, 1995 are not included in the Company's consolidated
statements of operations or cash flows. An adjustment has been made to
stockholders' equity as of January 1, 1996 to adjust for the effect of
excluding PPSI's results of operations for the two months ending December 31,
1995. The following is a summary of operations and cash flow for the two
months ending December 31, 1995 (in thousands):
<TABLE>
<S> <C>
Statement of Operations Data:
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,850
Operating expenses:
Cost of affiliated physician services . . . . . . . . . . . . . . . . . . 32,600
Clinic salaries, wages and benefits . . . . . . . . . . . . . . . . . . . 13,142
Outside referral 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 used by operating activities . . . . . . . . . . . . . . . . . $ (3,569)
Net cash provided by investing activities . . . . . . . . . . . . . . . 4,455
Net cash used in financing activities . . . . . . . . . . . . . . . . .
(81)
--------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . $ 805
========
</TABLE>
8
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MEDPARTNERS/MULLIKIN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ACQUISITIONS (CONTINUED)
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 (in
thousands):
<TABLE>
<S> <C>
Investment banking fees . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,625
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,616
Other transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . 1,099
Restructuring charges:
Abandonment of facilities . . . . . . . . . . . . . . . . . . . . . . 10,768
Severance costs for identified employees . . . . . . . . . . . . . . 5,865
Restructuring of benefits . . . . . . . . . . . . . . . . . . . . . . 2,392
Unamortized bond issue costs . . . . . . . . . . . . . . . . . . . . 1,922
Noncompatible technology . . . . . . . . . . . . . . . . . . . . . . 1,700
Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . 1,361
Other restructuring charges . . . . . . . . . . . . . . . . . . . . . 100
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,448
=======
</TABLE>
4. 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 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.
9
<PAGE> 10
MEDPARTNERS/MULLIKIN, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. SUBSEQUENT EVENTS
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 approximately 1,600 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. Caremark Stockholders will receive 1.21 shares of the
Company's Common Stock for each Caremark share. Based on this exchange ratio,
a total of approximately 94 million shares of the Company's Common Stock will
be given as consideration for the transaction. The transaction is expected to
be accounted for as a pooling of interests and is expected to close prior to
September 30, 1996.
In addition to the Caremark transaction, the Company has agreed to
acquire CHS Management, Inc., Cardinal Healthcare, the Summit Medical Group and
Emergency Professional Services. These four organizations will represent
approximately $200 million in revenue based on their current run rates. A
total of approximately 9.5 million shares of the Company's Common Stock will be
exchanged as consideration for these transactions.
10
<PAGE> 11
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of the results of operations and financial
condition of MedPartners/Mullikin, Inc. (MedPartners/Mullikin or the Company)
should be read in conjunction with the Consolidated Financial Statements of
MedPartners/Mullikin and notes thereto included elsewhere in this document.
GENERAL
MedPartners/Mullikin is the result of the business combination between
MedPartners, Inc. and Mullikin Medical Enterprises, which was consummated on
November 29, 1995. The financial information referred to in this discussion
reflects the combined operations of several entities. In February of 1996,
MedPartners/Mullikin merged with Pacific Physician Services, Inc. ("PPSI") in a
business combination that was accounted for as a pooling of interests. During
1995 PPSI combined with Team Health in a business combination accounted for as
a pooling of interests.
The Company 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. The Company believes the practice management
agreements convey to the Company perpetual and 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 corporation is necessary to present
fairly the financial position and results of operations of the Company.
Control by the Company is perpetual rather than temporary because of (i)
the length of the original term of the agreements, (ii) the continuing
investment of capital by the Company, (iii) the employment of the majority of
the non-physician personnel, and (iv) the nature of the services provided to
the professional corporations by the Company. The Company's financial
relationship with each practice offers the physicians access to capital,
management expertise, sophisticated information systems, and managed care
contracts. The Company's revenue is derived from medical services provided by
physicians under the practice management agreements, which has been assigned to
the Company. Approximately 50.0% of this revenue is derived through contracts
with HMO's. The Company contracts directly with the HMOs to provide medical
services to HMO enrollees who have chosen the Company's affiliated physicians,
or, in some cases, physicians who are members of the Mullikin Independent
Physician Association ("MIPA"). Through its wholly owned subsidiaries, the
Company also contracts with hospitals to provide medical staff for various
hospitals. The Company'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, the Company
endeavors to achieve an equal number of primary care physicians and specialists
in each network. Institutional capitation increases revenue without a material
impact on many of the clinic expenses.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth the breakdown of net revenue for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Prepaid health care . . . . . . . . . . . . . 53.5% 50.0% 53.4% 48.5%
Fee-for-service . . . . . . . . . . . . . . . 45.1 49.1 45.3 50.5
Other . . . . . . . . . . . . . . . . . . . . 1.4 0.9 1.3 1.0
----- ----- ----- -----
Net Revenue . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
ENROLLMENT
The Company'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). The Company 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:
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>
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
For the three months ended June 30, 1996, net revenue was $360
million, compared to $288 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 $36.2 and
$26.1 million of the increase in revenue, respectively. The remaining increase
is primarily related to existing clinic growth.
Operating expenses, at the clinic level were $316 million, or 87.7% of
net revenue for the quarter ended June 30, 1996 compared to $253 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 three months ended
June 30, 1995 to the three 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 referral expense increased
from $28 million for the three months ended June 30, 1995 to $48 million for
the three months ended June 30,
12
<PAGE> 13
1996, and also increased as a percentage of net revenue from 9.8% for the
three months ended June 30, 1995 to 13.3% for the three months ended June 30,
1996. This is directly related to the increase of the Company's global
capitation and the increase in IPA business. General corporate expenses
increased from $16 million during the second quarter of 1995 to $20 million
during the second quarter of 1996. As a percent of net revenue, general
corporate expenses decreased from 5.7% in the second quarter of 1995 to 5.6% in
the second quarter of 1996.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net revenue was $704 million for the six months ended June 30, 1996
compared to $547 million for the same period in 1995. The increase in net
revenue 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 revenue, respectively. The remaining increase is
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. Outside referral 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 the increase in IPA business. General corporate expenses
also increased during the first half of 1996 going from $32 million for the six
months ended June 30, 1995 to $40 million for the same period of 1996.
However, as a percent of net revenue, general corporate expenses decreased from
5.9% in the first half of 1995 to 5.6% in the first half of 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 $24.1 million
for restructuring of operations, $6.6 million in brokerage fees, $2.6 million
in professional fees, and $1.1 million in other transaction costs. The major
components of the restructuring of operations included $10.8 million in
abandonment of facilities, $5.9 million in severance costs, $2.4 million in
restructuring of benefits, $1.9 million in unamortized bond issue costs and
$1.4 million for the impairment of assets.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company 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 in cash paid for
merger costs, was $6.0 million compared to $13.2 million for the same period of
1995. On a monthly basis, the Company'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.
For the six months ended June 30, 1996, the Company 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 six months ended June 30, 1995, the Company's investing
activities totaled $59.9 million, which was primarily composed of $27.2 million
related to practice acquisitions, $15.6 million related to the purchase of
property and equipment and $12.1 million related to the purchase of marketable
securities. These expenditures were funded from equity proceeds.
13
<PAGE> 14
On March 13, 1996, the Company sold 6.6 million shares of Common Stock
at $30.25 per share. The Company 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 the Company's
convertible subordinated debentures.
Effective November 29, 1995, the Company entered into the $150 million
Bank Credit Facility replacing its then existing revolving credit facility.
Interest is paid quarterly based on the London Interbank Offered Rate (LIBOR)
plus a two percent margin. No principal is due on the facility until its
maturity date of May 10, 1998. The Company 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 the Company to maintain certain financial
ratios (including maintain 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. Additionally, the Company is required to obtain bank consent for
acquisitions with an aggregate purchase price in excess of $15 million. As of
June 30, 1996, the Company was in compliance with the covenants in the Bank
Credit Facility.
The Company 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. The Company believes that its
existing cash resources, the use of the Company's Common Stock for selected
practice and other acquisitions, and available borrowings under the Bank Credit
Facility and the increased Bank Credit Facility anticipated to be entered into
in connection with the consummation of the Caremark merger, will be sufficient
to meet the Company's anticipated acquisition, expansion and working capital
needs for the next twelve months. The Company 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 the Company on a long-term basis (i.e., for a period
in excess of 12 months).
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits filed as a part of the Quarterly Report are listed in
Item 6(c) of this Quarterly Report on Form 10-Q, which is hereby incorporated
herein by reference.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits required by Regulation S-K are set forth in the following
list.
(11) - Statement re: Computation of Per Share Earnings (Unaudited)
(27) - Financial Data Schedule (for SEC use only)
No other Items of Part II are applicable to the Company for the period
covered by this Quarterly Report on Form 10-Q.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MedPartners/Mullikin, Inc.
By: /s/ Harold O. Knight, Jr.
--------------------------------------------------------------------------
Harold O. Knight, Jr. Executive Vice President and Chief Financial Officer
Date: August 14, 1996
By: /s/ Larry R. House
--------------------------------------------------------------------------
Larry R. House Chairman, President and Chief Executive Officer
Date: August 14, 1996
15
<PAGE> 1
EXHIBIT 11 - (UNAUDITED)
MEDPARTNERS/MULLIKIN, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $10,024 $ 5,796 $(5,275) $10,731
======= ======= ======= =======
PRIMARY
Weighted average common shares outstanding 52,108 42,389 49,152 40,590
Net common shares issuable on exercise of certain
stock options (1) 728 1,167 882 1,277
------- ------- ------- -------
Average common and common equivalent shares
outstanding 52,836 43,556 50,034 41,867
======= ======= ======= =======
Per share amounts $ 0.19 $ 0.13 $ (0.11) $ 0.26
======= ======= ======= =======
FULLY DILUTED
Weighted average common shares outstanding 52,108 42,389 49,152 40,590
Net common shares issuable on exercise of certain
stock options (1) 728 1,167 882 1,300
------- ------- ------- -------
Average common and common equivalent shares
outstanding 52,836 43,556 50,034 41,890
======= ======= ======= =======
Per share amounts $ 0.19 $ 0.13 $ (0.11) $ 0.26
======= ======= ======= =======
</TABLE>
(1) Net common shares issuable on exercise of certain stock options is
calculated based on the treasury stock method using the average market
price for the primary calculation and the ending market price, if
higher than average, for the fully diluted calculation.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 56,221
<SECURITIES> 0
<RECEIVABLES> 165,105
<ALLOWANCES> 0
<INVENTORY> 11,087
<CURRENT-ASSETS> 260,391
<PP&E> 167,502
<DEPRECIATION> 0
<TOTAL-ASSETS> 618,184
<CURRENT-LIABILITIES> 159,353
<BONDS> 35,080
0
0
<COMMON> 52
<OTHER-SE> 414,559
<TOTAL-LIABILITY-AND-EQUITY> 618,184
<SALES> 0
<TOTAL-REVENUES> 703,683
<CGS> 0
<TOTAL-COSTS> 615,317
<OTHER-EXPENSES> 90,470
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,811
<INCOME-PRETAX> (4,915)
<INCOME-TAX> 360
<INCOME-CONTINUING> (5,275)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,275)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
