<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 MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------- --------
COMMISSION FILE NUMBER: 0-27276
MEDPARTNERS, INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-1151076
(State or Other Jurisdiction 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 9, 1997
------------ --------------------------
COMMON STOCK, PAR VALUE 171,518,190*
$.001 PER SHARE
* Includes 9,317,000 shares held in trust to be utilized in employee benefit
plans.
1
<PAGE> 2
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS. Statements in this document that are not
historical facts are hereby identified as "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act") and section 27A of the Securities Act of 1933
( the "Securities Act"). MedPartners, Inc. (the "Company") cautions readers
that such "forward looking statements", including without limitation, those
relating to the Company's future business prospects, revenue, working capital,
liquidity, capital needs, interest costs and income, wherever they occur in
this document or in other statements attributable to the Company are
necessarily estimates reflecting the best judgment of the Company's senior
management and involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the "forward
looking statements". Such "forward looking statements" should therefore, be
considered in light of various important factors, including those set forth
below and others set forth from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission (the
"SEC").
These "forward looking statements" are found at various places throughout
this document. Additionally, the discussion herein under the captions "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" are susceptible to the risks and uncertainties
discussed below. Moreover, the Company, through its senior management, may
from time to time make "forward looking statements" about matters described
herein or other matters concerning the Company.
The Company disclaims any intent or obligation to update "forward looking
statements".
FACTORS THAT MAY AFFECT FUTURE RESULTS. The healthcare industry in
general and the physician practice management business in particular are in a
state of significant flux. This, together with the circumstance that the
Company has a relatively short operating history and is the largest physician
practice management ("PPM") consolidator in the United States, makes the
Company particularly susceptible to various factors that may affect future
results such as the following:
risks relating to the Company's growth strategy; risks relating to
integration in connection with acquisitions; risks relating to capital
requirements; identification of growth opportunities; dependence on HMO
enrollee growth; risks related to the capitated nature of revenue; control of
healthcare costs; risks relating to certain legal matters; risks relating to
exposure to professional liability; risks relating to government regulation;
risks relating to pharmacy licensing operations; risks relating to healthcare
reform and proposed legislation; and possible volatility of stock price.
For a more detailed discussion of these factors and their potential impact
on future results, see the applicable discussions herein.
2
<PAGE> 3
MEDPARTNERS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1996 (Audited) and March 31, 1997 (Unaudited)............................... 4
Consolidated Statements of Operations (Unaudited)-
Three Months Ended March 31, 1996 and 1997............................................... 5
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1996 and 1997............................................... 6
Notes to Consolidated Financial Statements (Unaudited)................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................................. 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 16
Item 2. Changes in Securities............................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................................. 16
</TABLE>
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MEDPARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 123,779 $ 141,578
Accounts receivable, less allowances for bad debts of $120,350 and $124,925......... 563,519 610,675
Inventories......................................................................... 150,156 131,403
Income tax receivable............................................................... 2,496 1,223
Deferred tax assets, net........................................................... 52,479 34,030
Prepaid expenses and other current assets........................................... 54,689 77,556
---------- ----------
Total current assets............................................................. 947,118 996,465
Property and equipment, net........................................................... 505,060 507,878
Intangible assets, net................................................................ 659,202 681,720
Deferred tax asset.................................................................... 18,333 10,243
Other assets.......................................................................... 136,256 170,299
---------- ----------
Total assets..................................................................... $2,265,969 $2,366,605
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 280,060 $ 305,974
Accrued medical claims payable...................................................... 93,043 95,817
Other accrued expenses and liabilities.............................................. 375,618 334,119
Current portion of long-term liabilities............................................ 28,084 24,224
---------- ----------
Total current liabilities........................................................ 776,805 760,134
Long-term debt, net of current portion................................................ 715,657 763,893
Other long-term liabilities........................................................... 34,010 33,504
Stockholders' equity:
Common stock, $.001 par value; 400,000 shares authorized; issued -- 165,281 in 1996
and 171,537 in 1997............................................................... 165 172
Additional paid-in capital.......................................................... 788,636 822,472
Notes receivable from stockholders.................................................. (1,665) (1,590)
Shares held in trust, 9,317 shares in 1996 and 1997................................. (150,200) (150,200)
Retained earnings................................................................... 102,561 138,220
---------- ----------
Total stockholders' equity....................................................... 739,497 809,074
---------- ----------
Total liabilities and stockholders' equity....................................... $2,265,969 $2,366,605
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1996 1997
----------- ----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net revenue..................................................... $1,149,812 $1,332,271
Operating expenses:
Clinic expenses............................................... 563,224 640,623
Non-clinic goods and services................................. 477,264 555,818
General and administrative expenses........................... 39,439 35,399
Depreciation and amortization................................. 19,592 25,334
Net interest expense.......................................... 6,741 9,686
Merger expenses............................................... 34,448 -
Other, net.................................................... (144) -
---------- ----------
Income from continuing operations before income taxes........... 9,248 65,411
Income tax expense.............................................. 6,496 24,925
---------- ----------
Income from continuing operations............................... 2,752 40,486
Discontinued operations:
Loss from discontinued operations............................. (71,221) -
Net gains on sales of discontinued operations................. 2,523 -
---------- ----------
Loss from discontinued operations............................... (68,698) -
---------- ----------
Net income (loss)............................................... $ (65,946) $ 40,486
========== ==========
Earnings per common and common equivalent share:
Income from continuing operations............................. $ 0.02 $ 0.25
Operating loss from discontinued operations................... (0.46) -
---------- ----------
Net income (loss)............................................. $ (0.44) $ 0.25
========== ==========
Weighted average common and common equivalent shares outstanding 150,422 164,841
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
MEDPARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income from continuing operations................................................. $ 2,752 $ 40,486
Adjustments to reconcile net income from continuing operations to net cash and cash
equivalents provided by operating activities:
Depreciation and amortization....................................................... 19,592 25,334
Provision for deferred taxes........................................................ 2,577 23,451
Merger expenses..................................................................... 34,448 -
Other............................................................................... - 612
Changes in operating assets and liabilities, net of effects of acquisitions......... (24,641) (44,630)
-------- --------
Net cash and cash equivalents provided by operating activities.................... 34,728 45,253
Investing activities:
Cash paid for merger charges........................................................ (17,754) (25,887)
Net cash used to fund acquisitions.................................................. (76,012) (43,144)
Purchase of property and equipment.................................................. (30,758) (16,769)
Additions to intangibles, net of acquisitions........................................ (1,464) (5,256)
Net proceeds from marketable securities............................................. 27,482 -
Other............................................................................... 5 (1,335)
-------- --------
Net cash and cash equivalents used in investing activities........................ (98,501) (92,391)
Financing activities:
Common stock issued and capital contributions....................................... 224,114 24,464
Proceeds from debt.................................................................. 18,786 120,805
Repayment of debt................................................................... (96,241) (79,445)
Other............................................................................... 64 75
-------- --------
Net cash and cash equivalents provided by financing activities.................... 146,723 65,899
Cash provided by (used in) discontinued operations.................................... 44,300 (1,453)
-------- --------
Net increase in cash and cash equivalents............................................. 127,250 17,308
Cash and cash equivalents at beginning of period...................................... 87,081 123,779
Beginning cash and cash equivalents of immaterial pooling of interests entities....... 3,295 491
-------- --------
Cash and cash equivalents at end of period............................................ $217,626 $141,578
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
MEDPARTNERS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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.
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, 1996 audited consolidated financials statements and the notes
thereto.
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.
NOTE 2. ACQUISITIONS
During the three months ended March 31, 1997, the Company, through its
wholly-owned subsidiaries, acquired certain operating assets of various medical
practices. Simultaneously with each medical practice acquisition, the Company
entered into a practice management agreement which generally has a 20 to 40 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. 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 $50.1 million. A
total of $43.1 million in cash and 329,070 shares of stock valued at
approximately $7.0 million were given in exchange for these assets during the
three months ended March 31, 1997.
NOTE 3. DISCONTINUED OPERATIONS
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 $2.5 million. In March 1996, Caremark
agreed to settle all disputes with a number of private payors. The settlements
resulted in an after-tax charge of $43.8 million. These disputes related to
businesses that were covered by Caremark's settlement with federal and state
agencies in June 1995. In addition, Caremark agreed to pay $24.1 million
after-tax to cover the private payors' pre-settlement and settlement related
expenses. An after-tax charge for the above amounts is included in first
quarter 1996 discontinued operations. The Company's consolidated financial
statements present the operating income and net assets of these discontinued
operations separately from continuing operations.
7
<PAGE> 8
MEDPARTNERS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4. SUBSEQUENT EVENTS
On January 20, 1997, the Company agreed to merge with InPhyNet Medical
Management Inc. ("InPhyNet"), a provider of hospital based physician services
headquartered in the Ft. Lauderdale area. In 1996, InPhyNet provided physician
practice management services at 188 service sites in 26 states with
hospital-based services and capitated networks. The consideration for this
transaction is based on a fixed exchange ratio of 1.311 shares of MedPartners
common stock for each share of InPhyNet common stock. Based on this ratio,
approximately 22 million shares of the Company's common stock will be issued in
exchange for all outstanding shares of InPhyNet's common stock. The
transaction is expected to be accounted for as a pooling of interests and is
expected to close during the second quarter of 1997.
On May 2, 1997, the Company completed a transaction in which it
acquired Aetna Professional Management Corporation ("APMC"), Aetna U.S.
Healthcare's physician practice management business, and most of the Health
Ways Family Medical Centers and affiliated group practices. The Company's
acquisition of Health Ways Family Medical Centers includes 47 Health Ways and
affiliated medical centers which employ 189 physicians; and the six independent
practice associations ("IPAS") which represent nearly 800 physicians to which
APMC provides practice management and other services. Health Ways and the
affiliated centers are located in seven metropolitan markets where the Company
already has a presence, including Atlanta, the Baltimore/D.C. and northern
Virginia area, Philadelphia, Dallas, Akron, Chicago, and southern California.
Health Ways and the affiliated centers provide primary and specialty care to
approximately 280,000 individuals, including 40,000 Aetna U.S. Healthcare
members. As part of the APMC acquisition, the Company will enter into a
10-year agreement which will allow the members of the Company's networks of
affiliated physicians to be authorized providers for many of the 14 million
members of Aetna U.S. Healthcare's health plan.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of the following discussion is to facilitate the
understanding and assessment of significant changes and trends related to the
results of operations and financial condition of the Company, including changes
arising from recent acquisitions by the Company, the timing and nature of which
have significantly affected the Company's results of operations. This
discussion should be read in conjunction with the consolidated financial
statements and the notes thereto included elsewhere in this document. Unless
the context otherwise requires, as used herein, the term "MedPartners" or the
"Company" refers collectively to MedPartners, Inc. and its predecessor, also
named MedPartners, Inc. and their respective subsidiaries and affiliates.
GENERAL
MedPartners is the largest physician practice management ("PPM")
company in the United States. The Company develops, consolidates and manages
integrated healthcare delivery systems. Through its network of affiliated
group and IPA physicians, the Company provides primary and specialty healthcare
services to prepaid managed care enrollees and fee-for-service patients. The
Company also operates one of the largest independent prescription benefit
management ("PBM") programs in the United States and provides disease
management services and therapies for patients with certain chronic conditions.
The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcome measurement.
The Company provides affiliated physicians with access to capital and advanced
management information systems. MedPartners' PPM revenue is derived primarily
from the contracts with HMOs that compensate MedPartners and its affiliated
physicians on a prepaid basis. In the prepaid arrangements, MedPartners
typically is paid by the HMO a fixed amount per member ("enrollee") per month
("professional capitation") or a percentage of the premium per member per month
("percent of premium") paid by employer groups and other purchasers of
healthcare coverage to the HMOs. In return, MedPartners is responsible for
substantially all of the medical services required by enrollees. In many
instances, MedPartners and its affiliated physicians accept financial
responsibility for hospital and ancillary healthcare services in return for
payment from HMOs on a capitated or percent of premium basis ("institutional
capitation"). In exchange for these payments (collectively, "global
capitation"), MedPartners, through its affiliated physicians, provides the
majority of covered healthcare services to enrollees and contracts with
hospitals and other healthcare providers for the balance of the covered
services. These relationships provide physicians with the opportunity to
operate under a variety of payor arrangements and increase their patient flow.
The Company offers medical group practices and independent physicians
a range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through
equity exchange, or by affiliation on a contractual basis. In all instances,
the Company enters into long-term practice management agreements with the
affiliated physicians that provide for the management of their practices by the
Company while at the same time providing for the clinical independence of the
physicians.
The Company also organizes and manages physicians and other healthcare
professionals engaged in the delivery of emergency, radiology and teleradiology
services, hospital-based primary care and temporary staffing and support
services to hospitals, clinics, managed care organizations and physician
groups. Under contracts with hospitals and other clients, the Company
identifies and recruits physicians and other healthcare professionals for
admission to a client's medical staff, monitors the quality of care and proper
utilization of services and coordinates the ongoing scheduling of staff
physicians who provide clinical coverage in designated areas of care.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
The Company also manages outpatient prescription drug benefit
programs for clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses prescriptions daily through four mail
service pharmacies and manages patients' immediate prescription needs through
a network of national retail pharmacies. The Company is in the process of
integrating its PBM program with the PPM business by providing PBM services to
the affiliated physicians, clinics and HMOs. The Company's disease management
services are intended to meet the healthcare needs of individuals with chronic
diseases or conditions. These services include the design, development and
management of comprehensive programs that comprise drug therapies, physician
support and patient education. The Company currently provides therapies and
services for individuals with such conditions as hemophilia, growth disorders,
immune deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
RESULTS OF OPERATIONS
Through the Company's network of affiliated group and IPA physicians,
MedPartners provides primary and specialty healthcare services to prepaid
managed care enrollees and fee-for-service patients. The Company also fills in
excess of 50 million prescriptions on an annual basis and provides services and
therapies to patients with certain chronic conditions, primarily hemophilia and
growth disorders. The following table sets forth the earnings summary by
service area for the periods indicated (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1997
-------- --------
<S> <C> <C>
Physician Services
Net revenue $614,054 $715,100
Operating income 26,329 46,790
Margin 4.3% 6.5%
Pharmaceutical Services
Net revenue $422,691 $500,839
Operating income 16,465 19,297
Margin 3.9% 3.9%
Specialty Services
Net revenue $113,067 $116,332
Operating income 13,937 13,235
Margin 12.3% 11.4%
Corporate Services
Operating (loss) $ (6,438) $ (4,225)
Percentage of total net revenue (0.6%) (0.3%)
</TABLE>
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -(CONTINUED)
Physician Practice Management Services
The Company's PPM revenue has increased primarily due to growth in
prepaid enrollment, existing practice growth and new practice affiliations. The
Company's PPM operations in the western region of the country function in a
predominantly prepaid environment. The Company's PPM operations in the other
regions of the country are in predominantly fee-for-service environments with
limited but increasing managed care penetration. The following table sets forth
the breakdown of net revenue for the PPM services area for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Prepaid health care....... $333,096 $373,370
Fee-for-service........... 276,049 337,939
Other..................... 4,909 3,791
-------- --------
Net Revenue............... $614,054 $715,100
======== ========
</TABLE>
The Company's prepaid healthcare revenue reflects the number of HMO
enrollees for whom it receives monthly capitation payments. The Company
receives professional capitation to provide physician services and
institutional capitation to provide hospital care and other non-professional
services. The table below sets forth the changes in enrollment for
professional and institutional capitation:
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Professional enrollees 915,272 1,027,230
Global enrollees 605,042 659,752
--------- ---------
Total enrollees 1,520,314 1,686,982
========= =========
</TABLE>
The Company has consolidated the majority of its acquisitions into its
management infrastructure, eliminating substantial overhead expenses and
improving integration of medical, administrative, and operation management.
The integration of various acquisitions into existing networks has allowed the
conversion of thousands of prepaid enrollees from professional capitation to
global capitation. This integration has been a significant factor in
increasing operating margins in the PPM service area from 4.3% in the first
quarter of 1996 to 6.5% in the first quarter of 1997.
The Company has developed strong relationships with many of the
national and regional managed care organizations and has demonstrated its
ability to deliver high-quality, cost-effective care. The Company is
strategically positioned to capitalize on the industry's continued evolution
toward a prepaid environment, specifically by increasing the number of prepaid
enrollees and converting existing enrollees from professional to global
capitation. These changes are expected to result in significant internal
growth. During the first quarter of 1997, for example, the Company converted
approximately 56,000 lives from professional to global capitation. An
additional 180,000 lives are expected to be converted in the second quarter,
exclusive of lives from the Company's alliance with Aetna U.S. Healthcare.
The Company has continued to acquire high-quality groups of emergency
physicians and radiologists who believe in the value of providing increasingly
cost-effective care. The reputation and strong local presence of new and
existing hospital-based groups provide a substantial advantage in the
competition for contracts with emergency room and radiology departments. The
excellent reputation and leadership of these groups continue to provide
opportunities for new contracts.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -(CONTINUED)
In addition to the increased revenue and operational efficiencies
realized through acquisition and consolidation, the Company is profiting from
synergies produced by the exchange of ideas among physicians and managers
across geographical boundaries and varied areas of specialization. The PPM
service area, for example, has established medical management committees that
meet monthly to discuss implementation of the best medical management
techniques to assist the Company's affiliated physicians in delivering the
highest quality of care at lower costs in a consistent fashion. The Company is
capitalizing on the knowledge of its western groups, which have significant
experience operating in a prepaid environment, to transfer the best practices
to other groups in markets with increasing managed care penetration. Through
interaction between physicians and managers from various medical groups,
significant cost savings continue to be identified at several of the Company's
larger affiliated groups.
The PPM service area has also created a medical advisory committee,
which is developing procedures for the identification, packaging and
dissemination of the best clinical practices within the Company's medical
groups. The committee also provides the Company's affiliated physicians a forum
to discuss innovative ways to improve the delivery of healthcare.
The Company has also initiated integration efforts between the PPM,
PBM and disease management areas. A project is in process to integrate patient
care data from several of the Company's affiliated clinics with the PBM's
healthcare information system. Through this database, which combines medical
and claims data with the prescription information tracked by the PBM area, the
Company will have access to the industry's most complete and detailed
collection of information on successful treatment patterns. Another synergy
arising from integration is the opportunity which the existing PBM
infrastructure affords to affiliated physician groups to further expand
services by providing pharmacy services ranging from fee-for-service retail
claims processing to full drug capitation programs. The Company is also
beginning to integrate the disease management area's expertise in an effort to
formulate and implement disease management programs for the Company.
Pharmacy Benefit Management Services
Pharmaceutical Services revenue continues to exhibit sustained growth
reflecting increases in both mail and retail related services. First quarter
1997 revenue is 18.5% above first quarter 1996. This growth is due to
increased pharmacy transaction volume (8.0%), drug cost inflation, product mix
and pricing (9.9%), and growth of clinical and other programs (0.6%). Key
factors contributing to this growth include high customer retention, additional
penetration of retained customers, and new customer contracts. Pharmaceutical
Services' largest single client contract, with the National Association of
Letter Carriers, became effective January 1, 1997. The majority of
Pharmaceutical Services revenue is earned on a fee-for-service basis through
contracts covering one to three-year periods. Revenue for selected types of
services is earned based on a percentage of savings achieved or on a
per-enrollee or per-member basis; however, this revenue is not material to
total revenue.
Operating income experienced growth of 17.2% in the first quarter of
1997 over the first quarter 1996. Operating margins remained flat as compared
to the first quarter of 1996. Lower margin retail service revenue continues to
grow at a faster rate than mail related revenue. However, reductions in
operating expenses have offset any impact on operating margins and have
contributed to the overall growth in operating income.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -(CONTINUED)
Specialty Services
Specialty Services concentrates on providing high quality products and
services in the home. Domestically, these services focus on low incidence
chronic diseases. Internationally, the Company has established home care
businesses in Canada, Germany, the Netherlands, the United Kingdom, and Japan,
where it is expanding into new services in response to transforming healthcare
delivery systems in these countries. Margins for specialty services have
declined slightly as a result of managed care pricing pressures, restructuring
of benefit plans by payors and reduced reimbursement from Medicaid and other
state agency payors. For the hemophilia business, federal government programs
providing special pricing to qualified organizations who may be competitors
have impacted margins negatively. In addition to pricing pressures,
particularly in growth deficiency therapy, operating expenses and cost of
service expenses rose due to programs targeted at launching the Company's new
MS therapy service, an expanded payor marketing initiative and an initiative
targeted at attaining accreditation by the Joint Committee on Accreditation of
Healthcare Organizations for the nationwide system of pharmacies. To offset
these declines, the Company launched new products and services including the
opening of a PBM in the Netherlands and a multiple sclerosis ("MS") therapy
service in the U.S.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 AND 1996
For the three months ended March 31, 1997, net revenue was $1,332.3
million, compared to $1,149.8 million for the same period in 1996, an increase
of 15.9%. The increase in net revenue primarily resulted from affiliations
with new physician practices and the increase in pharmaceutical services net
revenue, which accounted for $26.9 million and $78.1 million of the increase in
net revenue, respectively. The increase in pharmaceutical services net revenue
is attributable to pharmaceutical price increases, the addition of new
customers, further penetration of existing customers and the sale of new
products.
Operating income grew 77.7% and 17.2% in the first quarter of 1997,
as compared to the same period of 1996, for the physician services and
pharmaceutical services areas, respectively. The increase in the physician
services area is the result of higher net revenue and increases in operating
margins resulting from the spreading of fixed overhead expenses over a larger
revenue base and continued integration of operations. The pharmaceutical
services area's increase in operating income was primarily due to reductions in
operating expenses and higher net revenue. Operating income and margins
declined in the corresponding periods for the specialty services area as a
result of lower volumes in the hemophilia business and continued pricing
pressures for its growth hormone products.
Net income for the first quarter of 1997 was $40.5 million, as
compared to a loss of $(65.9) million for the same period of 1996. Net loss
for the first quarter of 1996 included merger charges totaling $34.4
million relating to the business combination with PPSI and a loss from
discontinued operations of $68.7 million discussed below.
DISCONTINUED OPERATIONS
During the first quarter of 1996, Caremark divested its Nephrology
Services business in addition to settling disputes with private payors, both
discussed in Note 3 of the accompanying unaudited consolidated financial
statements. 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.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -(CONTINUED)
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future operating results and financial condition of the Company
are dependent on the Company's ability to market its services profitably,
successfully increase market share and manage expense growth relative to
revenue growth. The future operating results and financial condition of the
Company may be affected by a number of additional factors, including: the
Company's growth strategy, which involves the ability to raise the capital
required to support growth, competition for expansion opportunities,
integration risks and dependence on HMO enrollee growth; efforts to control
healthcare costs; exposure to professional liability; and pharmacy licensing,
healthcare reform and government regulation. Changes in one or more of these
factors could have a material adverse effect on the future operating results
and financial condition of the Company.
The Company completed the Caremark acquisition in September 1996.
There are various Caremark legal matters which, if materially adversely
determined, could have a material adverse effect on the Company's operating
results and financial condition. See Part II, Item 1 of this Quarterly report
on Form 10-Q for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had working capital of $236.3
million, including cash and cash equivalents of $141.6 million. For the first
three months of 1997, cash flow from operations was $45.3 million compared to
$34.7 million for the same period of 1996.
For the three months ended March 31, 1997 and 1996, the Company
invested $43.1 million and $76.0 million, respectively, in acquisitions of the
assets of physician practices, and $16.8 million and $30.8 million,
respectively, in property and equipment. During the three months ended March
31, 1997 and 1996, the Company paid $25.9 and $17.8 million, respectively, in
cash for merger costs. These expenditures were funded by approximately $24.5
million derived primarily from stock option exercises and net incremental
borrowings of $41.4 million for the three months ending March 31, 1997 and
$224.1 million derived from a secondary stock offering for the same period of
1996. Investments in acquisitions and property and equipment are anticipated
to continue to be substantial uses of funds in future periods.
The Company entered into a $1 billion Revolving Credit and
Reimbursement Agreement, which became effective simultaneously with the closing
of the Caremark acquisition on September 5, 1996, replacing its then existing
credit facility. No principal is due on the facility until its maturity date
of September 2001. As of March 31, 1997, there was $266 million outstanding
under the facility.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -(CONTINUED)
The Company's growth strategy requires substantial capital for the
acquisition of PPM businesses and assets of physician practices, and for their
effective integration, operation, and expansion. Affiliated physician
practices may also require capital for renovation, expansion, and additional
medical equipment and technology. The Company believes that its existing cash
resources, the use of the Company's common stock for selected practice and
other acquisitions, and available borrowings under the $1.0 billion credit
facility or any successor credit facility, will be sufficient to meet the
Company's anticipated acquisition, expansion, and working capital needs for the
next twelve months. The Company expects from time to time to raise additional
capital through the issuance of long-term or short-term indebtedness or the
issuance of additional equity securities in private or public transactions, at
such times as management deems appropriate and the market allows in order to
meet the capital needs of the Company. There can be no assurance that
acceptable financing for future acquisitions or for the integration and
expansion of existing networks can be obtained. Any of such financings could
result in increased interest and amortization expense, decreased income to fund
future expansion and dilution of existing equity positions.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 3 in the Annual Report on Form 10-K/A, as filed with the
Commission on May 15, 1997, which is hereby incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES.
See Item 5 in the Annual Report on Form 10-K/A, as filed with the
Commission on May 15, 1997, which is hereby incorporated herein by reference.
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) - Statements 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.
16
<PAGE> 17
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, Inc.
By: /s/ Harold O. Knight, Jr.
--------------------------------------------------------------------------
Harold O. Knight, Jr. Executive Vice President and Chief Financial Officer
Date: May 15, 1997
By: /s/ Larry R. House
---------------------------------------------------------------------------
Larry R. House Chairman, President and Chief Executive Officer
Date: May 15, 1997
17
<PAGE> 1
EXHIBIT 11 - (UNAUDITED)
MEDPARTNERS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1997
--------- --------
<S> <C> <C>
Earnings:
Income from Continuing operations $ 2,752 $40,486
Discontinued operations:
Loss from discontinued operations (71,221) -
Net gains on sales of discontinued operations 2,523 -
------- -------
Loss from discontinued operations (68,698) -
-------- -------
Net income (loss) $(65,946) $40,486
======== =======
PRIMARY
Weighted average common shares outstanding 145,363 161,725
Net common shares issuable on exercise of certain
stock options (1) 5,059 3,116
-------- -------
Average common and common equivalent shares
outstanding 150,422 164,841
Per share amounts:
Income from continuing operations $ 0.02 $ 0.25
Loss from discontinued operations (0.46) -
-------- -------
Net income (loss) $ (0.44) $ 0.25
======== =======
FULLY DILUTED
Weighted average common shares outstanding 145,363 161,725
Net common shares issuable on exercise of certain
stock options (1) 5,422 3,116
-------- -------
Average common and common equivalent shares
outstanding 150,785 164,841
======== =======
Per share amounts:
Income from continuing operations $ 0.02 $ 0.25
Loss from discontinued operations (0.46) -
-------- -------
Net income (loss) $ (0.44) $ 0.25
======== =======
</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.
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 141,578
<SECURITIES> 0
<RECEIVABLES> 610,675
<ALLOWANCES> 124,925
<INVENTORY> 131,403
<CURRENT-ASSETS> 996,465
<PP&E> 507,878
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,366,605
<CURRENT-LIABILITIES> 760,134
<BONDS> 763,893
0
0
<COMMON> 172
<OTHER-SE> 808,902
<TOTAL-LIABILITY-AND-EQUITY> 2,366,605
<SALES> 0
<TOTAL-REVENUES> 1,332,271
<CGS> 0
<TOTAL-COSTS> 1,257,174
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,686
<INCOME-PRETAX> 65,411
<INCOME-TAX> 24,925
<INCOME-CONTINUING> 40,486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,486
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
