<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1997
REGISTRATION NO. 333-30921
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MEDPARTNERS, 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>
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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)
J. BROOKE JOHNSTON, JR., ESQ.
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
MEDPARTNERS, 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>
<C> <C>
FREDERICK W. KANNER, ESQ. ROBERT E. LEE GARNER, ESQ.
DEWEY BALLANTINE F. HAMPTON MCFADDEN, JR., ESQ.
1301 AVENUE OF THE AMERICAS HASKELL SLAUGHTER & YOUNG, L.L.C.
NEW YORK, NEW YORK 10019-6092 1200 AMSOUTH/HARBERT PLAZA
(212) 259-7300 1901 SIXTH AVENUE NORTH
BIRMINGHAM, ALABAMA 35203
(205) 251-1000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock Purchase Units(2)..........................
- ------------------------------------------------------------------------------------------------------------------------------
Stock Purchase Contracts(3)......................
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per share
(including the Common Stock Purchase
Rights)(4).....................................
- ------------------------------------------------------------------------------------------------------------------------------
Total............................................ 100% $406,884,375 $123,299(6)
==============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) There are being registered hereunder Stock Purchase Units having an
aggregate initial offering price of $406,884,375 (including Stock Purchase
Units subject to the underwriters' over-allotment option), representing
ownership of Stock Purchase Contracts and U.S. Treasury Securities.
(3) There are being registered hereunder that number of Stock Purchase
Contracts, representing rights to purchase Common Stock, forming a part of
the Stock Purchase Units.
(4) There are being registered hereunder such number of shares of Common Stock
as may be sold by the Registrant pursuant to the Stock Purchase Contracts.
(5) In no event will the aggregate initial offering price of all securities
issued from time to time pursuant to this Registration Statement exceed
$406,884,375.
(6) Of this amount, $121,970 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.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 26, 1997
PROSPECTUS
17,000,000 SECURITIES
LOGO
% TAP (SM)
(THRESHOLD APPRECIATION PRICE SECURITIESSM)
------------------
The securities offered hereby are 17,000,000 % TAPS(SM) (Threshold
Appreciation Price Securities(SM)) (the "Securities") of MedPartners, Inc.
("MedPartners" or the "Company"). Each Security has a Stated Amount of $ .
Payments of % of the Stated Amount per annum will be made on each Security
on and of each year, commencing , 1998 until
the Final Settlement Date of , 2000. These payments will consist of
interest on Treasury Notes payable by the United States Government at the rate
of % per annum and unsecured, subordinated yield enhancement payments
("Yield Enhancement Payments") payable by the Company at the rate of % per
annum. On the Final Settlement Date, the Stated Amount will automatically be
applied to the purchase of between of a share and one share of Common
Stock of the Company (depending on the Applicable Market Value of the Common
Stock on the Final Settlement Date, as described herein), subject to adjustment
under certain circumstances. The last reported per share sale price of the
Common Stock on the New York Stock Exchange ("NYSE") on , 1997 was
equal to the Stated Amount. See "Price Range of Common Stock".
(continued on next page)
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION RELEVANT TO
AN INVESTMENT IN THE SECURITIES, INCLUDING THE PERIOD AND CIRCUMSTANCES DURING
AND UNDER WHICH PAYMENTS OF DISTRIBUTIONS ON THE SECURITIES MAY BE DEFERRED AND
THE RELATED UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR 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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS PURCHASE PRICE OF PROCEEDS (DEFICIT) TO
PUBLIC AND COMMISSIONS(1) TREASURY NOTES COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Security $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
==============================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting".
(2) Before deducting expenses payable by the Company estimated at $ .
Does not include proceeds per Security and total proceeds of $ and
$ , respectively ($ and $ , respectively, if the
Underwriters' over-allotment option is exercised in full), receivable by the
Company upon settlement of Purchase Contracts.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 2,550,000 Securities to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds (Deficit) to Company will be
$ , $ and $ , respectively. See "Underwriting".
------------------
The Securities are offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that delivery of the Securities offered hereby will
be made at the offices of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001 on or about , 1997.
------------------
SMITH BARNEY INC. CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY DEAN WITTER
PIPER JAFFRAY INC.
, 1997
(SM)Service Mark of Smith Barney Inc.
<PAGE> 3
(continued from previous page)
Each Security will consist of (a) a stock purchase contract ("Purchase
Contract") under which (i) the holder will purchase from the Company on the
Final Settlement Date, for an amount in cash equal to the Stated Amount, a
number of shares of Common Stock equal to the Settlement Rate described herein
and (ii) the Company will pay the holder the Yield Enhancement Payments
described herein, and (b) % United States Treasury Notes having a principal
amount equal to the Stated Amount and maturing on the Final Settlement Date. The
Treasury Notes will be pledged to the Collateral Agent to secure the holder's
obligation to purchase Common Stock under the Purchase Contract. Unless a holder
of Securities settles the underlying Purchase Contracts either through the early
delivery of cash to the Purchase Contract Agent in the manner described herein
or otherwise, or upon certain termination events, as described herein, principal
of the Treasury Notes underlying such Securities, when paid at maturity, will
automatically be applied to satisfy in full the holder's obligation to purchase
Common Stock under the Purchase Contracts. For so long as a Purchase Contract
remains in effect, such Purchase Contract and the Treasury Notes securing it
will not be separable and may be transferred only as an integrated Security. See
"Description of the Securities".
Prior to the offering made hereby, there has been no public market for the
Securities. Application will be made to have the Securities approved for listing
on the NYSE under the symbol " ", subject to official notice of
issuance. On August 25, 1997, the last reported sale price of the Common Stock
on the NYSE was $20.81 per share.
The Securities will be represented by global certificates registered in the
name of The Depository Trust Company ("DTC") or its nominee. Beneficial
interests in the Securities will be shown on, and transfers thereof will be
effected only through, records maintained by participants in DTC. Except as
described herein, Securities in certificated form will not be issued in exchange
for global certificates. See "Description of the Purchase
Contracts -- Book-Entry System".
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus
and in the documents incorporated herein by reference. Except as otherwise
noted, all information in this Prospectus assumes that the over-allotment option
granted to the Underwriters will not be exercised. Unless the context otherwise
requires, references in this Prospectus to "MedPartners" or the "Company"
include the Company and its subsidiaries and affiliates.
THE COMPANY
MedPartners is the largest physician practice management ("PPM") company in
the United States, based on revenues. The Company develops, consolidates and
manages comprehensive integrated healthcare delivery systems, consisting of
primary care and specialty physicians, as well as the nation's largest group of
physicians engaged in the delivery of emergency medicine and other
hospital-based services. MedPartners provides services to prepaid managed care
enrollees and fee-for-service patients in 37 states through its network of
13,128 affiliated physicians. As an integral part of its PPM business,
MedPartners operates one of the nation's largest independent pharmacy benefit
management ("PBM") programs and provides disease management services and
therapies for patients with certain chronic conditions. See
"Business -- General".
The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and advanced
management information systems. In addition, the Company contracts with health
maintenance organizations and other third-party payors that compensate the
Company and its affiliated physicians on a prepaid basis (collectively, "HMOs"),
as well as hospitals and outside providers on behalf of its affiliated
physicians. These relationships provide physicians with the opportunity to
operate under a variety of payor arrangements and increase their patient flow.
MedPartners also operates the largest hospital-based physician ("HBP") group in
the country with over 2,200 physicians providing emergency medicine, radiology,
anesthesiology, primary care and other hospital-based physician services. In
addition, the Company provides comprehensive medical care for inmates at various
correctional institutions and for military personnel and their dependents at
facilities owned by the Department of Defense. See "Business -- Operations".
The Company 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 over 43,000 prescriptions daily through four mail service
pharmacies and manages patients' immediate prescription needs through a network
of retail pharmacies. The Company is in the process of integrating its PBM
program with the PPM business by providing pharmaceutical services to 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. See
"Business -- Operations".
3
<PAGE> 5
SIGNIFICANT HISTORICAL EVENTS
The Company has experienced substantial growth through acquisitions since
1995. The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The Company implements this strategy
through growth in its existing markets, expansion into new markets through
acquisitions and affiliations and through the implementation of comprehensive
healthcare solutions for patients, physicians and payors. In pursuing its
acquisition strategy, the Company creates strategic alliances with hospital
partners and HMOs. As an integral element of these alliances, the Company
utilizes sophisticated information systems to improve the operational efficiency
of, and to reduce the operating costs associated with, the Company's networks
and the practices of affiliated physicians. The Company's principal methods of
expansion are the acquisition of PPM businesses and affiliations with physician
and medical groups, including the acquisition of HBP groups and contract
management companies providing emergency department and other hospital-based
services.
The Company acquired Mullikin Medical Enterprises, L.P. ("MME") in November
1995 for $413 million in Common Stock, marking the Company's initial move
towards global capitation. In February 1996, the Company acquired Pacific
Physician Services, Inc. ("PPSI") for $342 million in Common Stock, which
provided the Company with HBP operations through PPSI's previously acquired
subsidiary, Team Health, Inc. ("Team Health"). In September 1996, the Company
acquired Caremark International Inc. ("Caremark") for $1.8 billion in Common
Stock, creating the largest PPM business in the United States and providing
MedPartners with PBM operations. In May 1997, the Company acquired the assets
and operations of Aetna Professional Management Corporation ("APMC"), a PPM
company and an affiliate of Aetna Inc., and simultaneously entered into a
nationwide 10-year master network agreement with Aetna U.S. Healthcare. In June
1997, the Company acquired InPhyNet Medical Management Inc. ("InPhyNet") for
$413 million in Common Stock creating the largest HBP group in the country. On
August 20, 1997, the Company commenced a cash tender offer to purchase all of
the common stock of Talbert Medical Management Holdings Corporation ("Talbert")
at an aggregate acquisition price of approximately $200 million. Talbert is a
physician practice management company representing 282 primary and specialty
care physicians and operating 52 clinics in five southwestern states.
The following table summarizes the significant acquisition and financing
milestones of the Company since its initial public offering ("IPO") in February
1995.
<TABLE>
<CAPTION>
CUMULATIVE
THREE MONTHS NUMBER OF
ENDED NET REVENUE(1) EBITDA(2) PHYSICIANS(3) SIGNIFICANT EVENTS(4)
- ------------ -------------- --------- ------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
12/31/94 (5) $ 31,467 $ 1,169 190 *
03/31/95 45,667 2,164 248 - IPO of $66 million of Common Stock.
06/30/95 57,272 3,056 354 - Establishment of $150 million line of
credit.
09/30/95 76,019 4,886 496 *
12/31/95 197,172 14,483 4,092 - Acquisition of Mullikin Medical
Enterprises, L.P.
03/31/96 332,549 24,529 5,077 - Acquisition of Pacific Physician
Services, Inc.
- Public offering of $250 million of
Common Stock.
06/30/96 360,398 24,040 5,777 *
09/30/96 1,182,015 82,691 7,975 - Acquisition of Caremark International
Inc.
- Establishment of $1 billion line of
credit.
12/31/96 1,267,782 90,734 8,875 - Public offering of $450 million of
senior notes.
03/31/97 1,332,271 100,431 9,538 *
06/30/97 1,560,600 121,418 13,128 - Acquisition of assets and business of
Aetna Professional Management Corporation.
- Acquisition of InPhyNet Medical
Management Inc.
09/30/97 ** ** ** - Acquisition of Talbert (pending).
</TABLE>
- ---------------
* During these periods the Company continued its physician practice
acquisition activities.
** Information not yet available.
(1) As originally reported, without restatement for subsequent acquisitions
accounted for as pooling of interests.
(2) EBITDA is defined as earnings before net interest expense, taxes,
non-recurring items, extraordinary items, depreciation and amortization and
minority interest.
(3) At end of period.
(4) The acquisitions of MME, PPSI, Caremark and InPhyNet were accounted for as
poolings of interests. The acquisition of APMC was accounted for as a
purchase. The acquisition of Talbert is expected to be accounted for as a
purchase.
(5) Pro forma for initial acquisitions and service agreements.
RISK FACTORS
Certain factors to be considered in connection with an investment in the
Securities offered hereby are set forth under "Risk Factors".
4
<PAGE> 6
SUMMARY CONDENSED FINANCIAL INFORMATION AND OPERATING DATA
The following summary condensed financial information and operating data
for the Company is derived from the financial statements incorporated by
reference herein. All of the following summary condensed financial information
should be read in conjunction with the historical financial information,
including the notes thereto, incorporated herein by reference.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................ $2,909,024 $3,908,717 $5,222,019 $2,524,407 $3,028,533
Operating expenses:
Clinic expenses.......................................... 1,200,291 1,785,564 2,683,107 1,292,898 1,591,774
Non-clinic goods and services............................ 1,365,203 1,688,075 2,019,895 985,531 1,121,538
General and administrative expenses...................... 169,273 172,896 173,428 85,587 85,561
Depreciation and amortization............................ 44,384 62,394 86,579 44,019 54,457
Net interest expense..................................... 16,214 19,114 24,715 11,188 22,330
Merger expenses.......................................... -- 69,064 308,945 34,698 59,434
Loss on investments...................................... -- 86,600 -- -- --
Other, net............................................... (143) (192) (1,075) (56) --
---------- ---------- ---------- ---------- ----------
Net operating expenses............................. 2,795,222 3,883,515 5,295,594 2,453,865 2,935,094
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and discontinued
operations............................................... 113,802 25,202 (73,575) 70,542 93,439
Income tax expense (benefit)............................... 50,292 (6,987) 3,215 28,149 46,994
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations................... 63,510 32,189 (76,790) 42,393 46,445
Income (loss) from discontinued operations................. 25,902 (136,528) (68,698) (68,698) (75,434)
---------- ---------- ---------- ---------- ----------
Net income (loss).......................................... $ 89,412 $ (104,339) $ (145,488) $ (26,305) $ (28,989)
========== ========== ========== ========== ==========
Net income (loss) per share(1)............................. $ 0.61 $ (0.66) $ (0.83) $ (0.15) $ (0.15)
========== ========== ========== ========== ==========
Number of shares used in net income (loss) per share
calculations(1).......................................... 146,773 158,109 174,269 171,889 187,192
========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA(2).................................................. $ 174,400 $ 262,374 $ 346,664 $ 160,447 $ 229,660
Capital expenditures(3).................................... 106,156 128,428 126,873 72,120 37,373
Income per share, excluding merger expense, loss on
investment and discontinued operations................... $ 0.43 $ 0.70 $ 0.84 $ 0.39 $ 0.51
Ratio of earnings to fixed charges(4)...................... 3.91x 4.21x 4.70x 4.36x 4.18x
CERTAIN OPERATING DATA (AT PERIOD END):
Group physicians........................................... 900 1,264 2,604 2,506 2,988
Total physicians........................................... 2,027 7,596 10,580 9,336 13,128
Prepaid enrollees.......................................... 835,855 1,134,999 1,702,695 1,515,205 1,957,515
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------
ACTUAL AS ADJUSTED(5)
---------- -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 134,162 $ 134,162
Working capital............................................. 277,766 277,766
Total assets................................................ 2,661,509 2,661,509
Long-term debt, less current portion........................ 926,524 926,524
Total stockholders' equity.................................. 853,061 853,061(6)
</TABLE>
- ---------------
(1) 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 the periods presented, even if anti-dilutive, under the treasury
stock method. Shares of 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) EBITDA is defined as earnings before net interest expense, non-recurring
items, extraordinary items, taxes, depreciation and amortization and
minority interest. The Company has presented EBITDA because it is commonly
used by investors to analyze and compare companies on the basis of operating
performance. The Company believes EBITDA is helpful in understanding cash
flow generated from operations that is available for debt service, taxes and
capital expenditures. EBITDA should not be considered in isolation or as
substitute for net income or other consolidated statement of operations or
5
<PAGE> 7
cash flow data prepared in accordance with generally accepted accounting
principles ("GAAP") as a measure of the profitability or liquidity of the
Company.
(3) Excludes capital expenditures related to acquisitions.
(4) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes plus fixed
charges. Fixed charges include interest, expensed or capitalized,
amortization of debt issuance costs and the interest component of rent
expense (approximately 1/3 of rental expense).
(5) Adjusted to reflect the offering of $350.0 million in senior subordinated
notes and the application of the net proceeds thereof to reduce borrowings
under the Credit Facility (as defined herein).
(6) Excludes the addition to stockholders' equity that will occur upon issuance
of Common Stock of the Company at the Final Settlement Date and excludes the
reduction to stockholders' equity that will occur upon the execution of the
Purchase Contract Agreement. The amount of such addition will be equal to
the aggregate Stated Amount (approximately $354 million), and the amount of
such reduction will be approximately $0.5 million for each five basis points
of Yield Enhancement Payments.
6
<PAGE> 8
THE OFFERING
Securities................. 17,000,000 % TAPS
Stated Amount.............. $ per Security
Payments................... % of the Stated Amount per annum, payable
semi-annually in arrears. These payments will
consist of interest on the Treasury Notes (as
defined below) payable by the United States
Government at the rate of % of the Stated
Amount per annum and unsecured, subordinated yield
enhancement payments ("Yield Enhancement Payments")
payable semi-annually by the Company at the rate of
% of the Stated Amount per annum, subject to
the Company's option to defer Yield Enhancement
Payments. See "Description of the Purchase
Contracts -- Yield Enhancement Payments" and "Risk
Factors -- Right to Defer Yield Enhancement
Payments". The Company's obligations with respect
to Yield Enhancement Payments are subordinated and
junior in right of payment to all other liabilities
of the Company and pari passu with the most senior
preferred stock directly issued, from time to time,
if any, by the Company. Amounts payable on the
first Payment Date (as defined below) will be
adjusted as described under "Description of the
Securities -- General".
Payment Dates.............. and of each year,
commencing , 1998, through and
including the Final Settlement Date referred to
below (each, a "Payment Date").
Final Settlement Date...... , 2000 (the "Final Settlement Date").
On the Final Settlement Date, the Stated Amount per
Security will automatically be applied to the
purchase of between of a share and one share
of Common Stock, par value $.001 per share ("Common
Stock"), of the Company (depending on the
Applicable Market Value of the Common Stock on the
Final Settlement Date, as described below), subject
to adjustment under certain circumstances.
Components of the
Securities................. The Securities will be issued under a Purchase
Contract Agreement, dated as of , 1997 (the
"Purchase Contract Agreement"), between the Company
and The First National Bank of Chicago, as agent
for the holders of the Securities (together with
any successor thereto in such capacity, the
"Purchase Contract Agent").
Each Security will consist of (a) a stock purchase
contract ("Purchase Contract") under which (i) the
holder of the Security will purchase from the
Company on the Final Settlement Date, for an amount
in cash equal to the Stated Amount, a number of
shares of Common Stock equal to the Settlement Rate
described below, and (ii) the Company will pay
Yield Enhancement Payments to the holder of the
Security, and (b) % United States Treasury
Notes due , 2000 ("Treasury Notes")
having a principal amount equal to the Stated
Amount and maturing on the Final Settlement Date.
If the aggregate fair market value of the Treasury
Notes at the time of their purchase exceeds their
aggregate principal amount, the Company shall, for
the benefit of holders of the Securities, provide
the amount of such excess as the additional
purchase price necessary to acquire Treasury Notes
having a principal amount equal to the Stated
Amount (such amounts, "Initial Premium Payments").
Holders of the Securities will not directly receive
any cash
7
<PAGE> 9
as a result of any Initial Premium Payments. The
Treasury Notes will be pledged with PNC Bank,
Kentucky, Inc., a Kentucky banking corporation, as
collateral agent for the Company (together with any
successor thereto in such capacity, the "Collateral
Agent"), to secure the obligations of holders of
the Securities under the Purchase Contracts to
purchase Common Stock. Unless a holder of
Securities settles the underlying Purchase
Contracts either through the early delivery of cash
to the Purchase Contract Agent in the manner
described below or otherwise, or unless the
Purchase Contracts are terminated (upon the
occurrence of certain events of bankruptcy,
insolvency or reorganization with respect to the
Company), principal of the Treasury Notes
underlying such Securities, when paid at maturity,
will automatically be applied to satisfy in full
the obligations under the Purchase Contracts of
holders of the Securities to purchase Common Stock
under the Purchase Contracts. For so long as a
Purchase Contract remains in effect, such Purchase
Contract and the Treasury Notes securing it will
not be separable and may be transferred only as an
integrated Security. See "Risk Factors" and
"Description of the Securities".
Settlement Rate............ The number of new shares of Common Stock issuable
upon settlement of each Purchase Contract (the
"Settlement Rate") will be calculated as follows
(subject to adjustment under certain
circumstances): (a) if the Applicable Market Value
(as defined below) is greater than $ (the
"Threshold Appreciation Price"), the Settlement
Rate will be , (b) if the Applicable Market
Value is less than or equal to the Threshold
Appreciation Price but greater than the Stated
Amount, the Settlement Rate will equal the Stated
Amount divided by the Applicable Market Value and
(c) if the Applicable Market Value is less than or
equal to the Stated Amount, the Settlement Rate
will be one. "Applicable Market Value" means the
average of the Closing Prices (as defined) per
share of Common Stock on each of the twenty
consecutive Trading Days (as defined) ending on the
second Trading Day immediately preceding the Final
Settlement Date.
Early Settlement........... A holder of Securities may settle the underlying
Purchase Contracts prior to the Final Settlement
Date in the manner described herein, but only in
integral multiples of Securities. Upon such
early settlement, (a) the holder will purchase, for
an amount in cash equal to the Stated Amount per
Security, of a share of Common Stock per
Security (regardless of the market price of the
Common Stock on the date of purchase), subject to
adjustment under certain circumstances, (b) the
Treasury Notes underlying such Securities will
thereupon be transferred to the holder free and
clear of the Company's security interest therein,
(c) the holder's right to receive Deferred Yield
Enhancement Payments (as defined below), if any, on
the Purchase Contracts being settled will be
forfeited, and (d) the holder's right to receive
additional Yield Enhancement Payments will
terminate and, except as contemplated by clause (a)
above, no adjustment will be made to or for the
holder on account of current or deferred amounts
accrued in respect thereof.
Termination................ The Purchase Contracts (including the right to
receive accrued or Deferred Yield Enhancement
Payments and the obligation to purchase Common
Stock) will automatically terminate upon the
occurrence of
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certain events of bankruptcy, insolvency or
reorganization with respect to the Company. Upon
such termination, the Collateral Agent will release
the Treasury Notes held by it to the Purchase
Contract Agent for distribution to the holders,
although there may be a limited delay before such
release and distribution.
Relationship to Common
Stock.................... No dividends have been paid on the Company's Common
Stock. As a result, the Yield Enhancement Payments
and interest payments on the Treasury Notes
represent an economic return to holders of the
Securities that has not historically been available
to holders of the Common Stock. However, since the
number of shares of Common Stock issuable upon
settlement of each Purchase Contract may decline by
up to % as the Applicable Market Value
increases, the opportunity for equity appreciation
afforded by an investment in the Securities is less
than that afforded by a direct investment in the
Common Stock.
Voting Rights.............. Holders of the Securities will have no voting
rights. See "Risk Factors -- No Stockholder
Rights".
Listing of the
Securities............... Application will be made to have the Securities
approved for listing on the NYSE, subject to notice
of issuance, under the symbol " ".
NYSE Symbol of Common
Stock.................... MDM
Federal Income Tax
Consequences............. Holders will include interest on the Treasury Notes
in income when received or accrued, in accordance
with the holder's method of accounting. The Company
intends to report the Yield Enhancement Payments
(and Initial Premium Payments, if any) as income to
holders, but holders should consult their own tax
advisors concerning the possibility that the Yield
Enhancement Payments (and Initial Premium Payments,
if any) may be treated as a reduction in the
holders' basis in the Securities rather than
included in income on a current basis. Additional
income, gain or loss may be realized on maturity of
the Treasury Notes to the extent that the Treasury
Notes are purchased at a premium or discount, and
certain elections should be considered in this
regard. See "Certain Federal Income Tax
Consequences".
Use of Proceeds............ Substantially all of the proceeds from the sale of
the Securities offered hereby will be used by the
Underwriters to purchase, at the direction of the
Company for the benefit of the holders of the
Securities, the underlying Treasury Notes, which
are being transferred to holders pursuant to the
terms of the Securities, and the Company will
receive no proceeds from such sale. Amounts
received by the Company upon settlement of Purchase
Contracts are expected to be used for general
corporate purposes including capital expenditures,
acquisitions, investments in subsidiaries, working
capital, repayment of debt and other business
opportunities. See "Use of Proceeds".
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<PAGE> 11
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD-LOOKING STATEMENTS. This Prospectus contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations and business of the Company. Statements in this document that are
not historical facts are hereby identified as "forward-looking statements" for
the purpose of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act") and Section 27A of the Securities Act
of 1933 (the "Securities Act"). The Company cautions readers that such
"forward-looking statements", including without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs and income, wherever they occur in this Prospectus
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 in this Prospectus and
other factors set forth from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission (the
"SEC").
The words "estimate", "project", "intend", "expect" and similar expressions
are intended to identify forward-looking statements. These "forward-looking
statements" are found at various places throughout this document. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
The Company disclaims any intent or obligation to update "forward looking
statements". Moreover, the Company, through senior management, may from time to
time make "forward-looking statements" about the matters described herein or
other matters concerning the Company. Additionally, the discussions herein under
the captions "Risk Factors", "Use of Proceeds" and "Business", are particularly
susceptible to the risks and uncertainties discussed below.
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 circumstances that the Company has a
relatively short operating history and is the nation's largest physician
practice management consolidator, 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 and risks relating to the
capitated nature of revenues; control of healthcare costs; risks relating
to certain legal matters; risks relating to exposure to professional
liability; liability insurance; risks relating to government regulation;
risks relating to pharmacy licensing and operation; risks relating to
healthcare reform; and proposed legislation.
For a more detailed discussion of these factors and others and their
potential impact on future results, see the applicable discussions herein.
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THE COMPANY
The Company was incorporated under the laws of Delaware in August 1995 as
"MedPartners/Mullikin, Inc." to be the surviving corporation in the combination
of the businesses of the original MedPartners, Inc., incorporated under the laws
of Delaware in 1993, and MME, a California limited partnership which, directly
or through its predecessor entities, had operated since 1957. In September 1996,
the Company changed its name to "MedPartners, Inc." The executive offices of the
Company are located at 3000 Galleria Tower, Suite 1000, Birmingham, Alabama
35244, and its telephone number is (205) 733-8996. See "Business".
RISK FACTORS
Prospective purchasers of the Securities offered hereby should consider
carefully, in addition to the other information contained or incorporated by
reference in this Prospectus, the following factors in evaluating the Company
and its business and an investment in such Securities. This Prospectus
(including the documents incorporated by reference herein) contains, in addition
to historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed below, as well as those discussed elsewhere in this
Prospectus.
RISKS RELATING TO THE COMPANY'S GROWTH STRATEGY; INTEGRATION IN CONNECTION WITH
ACQUISITIONS AND IDENTIFICATION OF GROWTH OPPORTUNITIES
The Company believes that its recent acquisitions of InPhyNet and APMC
represent additional steps in the Company's consolidation initiative in the PPM
business to develop integrated healthcare delivery systems through affiliation
with individual physicians, physician practices, hospitals and third-party
payors. The Company is still integrating these and other acquired businesses.
While the business plans of these acquired companies are generally similar,
their histories, geographical location, business models and cultures are
different in many respects. The Company's Board of Directors and senior
management of the Company face a significant challenge in their efforts to
integrate the businesses of the acquired companies so that the different
cultures and the varying emphases on managed care and fee-for-service can be
effectively managed to continue to grow the enterprise. The dedication of
management resources to such integration may detract attention from the
day-to-day business of the Company. 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 as a result of these integration efforts. Such
effects could have a material adverse effect on the operating results and
financial condition of the Company.
Integration Risks. Acquisitions of PPM companies and physician practices
entail the risk that such acquisitions will fail to perform in accordance with
expectations and that the Company will be unable to successfully integrate such
acquired businesses and physician practices into its operations. The
profitability of the Company is largely dependent on its ability to develop and
integrate networks of physicians, to manage and control costs and to realize
economies of scale from acquisitions of PPM companies and physician practices.
The histories, geographic location, business models, including emphasis on
managed care and fee-for-service, and cultures of acquired PPM businesses and
physician practices may differ from the Company's past experiences. Dedicating
management resources to the integration process may detract attention from the
day-to-day business of the Company. Moreover, the integration of the acquired
businesses and physician practices may require substantial capital and financial
investments. These, together with other risks described herein, could result in
the incurrence of substantial costs in connection with acquisitions that may
never achieve revenue and profitability levels comparable to the Company's
existing physician networks, which could have a material adverse effect on the
operating results and financial condition of the Company.
The major acquisitions carried out by the Company since January 1995 have
been structured as poolings of interests. As a result, the operating income of
the Company has been reduced by the merger expenses incurred in connection with
those acquisitions, resulting in a net loss for the year ended December 31,
1996. Included in pre-tax loss for the six months ended June 30, 1997, are
merger costs totaling $59.4 million, $50.0 million of which is related to the
business combination with InPhyNet. See Note 5 to the financial statements
included in the Form 10-Q for the quarter ended June 30, 1997, incorporated
herein by reference. There can
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<PAGE> 13
be no assurance that future merger expenses will not result in further net
losses, nor can there be any assurance that: there will not be substantial
future costs associated with integrating acquired companies; MedPartners will be
successful in integrating such companies; or the anticipated benefits of such
acquisitions will be realized fully. The unsuccessful integration of such
companies or the failure of MedPartners to realize such anticipated benefits
fully could have a material adverse effect on the operating results and
financial condition of the Company. See "-- Risks Relating to Capital
Requirements".
Risks Relating to Capital Requirements. The Company's growth strategy
requires substantial capital for the acquisition of PPM businesses and physician
practice assets and for their effective integration, operation and expansion.
Affiliated physician practices may also require capital for renovation,
expansion and additional medical equipment and technology. The Company believes
that its existing cash resources, the use of Common Stock for selected practice
and other acquisitions and available borrowings under the $1.0 billion credit
facility (the "Credit Facility") with NationsBank, National Association (South),
as administrative bank to a group of lenders, or any successor credit facility,
will be sufficient to meet the Company's anticipated acquisition, expansion and
working capital needs for the next twelve months. The Company expects from time
to time to raise additional capital through the issuance of long-term or
short-term indebtedness or the issuance of additional equity securities in
private or public transactions, at such times as management deems appropriate
and the market allows in order to meet the capital needs of the Company. There
can be no assurance that acceptable financing for future acquisitions or for the
integration and expansion of existing networks can be obtained. Any of such
financings could result in increased interest and amortization expense,
decreased income to fund future expansion and dilution of existing equity
positions.
Ability to Pursue New Growth Opportunities. The Company intends to
continue to pursue an aggressive growth strategy for the foreseeable future
through acquisitions and internal development. The Company's successful pursuit
of new growth opportunities will depend on many factors, including, among
others, the Company's ability to identify suitable targets and to integrate its
acquired practices and businesses. There can be no assurance that the Company
will anticipate all of the changing demands that expanding operations will
impose on its management, management information systems and physician network.
Any failure by the Company to adapt its systems and procedures to those changing
demands could have a material adverse effect on the operating results and
financial condition of the Company.
Competition for Expansion Opportunities. The Company is subject to the
risk that it will be unable to identify and recruit suitable acquisition
candidates in the future. The Company competes for acquisition, affiliation and
other expansion opportunities with national, regional and local PPM companies
and other physician management entities. In addition, certain companies,
including hospital management companies, hospitals and insurers, are expanding
their presence in the PPM market. The Company's failure to compete successfully
for expansion opportunities or to attract and recruit suitable acquisition
candidates could have a material adverse effect on the operating results and
financial condition of the Company. The Company is also subject to the risk that
it will be unable to recruit and retain qualified physicians and other
healthcare professionals to serve as employees or independent contractors of
MedPartners and its affiliates. See "Business -- Competition".
Different Business Operations. The PPM business of the Company includes
the provision of PBM and disease management services which are provided by
subsidiaries of the Company. The PBM services provided by the Company accounted
for approximately 33% and 36% of the Company's net revenue and operating
expenses, respectively, for the six months ended June 30, 1997. Specialty
Services, which include disease management, comprised 8% of the Company's net
revenue and 8% of the Company's operating expenses for the six months ended June
30, 1997.
Physician Compensation. Approximately 70% of the Company's PPM revenue for
the six months ended June 30, 1997, was derived from or through contracts
between the Company and hospitals or HMOs. The balance of the Company's PPM
revenue is generated through professional corporations ("PCs") that have entered
into contracts directly with HMOs or have the right to receive payment directly
from HMOs for the provision of medical services. The Company has a controlling
financial interest in these PCs by virtue of a long-term management agreement
that also provides for physician compensation.
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<PAGE> 14
The most significant clinic expense, physician compensation, accounted for
39% of total expenses in the Company's PPM service area in the first six months
of 1997. Physicians that generated 7% of PPM revenue in the first six months of
1997 received a fixed-dollar amount plus a discretionary bonus based on
performance criteria goals. Physician compensation expense was 51% of this first
category of PCs' total net revenue in the first six months of 1997. Physicians
that were compensated on a fee-for-service basis produced approximately 15% of
the Company's PPM revenue in the first six months of 1997. Physician
compensation expense pursuant to such agreements represented 48% of this second
category of PCs' total net revenue in the first six months of 1997. The
remaining 8% of PPM revenues were generated by physicians who were provided a
salary, bonus and profit-sharing payment based on the PC's net income. Physician
compensation expense pursuant to such agreements represented 39% of this third
category of PCs' total net revenue in the first six months of 1997. Under each
of these arrangements, revenue is assigned to MedPartners by the PC, and
MedPartners is responsible and at risk for all clinic expenses. See
"Business -- Operations". The profitability of the Company 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. The Company's operating results could be adversely affected in the event
the Company incurs costs associated with developing networks without generating
sufficient revenues from such networks.
Dependence on HMO Enrollee Growth. The Company is also largely dependent
on the continued increase in the number of HMO enrollees who use its physician
networks. This growth may come from development or acquisition of other PPM
entities, affiliation with additional physicians, increased enrollment in HMOs
currently contracting with MedPartners through its affiliated physicians and
additional agreements with HMOs. There can be no assurance that the Company will
be successful in identifying, acquiring and integrating additional medical
groups or other PPM companies or in increasing the number of enrollees. A
decline in enrollees in HMOs could have a material adverse effect on the
operating results and financial condition of the Company.
Dependence on Affiliated Physicians. MedPartners' revenue depends on
revenues generated by the physicians with whom MedPartners has practice
management agreements. These agreements define the responsibilities of the
physicians and MedPartners and govern all terms and conditions of their
relationship. The practice management agreements have terms generally of 20 to
40 years, subject to termination for cause, which includes bankruptcy or a
material breach. Practice management agreements with certain of the affiliated
practices contain provisions giving the physician practice the option to
terminate the agreement without cause, subject to significant limitations.
Because MedPartners cannot control the provision of medical services by its
affiliated physicians contractually or otherwise under the laws of California
and most other states in which MedPartners operates, affiliated physicians may
decline to enter into HMO agreements that are negotiated for them by MedPartners
or may enter into contracts for the provision of medical services or make other
financial commitments which are not intended to benefit MedPartners and which
could have a material adverse effect on the operating results and financial
condition of MedPartners. See "Business -- Operations -- Affiliated Physicians".
RISKS RELATING TO CAPITATED NATURE OF REVENUES; CONTROL OF HEALTHCARE COSTS
A substantial portion of MedPartners' revenue is derived from agreements
with HMOs that provide for the receipt of capitated fees. Under these
agreements, the Company, through its affiliated physicians, is generally
responsible for the provision of all covered outpatient benefits, regardless of
whether the affiliated physicians directly provide the medical services
associated with the covered benefits. MedPartners is statutorily and
contractually prohibited from controlling any medical decisions made by any
healthcare provider. To the extent that enrollees require more care than is
anticipated or require supplemental medical care that is not otherwise
reimbursed by the HMO, aggregate capitation rates may be insufficient to cover
the costs associated with the treatment of enrollees. If revenue is insufficient
to cover costs, the operating results and financial condition of the Company
could be materially adversely affected. As a result, MedPartners' success will
depend in large part on the effective management of healthcare costs through
various methods, including utilization management, competitive pricing for
purchased services and favorable agreements with payors. Recently, many
providers, including MedPartners, have experienced pricing pressures with
respect to
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<PAGE> 15
negotiations with HMOs. In addition, employer groups are becoming increasingly
successful in negotiating reductions in the growth of premiums paid for their
employees' health insurance, which tends to depress the reimbursement for
healthcare services. At the same time, employer groups are demanding higher
accountability from payors and providers of healthcare services with respect to
measurable accessibility, quality and service. If these trends continue, the
cost of providing physician services could increase while the level of
reimbursement could grow at a lower rate or could decrease. There can be no
assurance that these pricing pressures will not have a material adverse effect
on the operating results and financial condition of MedPartners. In addition,
changes in healthcare practices, inflation, new technologies, major epidemics,
natural disasters and numerous other factors affecting the delivery and cost of
healthcare could have a material adverse effect on the operating results and
financial condition of the Company.
The Company's financial statements include estimates of costs for covered
medical benefits incurred by HMO enrollees, but not yet reported. While these
estimates are based on information available at the time of calculation, there
can be no assurance that actual costs will approximate the estimates of such
amounts. If the actual costs significantly exceed the amounts estimated and
accrued, such additional costs could have a material adverse effect on the
operating results and financial condition of the Company.
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' financial statements contain accruals for estimates of shared-risk
amounts receivable from or payable to the HMOs that contract with their
affiliated physicians. These estimates are based upon inpatient utilization and
associated costs incurred by HMO enrollees compared to budgeted costs.
Differences between actual contract settlements and amounts estimated as
receivable or payable relating to HMO risk-sharing arrangements are generally
reconciled annually. This may cause fluctuations from amounts previously
accrued. To the extent that HMO enrollees require more care than is anticipated
or require supplemental care that is not otherwise reimbursed by the HMOs,
aggregate capitation rates may be insufficient to cover the costs associated
with the treatment of enrollees. Any such insufficiency could have a material
adverse effect on the operating results and financial condition of the Company.
Physician groups that render services on a fee-for-service basis (as
opposed to a capitated plan) typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, for the healthcare services provided to their patients. A
significant portion of the revenue of MedPartners is derived from payments made
by these third-party payors. There can be no assurance that payments under
governmental programs or from other third-party payors will remain at present
levels. In addition, third-party payors can deny reimbursement if they determine
that treatment was not performed in accordance with the cost-effective treatment
methods established by such payors or was experimental or for other reasons. Any
material decrease in payments received from such third-party payors could have a
material adverse effect on the operating results and financial condition of the
Company.
RISKS RELATING TO CERTAIN CAREMARK LEGAL MATTERS
OIG Settlement and Related Claims. Caremark agreed in June 1995 to settle
with the Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services (the "DHHS"), the United States
Department of Justice (the "DOJ"), the Veteran's Administration, the Federal
Employee Health Benefits Program ("FEHBP"), the Civilian Health and Medical
Program of the Uniformed Services ("CHAMPUS") and related state investigative
agencies in all 50 states and the District of Columbia a four-year-long
investigation of Caremark (the "OIG Settlement"). Under the terms of the OIG
Settlement, which covered allegations dating back to 1986, a subsidiary of
Caremark pled guilty to two counts of mail fraud -- one each in Minnesota and
Ohio -- resulting in the payment of civil penalties and criminal fines. The
basis of these guilty pleas was Caremark's failure to provide certain
information to CHAMPUS, FEHBP and federally funded healthcare benefit programs
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. See "Business -- Legal Proceedings".
In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory
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<PAGE> 16
violations, Caremark is required to report such violations to the OIG and DOJ.
Caremark is, therefore, subject to increased regulatory scrutiny and, in the
event it commits legal or regulatory violations, Caremark may be subject to an
increased risk of sanctions or penalties, including disqualification as a
provider of Medicare or Medicaid services, which would have a material adverse
effect on the operating results and financial condition of the Company.
In connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various non-governmental claims and may in
the future become subject to additional OIG-related claims. Caremark is a party
to, or the subject of, and may be subjected to in the future, various private
suits and claims (including stockholder derivative actions and an alleged class
action suit) being asserted in connection with matters relating to the OIG
Settlement by Caremark's stockholders, patients who received healthcare services
from Caremark and such patients' insurers. The Company cannot determine at this
time what costs or liabilities may be incurred in connection with future
disposition of non-governmental claims or litigation. Such additional costs or
liabilities, if incurred, could have a material adverse effect on the operating
results and financial condition of the Company. See "Business -- Legal
Proceedings".
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 in connection with public disclosures by Caremark regarding
Caremark's business practices and the status of the OIG investigation discussed
above. The complaints seek unspecified damages, declaratory and equitable
relief, and attorneys' fees and expenses. In June 1996, the complaint filed by
one group of stockholders alleging violations of the Exchange Act only, was
certified as a class. The parties 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 May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark, 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. MedPartners
intends to defend this case vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.
Private Payor Settlements. In March 1996, Caremark agreed to settle all
disputes with a number of private payors. These disputes relate to businesses
that were covered by the OIG Settlement. The settlements resulted in an
after-tax charge of approximately $43.8 million. In addition, Caremark paid
$24.1 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.
Coram Litigation. In September 1995, Coram Healthcare Corporation
("Coram") filed a complaint in the San Francisco Superior Court against
Caremark, its subsidiary, Caremark Inc., and others. The complaint, which arose
from Caremark's sale to Coram of Caremark's home infusion therapy business in
April 1995 for approximately $209.0 million in cash and $100.0 million in
securities, alleged breach of the sale agreement and made other related claims
seeking compensatory damages, in the aggregate, of $5.2 billion. Caremark filed
counterclaims against Coram and also filed a lawsuit in the United States
District Court in Chicago against Coram, claiming securities fraud. On July 1,
1997, the parties to the Coram litigation announced that a settlement had been
reached pursuant to which Caremark will return for cancellation all of the
securities issued by Coram in connection with the acquisition and will pay to
Coram $45 million in cash on or before September 1, 1997. The settlement
agreement also provides for the termination and resolution of all disputes and
issues between the parties and for the exchange of mutual releases. The Company
recognized an after tax charge from discontinued operations of $75.4 million in
the second quarter of 1997 related to this settlement.
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RISKS RELATING TO EXPOSURE TO PROFESSIONAL LIABILITY; LIABILITY INSURANCE
In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. Although the Company does
not engage in the practice of medicine or provide medical services, and does not
control the practice of medicine by its affiliated physicians or the compliance
with regulatory requirements directly applicable to the affiliated physicians
and physician groups, there can be no assurance that the Company will not become
involved in such litigation in the future. Through the ownership and operation
of Pioneer Hospital ("Pioneer Hospital"), U.S. Family Care Medical Center
("USFMC") and Friendly Hills Hospital ("Friendly Hills"), acute care hospitals
located in Artesia, Montclair and La Habra, California, respectively, and its
hospital-based operations, the Company is subject to allegations of negligence
and wrongful acts by its hospital-based physicians or arising out of providing
nursing care, hospital-based medical care, 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, the Company could be named in actions
involving care rendered to patients by physicians employed by or contracting
with affiliated medical organizations and physician groups.
The Company maintains professional and general liability insurance and
other coverage deemed necessary by the Company. Nevertheless, certain types of
risks and liabilities are not covered by insurance and there can be no assurance
that the limits of coverage will be adequate to cover losses in all instances.
In addition, the Company's practice management agreements require the affiliated
physicians to maintain professional liability and workers' compensation
insurance coverage on the practice and on each employee and agent of the
practice, and the Company generally is indemnified under each of the practice
management agreements by the affiliated physicians for liabilities resulting
from the performance of medical services. However, there can be no assurance
that a future claim or claims will not exceed the limits of these available
insurance coverages or that indemnification will be available for all such
claims. See "Business -- Corporate Liability and Insurance".
RISKS RELATING TO GOVERNMENT REGULATION
Federal and state laws regulate the relationships among providers of
healthcare services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid statutes, which prohibit
the solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for
recommendation, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services, as well as laws that impose significant penalties for
false or improper billings for physician services. These laws also impose
restrictions on physicians' referrals for designated health services to entities
with which they have financial relationships. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare and Medicaid programs. Such exclusion and penalties, if applied to the
Company's affiliated physicians, could result in significant loss of
reimbursement.
Moreover, the laws of many states, including California (from which a
significant portion of the Company's revenues are derived), prohibit physicians
from splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine. These laws and their interpretations vary from state to
state and are enforced by the courts and by regulatory authorities with broad
discretion. The Company believes that it has perpetual and unilateral control
over the assets and operations of the various affiliated professional
corporations. There can be no assurance that regulatory authorities will not
take the position that such control conflicts with state laws regarding the
practice of medicine or other federal restrictions. Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, there can be no assurance that the existing
organization of the Company and its contractual arrangements with affiliated
physicians will not be successfully challenged as constituting the unlicensed
practice of medicine or that the enforceability of the provisions of such
arrangements, including non-competition agreements, will not be limited. There
can be no assurance that review of the business of the Company and its
affiliates by courts or regulatory authorities will not result in a
determination that could
16
<PAGE> 18
adversely affect their operations or that the healthcare regulatory environment
will not change so as to restrict existing operations or expansion thereof. In
the event of action by any regulatory authority limiting or prohibiting the
Company or any affiliate from carrying on its business or from expanding the
operations of the Company and its affiliates to certain jurisdictions,
structural and organizational modifications of the Company may be required,
which could have a material adverse effect on the operating results and
financial condition of the Company.
In addition to the regulations referred to above, significant aspects of
MedPartners' operations are subject to state and federal statutes and
regulations governing workplace health and safety, the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances and the
disposal of medical waste. MedPartners' operations may also be affected by
changes in ethical guidelines and operating standards of professional and trade
associations and private accreditation commissions such as the American Medical
Association and the Joint Commission on Accreditation of Healthcare
Organizations. Accordingly, changes in existing laws and regulations, adverse
judicial or administrative interpretations of such laws and regulations or
enactment of new legislation could have a material adverse effect on the
operating results and financial condition of MedPartners. See "-- Risks Relating
to Pharmacy Licensing and Operation".
For the six months ended June 30, 1997, approximately 12% of the revenues
of the Company's affiliated physician groups are derived from payments made by
government-sponsored healthcare programs (principally, Medicare and state
reimbursement programs). As a result, any change in reimbursement regulations,
policies, practices, interpretations or statutes could adversely affect the
operations of MedPartners. There are also state and federal civil and criminal
statutes imposing substantial penalties (including civil penalties and criminal
fines and imprisonment) on healthcare providers that fraudulently or wrongfully
bill governmental or other third-party payors for healthcare services. The
Company believes it is in material compliance with such laws, but there can be
no assurance that MedPartners' activities will not be challenged or scrutinized
by governmental authorities or that any such challenge or scrutiny would not
have a material adverse effect on the operating results and financial condition
of the Company.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute", prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subjected. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the DHHS has the authority to exclude anyone, including
individuals or entities, who has committed any of the prohibited acts from
participation in the Medicare and Medicaid programs. If applied to the Company
or any of its subsidiaries or affiliated physicians, such exclusion could result
in a significant loss of reimbursement for the Company, up to a maximum of 12%
of the revenues of the Company's affiliated physician groups, which could have a
material adverse effect on the operating results and financial condition of the
Company. Although the Company believes that it is not in violation of the
Anti-Kickback Statute or similar state statutes, its operations do not fit
within any of the existing or proposed federal safe harbors.
Significant prohibitions against physician referrals were enacted by the
federal Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his immediate family is prohibited from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
the Company believes it is in compliance with such legislation, future
regulations could require the Company to modify the form of its relationships
with physician groups. Some states have also enacted similar self-referral laws,
and the Company believes it is likely that more states will follow. MedPartners
believes that its practices fit within exemptions contained in such statutes.
Nevertheless, expansion of the operations of MedPartners into certain
jurisdictions may require structural and organizational modifications of
MedPartners' relationships with physician groups to comply with new or revised
state
17
<PAGE> 19
statutes. Such structural and organizational modifications could have a material
adverse effect on the operating results and financial condition of the Company.
The Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act")
and the regulations promulgated thereunder subject entities which are licensed
as healthcare service plans in California to substantial regulation by the
California Department of Corporations (the "DOC"). In addition, licensees under
the Knox-Keene Act are required to file periodic financial data and other
information (which generally become available to the public), maintain
substantial tangible net equity on their balance sheets and maintain adequate
levels of medical, financial and operational personnel dedicated to fulfilling
the licensee's statutory and regulatory requirements. The DOC is empowered by
law to take enforcement actions against licensees that fail to comply with such
requirements. In March 1996, the DOC issued to Pioneer Provider Network, Inc., a
wholly-owned subsidiary of MedPartners, a healthcare service plan license (the
"Restricted License"). Non-compliance by Pioneer Network with the Knox-Keene Act
or other applicable laws and regulations could have a material adverse effect on
the operating results and financial condition of the Company.
The assumption of risk on a prepaid basis is being reviewed by various
state insurance commissioners as well as the National Association of Insurance
Commissioners ("NAIC") to determine whether the practice constitutes the
business of insurance. Any such determination could result in significant
additional regulation of the Company's business. See "Business -- Government
Regulation".
RISKS RELATING TO PHARMACY LICENSING AND OPERATION
The Company is subject to federal and state laws and regulations governing
pharmacies. Federal controlled substance laws require the Company to register
its pharmacies with the United States Drug Enforcement Administration and comply
with security, record-keeping, inventory control and labeling standards in order
to dispense controlled substances. State controlled substance laws require
registration and compliance with the licensing, registration or permit standards
of the state pharmacy licensing authority. State pharmacy licensing,
registration and permit laws impose standards on the qualifications of the
applicant's personnel, the adequacy of its prescription fulfillment and
inventory control practices and the adequacy of its facilities. In general,
pharmacy licenses are renewed annually. Pharmacists must also satisfy state
licensing requirements. Any failure to satisfy such pharmacy licensing statutes
and regulations could have a material adverse effect on the operating results
and financial condition of the Company.
RISKS RELATING TO HEALTHCARE REFORM; PROPOSED LEGISLATION
As a result of the continued escalation of healthcare costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been, and other proposals may be, introduced in the United States Congress
and state legislatures relating to healthcare reform. There can be no assurance
as to the ultimate content, timing or effect of any healthcare reform
legislation, nor is it possible at this time to estimate the impact of potential
legislation, which may be material, on the Company.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Third Restated Certificate of
Incorporation, as amended (the "MedPartners Certificate of Incorporation"), the
Company's Second Amended and Restated Bylaws (the "MedPartners Bylaws") and the
General Corporation Law of the State of Delaware (the "Delaware General
Corporation Law" or "DGCL") could, together or separately, discourage potential
acquisition proposals or delay or prevent a change in control of the Company.
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 the Company's Common Stock. The Company also
is subject to Section 203 of the DGCL, which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder.
In addition, the Company has a stockholders' rights plan, which provides for
discount purchase rights to certain stockholders of MedPartners upon certain
acquisitions
18
<PAGE> 20
of 10% or more of the outstanding shares of the Company's Common Stock, may also
inhibit a change in control of MedPartners.
INVESTMENT IN THE SECURITIES WILL BECOME INVESTMENT IN COMMON STOCK
Although holders of the Securities will be the beneficial owners of the
underlying Treasury Notes prior to the Final Settlement Date, unless a holder of
Securities settles the underlying Purchase Contracts either through the early
delivery of cash to the Purchase Contract Agent in the manner described below or
otherwise, or unless the Purchase Contracts are terminated (upon the occurrence
of certain events of bankruptcy, insolvency or reorganization with respect to
the Company), principal of the Treasury Notes, when paid at maturity, will
automatically be applied to the purchase of a specified number of shares of
Common Stock on behalf of such holders. Thus, following the Final Settlement
Date, holders will own shares of Common Stock rather than a beneficial interest
in Treasury Notes. See "Description of the Securities -- General". There can be
no assurance that such amount receivable by the holder on the Final Settlement
Date will be equal to or greater than the Stated Amount of the Securities. If
the Applicable Market Value of the Common Stock is less than the Stated Amount,
such amount receivable by the holder on the Final Settlement Date will be less
than the Stated Amount paid for the Securities, in which case an investment in
the Securities will result in a loss. Accordingly, a holder of the Securities
assumes the risk that the market value of the Common Stock may decline, and that
such decline could be substantial.
LIMITATIONS ON OPPORTUNITY FOR EQUITY APPRECIATION
The opportunity for equity appreciation afforded by an investment in the
Securities is less than the opportunity for equity appreciation afforded by a
direct investment in the Common Stock, because the amount receivable by a holder
of Securities on the Final Settlement Date will only exceed the Stated Amount of
such Securities if the Applicable Market Value of the Common Stock exceeds the
Threshold Appreciation Price (which represents an appreciation of % over
the Stated Amount). Moreover, holders of the Securities will only be entitled to
receive on the Final Settlement Date % (the percentage equal to the Stated
Amount divided by the Threshold Appreciation Price) of any appreciation of the
value of Common Stock in excess of the Threshold Appreciation Price.
FACTORS AFFECTING TRADING PRICES OF THE SECURITIES AND THE COMMON STOCK
The trading prices of the Securities in the secondary market will be
directly affected by the trading prices of the Common Stock in the secondary
market. It is impossible to predict whether the price of Common Stock will rise
or fall, and there may be significant volatility in the market price of the
Common Stock. Trading prices of the Common Stock will be influenced by the
Company's operating results and prospects, developments in the healthcare
industry, including developments affecting MedPartners or its competitors, and
economic, financial and other factors and market conditions that can affect the
capital markets generally, including the level of, and fluctuations in, the
trading prices of stocks generally and sales of substantial amounts of Common
Stock in the market subsequent to the offering of the Securities or the
perception that such sales could occur. In addition, in recent years, the stock
market and, in particular, the healthcare 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.
It is expected that any secondary market for the Securities will be
affected by a number of factors, including, but not limited to, the
creditworthiness of the Company, the volatility of the Common Stock, the time
remaining to the Final Settlement Date of the Securities and market interest
rates.
NO STOCKHOLDER RIGHTS
Holders of the Securities will not be entitled to any rights with respect
to the Common Stock (including, without limitation, voting rights and rights to
receive any dividends or other distributions in respect thereof) unless and
until such time as the Company shall have delivered shares of Common Stock for
Securities on the Final Settlement Date and unless the applicable record date,
if any, for the exercise of such rights occurs after
19
<PAGE> 21
the Final Settlement Date. For example, in the event that an amendment is
proposed to the Company's Certificate of Incorporation and the record date for
determining the stockholders of record entitled to vote on such amendment occurs
prior to such delivery, holders of the Securities will not be entitled to vote
on such amendment even if the date on which the vote is to be cast is after the
delivery of the Common Stock to holders of the Securities on the Final
Settlement Date.
DILUTION OF COMMON STOCK
The number of shares of Common Stock that holders of the Securities are
entitled to receive on the Final Settlement Date is subject to adjustment for
certain events such as stock splits and combinations, stock dividends and
certain other actions of the Company that modify its capital structure. See
"Description of the Securities -- Anti-Dilution Adjustments". Such number of
shares of Common Stock to be received by the holders of the Securities on the
Final Settlement Date will not be adjusted for other events, such as offerings
of Common Stock for cash or in connection with acquisitions. The Company is not
restricted from issuing additional Common Stock during the term of the
Securities and has no obligation to consider the interests of the holders of the
Securities for any reason. Additional issuances may materially and adversely
affect the price of the Common Stock, and, because of the relationship of the
number of shares to be received on the Final Settlement Date to the price of the
Common Stock, such other events may adversely affect the trading price of the
Securities.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how the Securities will trade in the
secondary market or whether such market will be liquid or illiquid. The
Securities are novel securities, and there is currently no secondary market for
the Securities. Application will be made to list the Securities on the NYSE.
However, there can be no assurance that an active trading market for the
Securities will develop or that such listing will provide the holders of the
Securities with liquidity of investment.
TREASURY NOTES ENCUMBERED
Although holders of Securities will be beneficial owners of the underlying
Treasury Notes, those Treasury Notes will be pledged with the Collateral Agent
to secure the obligations of the holders under the Purchase Contracts. Thus,
rights of the holders to their Treasury Notes will be subject to the Company's
security interest, and no holder will be permitted to withdraw Treasury Notes
except in connection with the early settlement or termination of the related
Purchase Contracts. Additionally, upon the automatic termination of the Purchase
Contracts in the event that the Company becomes the subject of a case under the
United States Bankruptcy Code (the "Bankruptcy Code"), the delivery of the
Treasury Notes to holders of the Securities may be delayed by the imposition of
the automatic stay of Section 362 of the Bankruptcy Code. During the period of
any such delay, the Treasury Notes will continue to accrue interest, payable by
the United States Government, until their maturity.
SUBORDINATION OF YIELD ENHANCEMENT PAYMENTS
The Company's obligations with respect to Yield Enhancement Payments are
subordinate and junior in right of payment to all other liabilities of the
Company and pari passu with the most senior preferred stock directly issued from
time to time, if any, by the Company. There are no terms in the Purchase
Contract Agreement or the Purchase Contracts that limit the Company's ability to
incur obligations that rank senior to the Yield Enhancement Payments.
RIGHT TO DEFER YIELD ENHANCEMENT PAYMENTS
The Company may, at its option, defer the payment of Yield Enhancement
Payments on the Purchase Contracts. However, deferred installments of Yield
Enhancement Payments will bear additional Yield Enhancement Payments at the rate
of % per annum (compounding on each succeeding Payment Date) until paid
(such deferred installments of Yield Enhancement Payments together with the
additional Yield Enhancement Payments shall be referred to herein as the
"Deferred Yield Enhancement Payments"). Yield
20
<PAGE> 22
Enhancement Payments may not be deferred beyond the Final Settlement Date. If
the Purchase Contracts are settled early or terminated (upon the occurrence of
certain events of bankruptcy, insolvency or reorganization with respect to the
Company), the right to receive additional Yield Enhancement Payments and
Deferred Yield Enhancement Payments will terminate.
In the event that the Company elects to defer the payment of Yield
Enhancement Payments on the Purchase Contracts until the Final Settlement Date,
each holder will receive on the Final Settlement Date, in lieu of a cash
payment, a number of shares of Common Stock (in addition to a number of shares
of Common Stock equal to the Settlement Rate) equal to (x) the aggregate amount
of Deferred Yield Enhancement Payments payable to a holder of Securities divided
by (y) the Applicable Market Value. See "Description of the Purchase
Contracts -- Yield Enhancement Payments".
PURCHASE CONTRACT AGREEMENT NOT QUALIFIED UNDER TRUST INDENTURE ACT; LIMITED
OBLIGATIONS OF PURCHASE CONTRACT AGENT
The Purchase Contract Agreement will not be qualified as an indenture under
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the
Purchase Contract Agent will not be required to qualify as a trustee thereunder.
Accordingly, holders of the Securities will not have the benefits of the
protections of the Trust Indenture Act. Under the terms of the Purchase Contract
Agreement, the Purchase Contract Agent will have only limited obligations to the
holders of the Securities. See "Certain Provisions of the Purchase Contract
Agreement and the Pledge Agreement -- Information Concerning the Purchase
Contract Agent".
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the Securities will be
used by the Underwriters to purchase, at the direction of the Company for the
benefit of the holders of the Securities, the underlying Treasury Notes, which
are being transferred to holders pursuant to the terms of the Securities, and
the Company will receive no proceeds from the sale of the Securities. The
proceeds to be received by the Company upon settlement of the Purchase Contracts
are expected to be used for general corporate purposes, which may include
repayment of debt, capital expenditures, acquisitions, investments in
subsidiaries, working capital and other business opportunities.
Concurrently with the offering made hereby, the Company is offering for
sale to the public (the "Note Offering") $350,000,000 aggregate principal amount
of its % Senior Subordinated Notes due 2000 (the "Notes"). The net proceeds
from the Note Offering will be used for repayment of outstanding debt under the
Credit Facility. There can be no assurance that the sale of the Notes will be
consummated; however, neither the sale of the Securities nor the sale of the
Notes is dependent on the consummation of the other sale.
21
<PAGE> 23
PRICE RANGE OF COMMON STOCK
Prior to February 21, 1995, the effective date of the initial public
offering of the Company, there was no public market for the Company's Common
Stock. The Company's Common Stock traded on the Nasdaq National Market under the
symbol "MPTR" from February 21, 1995 until February 21, 1996. On February 22,
1996, the Company's 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 Company's 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
1996
First Quarter............................................... $34.75 $28.50
Second Quarter.............................................. 30.25 20.13
Third Quarter............................................... 23.13 16.63
Fourth Quarter.............................................. 24.50 19.88
1997
First Quarter............................................... $24.63 $18.63
Second Quarter.............................................. 22.38 18.00
Third Quarter (through August 25)........................... 24.06 20.31
</TABLE>
There were approximately 42,861 holders of record of the Company's Common
Stock as of August 6, 1997.
DIVIDEND POLICY
The Company has never paid or declared a dividend on its Common Stock. The
Company's present intention is to retain its earnings to finance the growth and
development of its business, and the Company does not anticipate paying
dividends in the foreseeable future. Moreover, restrictions contained in the
Credit Facility prohibit the payment of non-stock dividends on the Company's
Common Stock without the prior consent of a specified percentage of the lenders
thereunder.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth as of June 30, 1997, (i) the actual
capitalization of the Company and (ii) the as adjusted capitalization that gives
effect to the offering made hereby and the Note Offering.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt and current portion of long-term debt....... $ 24,953 $ 24,953
Senior Subordinated Notes due 2000.......................... -- 350,000
7 3/8% Senior Notes due 2006................................ 450,000 450,000
Credit Facility............................................. 383,000 33,000
Other long-term debt........................................ 93,524 93,524
Stockholders' equity:
Preferred stock, $.001 par value, 95,000 shares
authorized; no shares issued and outstanding........... -- --
Series C Junior Participating Preferred Stock, $.001 par
value; 500 shares authorized; no shares issued and
outstanding............................................ -- --
Common Stock, $.001 par value; 400,000 shares authorized;
192,309 shares issued and outstanding(1)............... 192 192
Additional paid-in capital................................ 904,030 904,030
Shares held in trust...................................... (150,200) (150,200)
Notes receivable from stockholders........................ (1,505) (1,505)
Retained earnings......................................... 100,544 100,544
---------- ----------
Total stockholders' equity........................ 853,061 853,061(2)
---------- ----------
Total capitalization.............................. $1,804,538 $1,804,538
========== ==========
</TABLE>
- ---------------
(1) Excludes approximately 22.9 million shares of Common Stock reserved for
issuance pursuant to outstanding stock options as of June 30, 1997.
(2) Excludes the addition to stockholders' equity that will occur upon issuance
of Common Stock of the Company at the Final Settlement Date and excludes the
reduction to stockholders' equity that will occur upon the execution of the
Purchase Contract Agreement. The amount of such addition will be equal to
the aggregate Stated Amount (approximately $354 million) and the amount of
such reduction will be approximately $0.5 million for each five basis points
of Yield Enhancement Payments.
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<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company for, and as of the
end of, each of the periods indicated in the five-year period ended December 31,
1996, have been derived from the audited consolidated financial statements of
the Company. The selected consolidated financial data for each of the six months
ended June 30, 1996 and 1997, and as of June 30, 1997, have been derived from
the unaudited consolidated financial statements of the Company, which reflect,
in the opinion of management of the Company, all adjustments (which include only
normal recurring adjustments) necessary for the fair presentation of the
financial data for such periods. The results for such interim periods are not
necessarily indicative of the results for the full year. The selected financial
data should be read in conjunction with the consolidated financial statements of
the Company and the notes thereto which have been incorporated by reference
herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue.............. $1,484,027 $1,980,967 $2,909,024 $3,908,717 $5,222,019 $2,524,407 $3,028,533
Income (loss) from
continuing
operations............. $ 25,351 $ 55,017 $ 63,510 $ 32,189 $ (76,790) $ 42,393 $ 46,445
Income (loss) from
discontinued
operations............. $ 5,858 $ 30,808 $ 25,902 $ (136,528) $ (68,698) $ (68,698) $ (75,434)
Net income (loss)........ $ 31,209 $ 85,825 $ 89,412 $ (104,339) $ (145,488) $ (26,305) $ (28,989)
Income (loss) per share
from continuing
operations(1).......... $ 0.24 $ 0.42 $ 0.43 $ 0.20 $ (0.44) $ 0.25 $ 0.25
Income (loss) per share
from discontinued
operations(1).......... $ 0.05 $ 0.24 $ 0.18 $ (0.86) $ (0.39) $ (0.40) $ (0.40)
Net income (loss) per
share(1)............... $ 0.29 $ 0.66 $ 0.61 $ (0.66) $ (0.83) $ (0.15) $ (0.15)
Number of shares used in
net income (loss) per
share calculations..... 107,460 130,903 146,773 158,109 174,269 171,889 187,192
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 40,249 $ 44,852 $ 101,101 $ 87,581 $ 127,397 $ 134,162
Working capital..................... 158,634 251,736 180,198 286,166 226,409 277,766
Total assets........................ 832,671 1,117,557 1,682,345 1,964,130 2,423,120 2,661,509
Long-term debt, less current
portion........................... 92,873 177,141 394,811 541,391 715,996 926,524
Total stockholders' equity.......... 395,441 491,039 644,918 674,442 837,408 853,061
</TABLE>
- ---------------
(1) Income (loss) per share amounts are computed by dividing income (loss) by
the number of common equivalent shares outstanding during the periods
presented in accordance with the applicable rules of the Commission. 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 Common Stock 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> 26
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 of the
Company and the notes thereto incorporated herein by reference. See "-- Recent
Developments".
GENERAL
In February and September of 1996, the Company combined with PPSI and
Caremark, respectively. In June of 1997 the Company combined with InPhyNet.
These business combinations were accounted for as poolings of interests. The
financial information referred to in this discussion reflects the combined
operations of these entities and several additional immaterial entities
accounted for as poolings of interests.
The Company is the largest 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 enrollees and fee-for-
service patients in the United States. The Company also operates independent PBM
programs and furnishes 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 prepaid payor systems. The Company enhances clinic operations
by centralizing administrative functions and introducing management tools such
as clinical guidelines, utilization review and outcomes measurement. The Company
provides affiliated physicians with access to capital and advanced management
information systems. The Company's PPM revenue is derived primarily from the
contracts with HMOs that compensate the Company and its affiliated physicians on
a prepaid basis. In the prepaid arrangements, the Company 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, the Company is responsible for substantially all of the
medical services required by enrollees. In many instances, the Company and its
affiliated physicians accept financial responsibility for hospital and ancillary
healthcare services in return for payment from HMOs on a capitated or percent of
premium basis ("institutional capitation"). In exchange for these payments
(collectively, "global capitation"), the Company, through its affiliated
physicians, provides the majority of covered healthcare services to enrollees
and contracts with hospitals and other healthcare providers for the balance of
the covered services. 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 which are described in the notes to the consolidated
financial statements of the Company incorporated herein by reference. 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 both the
management of their practices by the Company and 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.
25
<PAGE> 27
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 approximately 43,000 prescriptions daily through four mail
service pharmacies and manages patients' immediate prescription needs through a
network of national retail pharmacies. The Company is 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, the
Company provides primary and specialty healthcare services to prepaid enrollees
and fee-for-service patients. The Company also fills in excess of 50 million
prescriptions on an annual basis through its mail service and retail pharmacies
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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Physician Services
Net revenue............................. $1,323,889 $1,989,068 $2,964,162 $1,424,343 $1,783,634
Operating income........................ 48,577 103,528 158,771 71,480 118,377
Margin.................................. 3.7% 5.2% 5.4% 5.0% 6.6%
Pharmaceutical Services
Net revenue............................. $1,097,315 $1,432,250 $1,784,319 $ 865,154 $1,001,463
Operating income........................ 46,236 56,022 75,788 33,514 41,249
Margin.................................. 4.2% 3.9% 4.2% 3.9% 4.1%
Specialty Services
Net revenue............................. $ 487,820 $ 487,399 $ 473,538 $ 234,910 $ 243,436
Operating income........................ 75,139 70,762 56,006 29,626 28,314
Margin.................................. 15.4% 14.5% 11.8% 12.6% 11.6%
Corporate Services
Operating loss.......................... $ (40,079) $ (30,524) $ (31,555) $ (18,248) $ (12,737)
Percentage of total net revenue......... (1.4)% (0.8)% (0.6)% (0.7)% (0.4)%
</TABLE>
Physician Practice Management Services
The Company's PPM revenues have increased substantially over the past three
years primarily due to growth in prepaid enrollment, existing practice growth
and new practice affiliations. Of the total 1996 PPM revenue, $1.7 billion can
be attributed to acquisitions (accounted for as either poolings of interests or
purchase transactions) made during the year. The Company's PPM operations in the
western region of the country function in a predominantly prepaid environment.
MedPartners' PPM operations in the other regions of the country are in
predominantly fee-for-service environments with limited but increasing managed
care
26
<PAGE> 28
penetration. The following table sets forth the breakdown of net revenue for the
PPM services area for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Prepaid........................................ $ 714,112 $1,096,789 $1,593,538 $ 649,449 $ 928,089
Fee-for-Service................................ 585,791 872,653 1,356,084 766,239 845,894
Other.......................................... 23,986 19,626 14,540 8,655 9,651
---------- ---------- ---------- ---------- ----------
Total net revenue from PPM service
area................................ $1,323,889 $1,989,068 $2,964,162 $1,424,343 $1,783,634
========== ========== ========== ========== ==========
</TABLE>
The Company's prepaid revenue reflects the number of HMO enrollees for whom
it receives monthly capitation payments. The Company receives professional
capitation to provide physician services and institutional capitation to provide
hospital care and other non-professional services. The table below reflects the
growth in enrollment for professional and global capitation:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------- ---------------------
1994 1995 1996 1996 1997
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Professional enrollees............. 548,821 603,391 983,543 867,753 998,380
Global enrollees (professional and
institutional)................... 286,034 531,608 719,152 647,452 959,135
------- --------- --------- --------- ---------
Total enrollees.......... 834,855 1,134,999 1,702,695 1,515,205 1,957,515
======= ========= ========= ========= =========
</TABLE>
During 1996, prepaid revenues increased 45.3% while prepaid enrollees
increased 50%. The reason for this difference relates to the mix of professional
capitation enrollment to total enrollment (which includes institutional
capitation). Therefore, the higher percentage of professional capitation
enrollment accounts for the lower percentage increase in prepaid revenue as
compared to the percentage increase in total enrollment. The percentage of
professional capitation enrollment to total enrollment was 57.8% at December 31,
1996, compared to 53.2% at December 31, 1995. Revenue per enrollee for
professional capitation is substantially lower than for global capitation as
discussed below.
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 have resulted in significant internal growth. During the first six
months of 1997, the Company converted approximately 225,000 lives from
professional capitation to global capitation.
The Company has consolidated the majority of its acquisitions into its
management infrastructure, eliminating substantial overhead expenses and
improving integration of medical, administrative and operational 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 3.7% at year end 1994 to 6.6% at
June 30, 1997.
The Company operates the largest hospital-based physician group in the
United States with over 2,200 physicians providing services at over 320 sites,
primarily hospitals, nationwide. The Company provides emergency medicine,
radiology, anesthesiology, primary care and other hospital-based physician
services. The Company also provides comprehensive medical services to inmates in
various state and local correctional institutions. As of June 30, 1997, the
Company had contracts with 45 correctional institutions. The Company provides
physicians, nurses and clerical support services for active duty and retired
military personnel and their dependents in emergency departments, ambulatory
care centers and primary care clinics operated by the Department of Defense. At
June 30, 1997, the Company's military medical services were provided under 15
contracts with the Department of Defense.
27
<PAGE> 29
In addition to the increased revenues 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 national 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 revenues continue to exhibit sustained growth
reflecting increases in both mail and retail related services. Revenue for the
six months ended June 30, 1997 increased 15.8% over the same period in 1996.
This growth was due to increased pharmacy transaction volume (6.1%), drug cost
inflation, product mix and pricing (9.7%). Key factors contributing to this
growth include high customer retention, additional penetration of retained
customers and new customer contracts, such as the National Association of Letter
Carriers which 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. Revenues for selected types of services are earned
based on a percentage of savings achieved or on a per-enrollee or per-member
basis; however, these revenues are not material to total revenues.
Operating income increased 23.1% in the first six months of 1997 compared
to the same period of 1996. Operating margins increased from 3.9% to 4.1% for
the six months ended June 30, 1996 and 1997, respectively. Lower margin retail
service revenue continues to grow at a faster rate than mail related revenue.
However, reductions in operating expenses along with the termination of accounts
with unacceptable levels of profitability have offset any impact on operating
margins and have contributed to the overall growth in operating income.
Operating income experienced accelerated growth in 1995 and 1996 while
margins fell slightly from 4.2% in 1994 to 3.9% in 1995 but returned to a 4.2%
level in 1996. Operating income and margins in 1996 were enhanced by reduced
information systems costs achieved through renegotiation of a contract with an
outsource service vendor, continued improvements in the acquisition costs of
drugs, increased penetration of higher margin value-oriented services and an
overall 13% reduction in selling and administrative expenses. Partially
offsetting these cost reductions were continued declines in prices to customers.
Margins in Pharmaceutical Services are also affected by the mix between
mail and retail service revenues. Margins on mail-related service revenues
currently are higher than those on retail service revenues. Revenues in both
mail and retail services continue to grow; although, the growth rate of retail
services in 1995
28
<PAGE> 30
and 1996 was greater than the growth rate of mail services. In 1996, retail
service revenues grew to represent nearly 49% of PBM revenues. The Company has
little or no influence over certain other factors, including demographics of the
population served and plan design, which can affect the mix between mail and
retail services. Consequently, margin percentage trends alone are not a
sufficient indication of progress. The Company's pricing and underwriting
strategies are closely linked to its working capital and asset management
strategies and focus on return on investment and overall improvements in return
on capital deployed in the business.
The Company has recently reorganized its sales and corporate accounts
management activities into eight geographic and two additional specialty areas.
This will enable the Company to improve its account retention, client service
and growth initiatives even further as a result of increased accountability and
focus. As mentioned under Physician Practice Management Services, the Company is
pursuing a number of PPM and PBM integration opportunities.
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, and the United Kingdom. Revenue
growth is due primarily to sales of the Company's new multiple sclerosis drug,
Copaxone, and other products. Margins for specialty services had been declining
slightly as a result of managed care pricing pressures, restructuring of benefit
plans by payors and reduced reimbursement for Medicaid and other state agency
payors. However, margins have increased slightly from the first quarter of 1997
to the second quarter of 1997. This increase can be attributed to the reduction
in operating expenses through increased efficiencies. Cost of service expenses
rose due to programs targeted at launching the Company's sale of the drug
Copaxone.
Discontinued Operations
During 1995, Caremark divested its Caremark Orthopedic Services, Inc.
subsidiary as well as its clozaril patient management system, home infusion
business and oncology management services business. The Company's consolidated
financial statements present the operating income and net assets of these
discontinued operations separately from continuing operations. Prior periods
have been restated to conform with this presentation. Discontinued operations
for 1995 reflect the net after-tax gain on the disposal of the clozaril patient
management system, the home infusion business and a $154.8 million after-tax
charge for the settlement discussed in the notes to the audited consolidated
financial statements incorporated herein by reference related to the OIG
investigation. Discontinued operations for 1996 reflects a $67.9 million
after-tax charge related to settlements with private payors discussed in the
notes to the audited consolidated financial statements incorporated herein by
reference and an after-tax gain on disposition of the nephrology services
business, net of disposal costs, of $2.5 million. During the second quarter of
1997, the Company settled a dispute with Coram Health Corporation arising from
Caremark's sale of its home infusion therapy business to Coram, also discussed
in Note 4 of the unaudited financial statements included in the Company's
Quarterly Report for the quarter ended June 30, 1997, incorporated herein by
reference. In accordance with APB 30, which addresses the reporting for
disposition of business segments, the Company's consolidated financial
statements present the operating income of these discontinued operations
separately from continuing operations.
Results of Operations -- Six Months Ended June 30, 1997 and 1996
For the six months ended June 30, 1997, net revenue was $3,028.5 million,
compared to $2,524.4 million for the same period in 1996, an increase of 20.0%.
The increase in net revenue primarily resulted form affiliations with new
physician practices and the increase in pharmaceutical services net revenue,
which accounted for $109.0 million and $136.3 million of the increase in net
revenue, respectively. Additional increases resulted from the shift of enrollees
from professional only to global capitation (approximately 225,000 enrollees
shifted in the six months ended June 30, 1997). The majority of the remainder of
the increase in PPM net revenue can be attributed to growth in existing
physician practices.
29
<PAGE> 31
Income from continuing operations, excluding merger expenses, for the
physician services and pharmaceutical services areas grew for the six months
ended June 30, 1997, as compared to the same period of 1996, 65.6% and 23.1%,
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, more
efficient use of system resources and higher net revenue. Operating income and
margins declined in the corresponding periods for the specialty services area as
a result of continued pricing pressures for certain products.
Included in pre-tax loss for the six months ended June 30, 1997 and 1996
were merger expenses totaling $59.4 and $34.7 million. The major components of
the $59.4 million, $50 million of which relates to the business combination with
InPhyNet, are listed in Note 5 of the unaudited consolidated financial
statements included in the Company's Quarterly Report for the quarter ended June
30, 1997, incorporated herein by reference. The $34.7 million relates primarily
to the business combination with Pacific Physician Services, Inc. in 1996. Also
included in the pre-tax loss for the six months ended June 30, 1997 were other
non-recurring charges from discontinued operations of $75.4 million, which are
discussed in Note 4 of the unaudited consolidated financial statements included
in the Company's Quarterly Report for the quarter ended June 30, 1997,
incorporated herein by reference.
Results of Operations for the Years Ended December 31, 1996 and 1995
For the year ended December 31, 1996, net revenue was $5,222.0 million,
compared to $3,908.7 million for 1995, an increase of 33.6%. The increase in net
revenue resulted primarily from affiliations with new physician practices and
the increase in PBM net revenue, which accounted for $339.9 million and $352.1
million of the increase in net revenue, respectively. The most significant
physician practice acquisition during this period was the CIGNA Medical Group
which was acquired in January 1996. This acquisition accounted for 92% of the
new practice revenue. The increase in PBM net revenue is attributable to
pharmaceutical price increases, the addition of new customers, further
penetration of existing customers and the sale of new products.
Operating income for the PPM and PBM services areas increased 53.4% and
35.3%, respectively, for 1996 compared to 1995. This growth was the result of
higher net revenues in both areas and increases in operating margins resulting
from the spreading of fixed overhead expenses over a larger revenue base and
continued integration of operations in the PPM services area. Operating income
and margins declined in the corresponding periods for the specialty services
area as a result of lower volumes in the hemophilia business and continued
pricing pressures for growth hormone products.
Included in the pre-tax loss for 1996 were merger expenses totaling $308.9
million related to the business combinations with Caremark, PPSI and several
other entities, the major components of which are listed in notes to the audited
consolidated financial statements incorporated herein by reference.
Results of Operations for the Years Ended December 31, 1995 and 1994
Net revenue for the year ended December 31, 1995 was $3,908.7 million, an
increase of $999.7 million, or 34.4%, over the year ended December 31, 1994. The
increase in net revenue resulted primarily from affiliation with new physician
practices and the increase in PBM net revenue, which accounted for $240.1
million, and $334.9 million of the increase in net revenue, respectively.
Additional increases resulted from an increase in prepaid enrollees at existing
affiliated physician practices. The most significant physician practice
acquisition affecting this period was the Friendly Hills Healthcare Network
which was acquired in May 1995. This acquisition accounted for 53% of the new
practice revenue. The increase in PBM net revenue resulted from increases in
covered lives due to new customer contracts and greater penetration of existing
customers.
Operating income grew 113.1% and 21.2% for 1995, compared to 1994, for the
PPM and PBM service areas, respectively. This growth is the result of higher net
revenues in both areas. The PPM service area also had a significant increase in
operating margin, from 3.7% in 1994 to 5.2% in 1995, which resulted from the
leveraging of fixed overhead expenses over a substantially larger revenue base,
integration of operations and
30
<PAGE> 32
the impact of the varying margins of new physician practice affiliations.
Operating income and margins declined in the corresponding periods for the
specialty services areas as a result of pricing pressures for growth hormone
products.
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 acquisition of Caremark in September 1996. There
are various Caremark legal matters which, if materially adversely determined,
could have a material adverse effect on the Company's operating results and
financial condition.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, and December 31, 1996, the Company had working capital
of $277.8 and $226.4 million, respectively, including cash and cash equivalents
of $134.2 and $127.4 million, respectively. For the six-month period ended June
30, 1997, cash flow from continuing operations was $101.2 million. Cash flow
from continuing operations for the fiscal years ended December 31, 1996, 1995
and 1994 was $176.5 million, $147.0 million and $52.4 million, respectively.
For the six-month period ended June 30, 1997 and the fiscal year ended
December 31, 1996, respectively, the Company invested $150.5 and $160.5 million,
respectively, in acquisitions of the assets of physician practices and $37.4 and
$126.9 million, respectively, in property and equipment. These expenditures were
funded by approximately $39.5 and $271.9 million, respectively, derived from
equity proceeds and $149.4 and $124.4 million, respectively, in net incremental
borrowings. For the six months ended June 30, 1996 the Company invested $104.3
million in acquisitions of the assets of physician practices and $72.1 million
in property and equipment. These expenditures were funded by a portion of the
$224.1 million derived from a stock offering in March 1996. For the year ended
December 31, 1995, the Company invested $212.1 million in acquisitions of the
assets of physician practices and $128.4 million in property and equipment.
These expenditures were funded by approximately $100.4 million derived from
equity proceeds and $69.5 million in net incremental borrowings. For the year
ended December 31, 1994, the Company's investing activities totaled $261.0
million, which was composed primarily of $134.7 million related to practice
acquisitions and $106.2 million related to the purchase of property and
equipment. These expenditures were funded by $150.1 million derived from equity
proceeds and $225.0 million in net incremental borrowings. Investments in
acquisitions and property and equipment are anticipated to continue to be
substantial uses of funds in future periods.
The Company entered into the $1 billion Credit Facility, which became
effective simultaneously with the closing of the Caremark acquisition, on
September 5, 1996, replacing its then existing credit facility. At the Company's
option, pricing on the Credit Facility is based on either a debt to cash flow
test or the Company's senior debt ratings. No principal is due on the facility
until its maturity date of September 2001. As of June 30, 1997, there was $383.0
million outstanding under the facility. The Credit Facility contains affirmative
and negative covenants which include requirements that the Company maintain
certain financial ratios (including minimum net worth, minimum fixed charge
coverage ratio and maximum indebtedness to cash flow), and establishes certain
restrictions on investments, mergers and sales of assets. Additionally, the
Company is required to obtain bank consent for acquisitions with an aggregate
purchase price in excess of $75 million and for which more than half of the
consideration is to be paid in cash. The Credit Facility is unsecured but
31
<PAGE> 33
provides a negative pledge on substantially all assets of the Company. As of
June 30, 1997, the Company was in compliance with the covenants in the Credit
Facility.
Effective October 8, 1996, the Company completed a $450 million senior note
offering. These ten-year notes carry a coupon rate of 7 3/8%. The notes are not
redeemable by the Company prior to maturity and are not entitled to the benefit
of any mandatory sinking fund. The notes are general unsecured obligations of
the Company ranking senior in right of payment to all existing and future
subordinated indebtedness of the Company and pari passu in right of payment with
all existing and future unsubordinated and unsecured obligations of the Company.
The notes are effectively subordinated to all existing and future indebtedness
and other liabilities of the Company's subsidiaries. The notes are rated
BBB/Baa3 by Standard & Poors and Moody's Investor Services, respectively. The
Company is the only physician practice management company to earn an investment
grade debt rating. Net proceeds from the offering were used to reduce amounts
under the Credit Facility.
In connection with the offerings of the Securities and the Notes, Standard
& Poors affirmed its BBB corporate credit rating on the Company and on the
Company's 7 3/8% Senior Notes due 2006 and assigned a rating of BBB-r to the
Securities, a rating of BBB- to the Notes and a rating of BBB to the Company's
Credit Facility. In connection with the issuance of its ratings, Standard &
Poors revised its outlook for the Company to negative from stable. Standard &
Poors stated that its revised outlook reflects the challenges of controlling and
further growing the Company, the Company's susceptibility to reimbursement
changes and increases in medical need and cost and increasing competition. Also
in connection with the offerings of the Securities and the Notes, Moody's
Investors Service confirmed its Baa3 rating on the Company's unsecured senior
notes and assigned a Baa3 rating to the Company's Credit Facility, a Baa2 rating
to the Securities and a Ba2 rating to the Notes. A security rating is not a
recommendation to buy, sell or hold securities, may be subject to revision or
withdrawal at any time by the assigning rating organization and should be
evaluated independently of any other rating.
On October 30, 1996, the Company completed its tender offer for Caremark's
$100 million 6 7/8% notes due August 15, 2003. Of the $100 million principal
amount of such notes outstanding, $99.9 million principal amount were tendered
and purchased. The total consideration for each $1,000 principal amount of
outstanding notes tendered was $1,017.72.
The Company'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, the issuances of the Securities and the Notes 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.
RECENT DEVELOPMENTS
On August 20, 1997, the Company commenced a cash tender offer to purchase
all of the issued and outstanding common stock, par value $.01 per share, of
Talbert at a price of $63.00 net per share, in cash, or an aggregate acquisition
price of approximately $200 million. Talbert is a physician practice management
company representing 282 primary and specialty care physicians and operating 52
clinics in five southwestern states. The Talbert acquisition will be accounted
for as a purchase transaction, and is subject to the normal
32
<PAGE> 34
conditions for a transaction of this kind, including the tender of a minimum
number of shares of Talbert common stock and compliance with the
Hart-Scott-Rodino Anti-Trust Improvements Act of 1976.
On July 1, 1997, the Company announced that a settlement had been reached
in the Coram litigation pursuant to which Caremark will return for cancellation
all of the securities issued by Coram in connection with its acquisition of
Caremark's home infusion therapy business and will pay to Coram $45 million in
cash on or before September 1, 1997. The settlement agreement also provides for
the termination and resolution of all disputes and issues between the parties
and for the exchange of mutual releases. The Company recognized an after-tax
charge of $75.4 million during the second quarter of 1997 related to this
settlement. See "Business -- Legal Proceedings".
In June 1997, the Company acquired InPhyNet, a publicly traded PPM company
based in Fort Lauderdale, Florida and specializing in HBP operations and
correctional care in exchange for approximately 19.3 million shares of the
Company's Common Stock having a total value of approximately $413 million,
creating the largest HBP group in the United States with over 2,200 physicians.
In June 1997, the Company also acquired Fischer Mangold, a California-based
contract management group providing administrative management and physician
staffing to 28 hospital clients in 11 states. This acquisition is being
accounted for as a pooling of interests.
In May 1997, the Company acquired the business assets and assumed the
liabilities of most of the operations of APMC, a PPM Company and affiliate of
Aetna Inc. based in Glastonbury, Connecticut. For accounting purposes, this
acquisition is being treated as an asset purchase. As a part of this
acquisition, the Company entered into a 10-year Master Network Agreement with
Aetna U.S. Healthcare, pursuant to which the members of the Company's networks
of affiliated physicians will be authorized providers for many of the 14 million
members of Aetna U.S. Healthcare's health plan.
33
<PAGE> 35
QUARTERLY RESULTS (UNAUDITED)
The following tables set forth certain unaudited quarterly financial data
for 1995, 1996 and the first two quarters of 1997. In the opinion of the
Company's management, this unaudited information has been prepared on the same
basis as the audited information and includes all adjustments (consisting of
normal recurring items) necessary to present fairly the information set forth
therein. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- --------- ------------- ------------ ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue........... $876,747 $ 961,290 $1,016,228 $ 1,054,452 $1,237,715 $1,286,692 $1,313,019
Operating expenses.... 836,052 915,796 963,265 993,816 1,181,064 1,226,971 1,246,846
Net interest
expense........... 6,551 2,549 5,883 4,131 7,030 4,158 5,395
Merger expenses..... -- 1,051 3,473 64,540 34,448 250 263,000
Losses on
investments....... -- -- -- 86,600 -- -- --
Other, net.......... (406) 5 (27) 236 (107) 51 328
-------- --------- ---------- ----------- ---------- ---------- ----------
Income (loss) from
continuing
operations before
income taxes........ 34,550 41,889 43,634 (94,871) 15,280 55,262 (202,550)
Income tax expense
(benefit)......... 12,876 15,729 17,644 (53,236) 8,878 19,271 (53,423)
-------- --------- ---------- ----------- ---------- ---------- ----------
Income (loss) from
continuing
operations.......... 21,674 26,160 25,990 (41,635) 6,402 35,991 (149,127)
Discontinued
operations:
Income (loss) from
discontinued
operations........ (2,605) (144,011) (5,791) (15,935) (71,221) -- --
Net gains (losses)
on sales of
discontinued
operations........ 10,895 (3,810) -- 24,729 2,523 -- --
-------- --------- ---------- ----------- ---------- ---------- ----------
Income (loss) from
discontinued
operations.......... 8,290 (147,821) (5,791) 8,794 (68,698) -- --
-------- --------- ---------- ----------- ---------- ---------- ----------
Net income
(loss)........ $ 29,964 $(121,661) $ 20,199 $ (32,841) $ (62,296) $ 35,991 $ (149,127)
======== ========= ========== =========== ========== ========== ==========
<CAPTION>
QUARTER ENDED
--------------------------------------
DECEMBER 31, MARCH 31, JUNE 30,
1996 1997 1997
------------ ---------- ----------
<S> <C> <C> <C>
Net revenue........... $1,384,593 $1,467,933 $1,560,600
Operating expenses.... 1,308,128 1,386,301 1,467,029
Net interest
expense........... 8,132 9,781 12,549
Merger expenses..... 11,247 -- 59,434
Losses on
investments....... -- -- --
Other, net.......... (1,347) -- --
---------- ---------- ----------
Income (loss) from
continuing
operations before
income taxes........ 58,433 71,851 21,588
Income tax expense
(benefit)......... 28,489 27,454 19,540
---------- ---------- ----------
Income (loss) from
continuing
operations.......... 29,944 44,397 2,048
Discontinued
operations:
Income (loss) from
discontinued
operations........ -- -- (75,434)
Net gains (losses)
on sales of
discontinued
operations........ -- -- --
---------- ---------- ----------
Income (loss) from
discontinued
operations.......... -- -- (75,434)
---------- ---------- ----------
Net income
(loss)........ $ 29,944 $ 44,397 $ (73,386)
========== ========== ==========
</TABLE>
The Company's historical unaudited quarterly financial data have been
restated to include the results of all businesses acquired prior to June 30,
1997 that were accounted for as poolings of interests (collectively, the
"Mergers"). The Company's Quarterly Reports on Form 10-Q set forth below were
filed prior to the Mergers and thus, differ from the amounts for the quarters
included herein. The differences caused solely by the operation of the merged
companies are summarized as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 MARCH 31, 1997
----------------------- ----------------------- ------------------------ ------------------------
FORM 10-Q AS RESTATED FORM 10-Q AS RESTATED FORM 10-Q AS RESTATED FORM 10-Q AS RESTATED
--------- ----------- --------- ----------- ---------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.............. $332,549 $1,237,715 $360,398 $1,286,692 $1,182,015 $1,313,019 $1,332,271 $1,467,933
Income (loss) from
continuing operations
before income taxes.... (21,435) 15,280 16,153 55,262 (207,168) (202,550) 65,411 71,851
Income tax expense
(benefit).............. (5,935) 8,878 6,129 19,271 (55,634) (53,423) 24,925 27,454
Loss from discontinued
operations............. -- (68,698) -- -- -- -- -- --
Net income (loss)........ $(15,500) $ (62,296) $ 10,024 $ 35,991 $ (151,534) $ (149,127) $ 40,486 $ 44,397
</TABLE>
34
<PAGE> 36
BUSINESS
GENERAL
The Company is the largest PPM company in the United States, based on
revenues. The Company develops, consolidates and manages comprehensive
integrated healthcare delivery systems, consisting of primary care and specialty
physicians, as well as the nation's largest group of physicians engaged in the
delivery of emergency medicine and other hospital-based services. MedPartners
provides services to prepaid managed care enrollees and fee-for-service patients
in 37 states through its network of approximately 13,128 physicians. The Company
also operates one of the nation's largest independent pharmacy benefit
management ("PBM") programs and provides disease management services and
therapies for patients with certain chronic conditions. As of June 30, 1997, the
Company operated its PBM program in all 50 states.
The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and to
advanced management information systems. In addition, the Company contracts with
health maintenance organizations and other third-party payors that compensate
the Company and its affiliated physicians on a prepaid basis (collectively
"HMOs"), hospitals and outside providers on behalf of its affiliated physicians.
These relationships provide physicians with the opportunity to operate under a
variety of payor arrangements and to increase their patient flow.
The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through an
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements that provide for
the management of the affiliated physicians by the Company while assuring the
clinical independence of the physicians.
The Company's PPM revenue is derived from contracts with HMOs that
compensate the Company and its affiliated physicians on a prepaid basis and from
the provision of fee-for-service medical services. In the prepaid arrangements,
the Company, through its affiliated physicians, typically is paid by the HMO a
fixed amount per member ("enrollee") per month ("professional capitation") or a
percentage of the premium per member per month ("percent of premium") paid by
employer groups and other purchasers of healthcare coverage to the HMOs. In
return, the Company, through its affiliated physicians, is responsible for
substantially all of the medical services required by enrollees. In many
instances, the Company and its affiliated physicians accept financial
responsibility for hospital and ancillary healthcare services in return for
payment from HMOs on a capitated or percent of premium basis ("institutional
capitation"). In exchange for these payments (collectively, "global
capitation"), the Company, through its affiliated physicians, provides the
majority of covered healthcare services to enrollees and contracts with
hospitals and other healthcare providers for the balance of the covered
services. In March 1996, the DOC issued the Restricted License to Pioneer
Network, in accordance with the requirements of the Knox-Keene Act which
authorizes Pioneer Network to operate as a healthcare service plan in the state
of California. The Company intends to utilize the Restricted License for a broad
range of healthcare services. See "-- Government Regulation".
The Company operates the largest HBP group in the country with over 2,200
physicians providing services at over 320 sites, primarily hospitals,
nationwide. The Company provides emergency medicine, radiology, anesthesiology,
primary care and other hospital-based physician services. The Company also
provides comprehensive medical services to inmates in various state and local
correctional institutions. As of June 30, 1997, the Company had contracts with
45 correctional institutions providing healthcare services to approximately
44,000 inmates at 65 sites. The Company provides physicians, nurses and clerical
support services for active duty and retired military personnel and their
dependents in emergency departments, ambulatory care centers and primary care
clinics operated by the Department of Defense. At June 30, 1997, the Company's
military medical services were provided under 15 contracts with the Department
of Defense.
35
<PAGE> 37
The Company 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 43,000 prescriptions daily through four mail service
pharmacies and manages patients' immediate prescription needs through a national
network of retail pharmacies. The Company is in the process of integrating the
PBM program with the PPM business by providing pharmaceutical services to
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 comprising drug therapy, physician support
and patient education. The Company currently provides therapies and services for
individuals with such conditions as hemophilia, growth disorders, immune
deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
ACQUISITION PROGRAM
The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The Company implements this strategy
through growth in its existing markets, expansion into new markets through
acquisitions and affiliations and through the implementation of comprehensive
healthcare solutions for patients, physicians and payors. In connection with
pursuing its strategy, the Company creates strategic alliances with hospital
partners and HMOs. As an integral element of these alliances, the Company
utilizes sophisticated information systems to improve the operational efficiency
of, and reduce the costs associated with, operating the Company's network and
the practices of the affiliated physicians. The Company's principal methods of
expansion are acquisitions of PPM businesses and affiliations with physician and
medical groups.
In November 1995, MedPartners acquired MME in exchange for 13.5 million
shares of Common Stock having a total value of approximately $413 million. The
acquisition of MME was accounted for as a pooling-of-interests. MME was a
significant factor in the Southern California managed care market and provided
MedPartners with its first steps towards global capitations.
In February 1996, the Company acquired PPSI, a publicly traded PPM company
based in Redlands, California, in exchange for approximately 11.0 million shares
of Common Stock having a total value of approximately $342 million. The
acquisition of PPSI was accounted for as a pooling of interests. PPSI, through
its previously acquired subsidiary Team Health, established MedPartners in the
HBP and hospital contract management industry.
In September 1996, the Company acquired Caremark International Inc., a
publicly traded PPM and PBM company based in Northbrook, Illinois, in exchange
for approximately 90.5 million shares of Common Stock having a total value of
approximately $1.8 billion (the "Caremark Acquisition"), creating the largest
PPM company in the United States and providing MedPartners with its initial PBM
operations. The Caremark Acquisition was accounted for as a pooling of
interests.
In May 1997, the Company acquired the business assets and assumed the
liabilities of most of the operations of APMC, a PPM company and affiliate of
Aetna Inc. based in Glastonbury, Connecticut. For accounting purposes, this
acquisition is being treated as an asset purchase. As a part of this
acquisition, the Company entered into a 10-year nationwide master network
agreement with Aetna U.S. Healthcare, pursuant to which the members of the
Company's networks of affiliated physicians will be authorized providers for
many of the 14 million members of Aetna U.S. Healthcare's health plan.
In June 1997, the Company acquired InPhyNet, a publicly traded PPM company
based in Fort Lauderdale, Florida and specializing in HBP operations and
correctional care, in exchange for approximately 19.3 million shares of Common
Stock having a total value of approximately $413 million, creating the largest
HBP group in the United States. The acquisition of InPhyNet was accounted for as
a pooling of interests.
In August 1997, the Company commenced a cash tender offer to purchase all
of the common stock of Talbert at an aggregate acquisition price of
approximately $200 million. Talbert is a physician practice
36
<PAGE> 38
management company representing 282 primary and specialty care physicians and
operating 52 clinics in five southwestern states. The Talbert acquisition will
be accounted for as a purchase transaction.
The Company's successful pursuit of new growth opportunities will depend on
many factors including, among others, the Company's ability to identify suitable
targets and to integrate its acquired practices and businesses. The Company's
efforts in this regard could be adversely affected by competition from other PPM
businesses and companies as well as hospital management companies, hospitals and
insurers who are also expanding into the PPM market. The Company's rapid
consolidation makes integration a significant challenge. The dedication of
management resources to integration may detract attention from the day-to-day
operations of the Company. There can be no assurance that the Company will be
able to continue its growth or successfully integrate its acquisitions. Such
failures could have a material adverse effect on the operating results and
financial condition of the Company.
The Company's major acquisitions since January 1995 have been structured as
poolings of interests. As a result, the Company's operating income has been
reduced by the related merger expenses resulting in a net loss for the year
ended December 31, 1996. Such merger expenses as well as integration costs may
result in future losses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Through December 31, 1994, the Company had affiliated with 190 physicians
(without giving effect to physicians who became affiliated with the Company
pursuant to acquisitions that were accounted for as poolings of interests). The
Company is currently affiliated with approximately 13,128 physicians.
INDUSTRY
The Health Care Financing Administration ("HCFA") estimates that national
healthcare spending in 1995 was in excess of $1 trillion, with physicians
controlling more than 80 percent of the overall expenditures. The American
Medical Association reports that approximately 613,000 physicians are actively
involved in patient care in the United States, with a growing number
participating in multi-specialty or single-specialty groups. Expenditures
directly attributable to physicians are estimated at $246 billion.
Concerns over the cost of healthcare have resulted in the rapid growth of
managed care in the past several years. As markets evolve from traditional
fee-for-service medicine to managed care, HMOs and healthcare providers confront
market pressures to provide high quality healthcare in a cost-effective manner.
Employer groups have begun to bargain collectively in an effort to reduce
premiums and to bring about greater accountability of HMOs and providers with
respect to accessibility, choice of provider, quality of care and other matters
that are fundamental to consumer satisfaction. The increasing focus on
cost-containment has placed small to mid-sized physician groups and solo
practices at a disadvantage. 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 that the healthcare delivery system may evolve to
the point where the primary care physician manages and directs healthcare
expenditures. Consequently, 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
such as the Company 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 HMO enrollment and physician membership in group medical practices have
continued to increase, healthcare providers have sought to reorganize themselves
into healthcare delivery systems that are better suited to the managed care
environment. Physician groups and IPAs are joining with hospitals, pharmacies
and other institutional providers in various arrangements to create vertically
integrated delivery systems that provide medical and hospital services ranging
from community-based primary medical care to specialized inpatient services.
These healthcare delivery systems contract with HMOs to provide hospital and
medical services to enrollees pursuant to full risk contracts. Under these
contracts, providers assume the obligation to
37
<PAGE> 39
provide both the professional and institutional components of covered healthcare
services to the HMO enrollees.
In order to compete effectively in this evolving environment, the Company
believes many physicians are concluding that they must obtain control over the
delivery and financial impact of a broader range of healthcare services through
global capitation. To this end, groups of independent physicians and medium to
large medical groups are taking steps to assume the responsibility and the risk
associated with healthcare services that they do not provide, such as
hospitalization and pharmacy services. Physicians are increasingly abandoning
traditional private practice in favor of affiliations with larger organizations
such as the Company that offer skilled and innovative management, sophisticated
information systems and significant capital resources. Many payors and their
intermediaries, including governmental entities and HMOs, are also looking to
outside providers of physician and pharmacy services to develop and maintain
quality outcomes, management programs and patient care data. In addition, such
payors and their intermediaries look to share the risk of providing healthcare
services through capitation arrangements that fix payments for patient care at a
specified amount over a specified period of time. Medical groups and independent
physicians seem to be concluding that while the acceptance of greater
responsibility and risk affords the opportunity to retain and enhance market
share and to operate at a higher level of profitability, the acceptance of
global capitation carries with it significant requirements for enhanced
infrastructure, information systems, capital, network resources and financial
and medical management. As a result, physicians are turning to organizations
such as the Company to provide the resources necessary to function effectively
in a managed care environment.
STRATEGY
The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The key elements of this strategy are
as follows:
Expansion of Existing Markets. The Company's principal strategy for
expanding its existing markets is through the acquisition of, or
affiliation with, physicians and medical groups within those markets. The
Company seeks to acquire or otherwise affiliate with physician groups, IPAs
and other providers that have significant market share in their local
markets and have established reputations for providing quality medical
care. The Company also develops multi-specialty physician networks that are
designed to meet the specific medical needs of a targeted geographic
market. The Company seeks to further enhance its existing market share by
increasing enrollment and fee-for-service business and by moving to global
capitation where possible in its existing affiliated practices and IPAs.
The Company anticipates further internal growth by expanding more of its
payor contracts to global capitation through Pioneer Network and otherwise.
Moreover, the Company believes that increasing marketing activities,
enhancing patient service and improving the accessibility of care will also
increase the Company's market share.
Expansion into New Markets. The Company expands into new markets
through the acquisition of or affiliation with other PPM entities and
medical groups. The Company believes that the acquisition of MME was the
first major consolidation in the industry. That acquisition was followed by
the merger with PPSI, Caremark and, most recently, the acquisitions of
InPhyNet, Fischer Mangold and APMC and the recently announced cash tender
offer for Talbert. As a result of the consolidation of physician practices
and the entry of other PPM companies into the market, the Company's
management has determined that it is important for the Company to continue
its rate of expansion through acquisitions and mergers. The Company
believes that by concentrating on larger acquisitions and by continuing to
expand its core of physician groups and IPAs, as well as its affiliations
with hospitals, it will create vertically integrated healthcare delivery
systems that enhance its competitive position. The Company continually
reviews potential acquisitions and physician affiliations and is currently
in preliminary negotiations with various candidates.
Movement to Global Capitation. The Company, which has been providing
healthcare services for capitated payments (through its predecessors) since
the mid-1970's, possesses significant experience and
38
<PAGE> 40
expertise in the managed care business. The Company intends to leverage
this experience and the managed care systems developed in its western
operations in all of its markets as it continues to develop its
comprehensive integrated healthcare delivery system. The Company has
capitated agreements with over 84 payors and intends to pursue a strategy
toward the implementation of global capitation in all of its markets. This
will be accomplished through the conversion of fee-for-service arrangements
to capitation, the conversion of professional capitation to global
capitation, where practicable, and the entry into new capitation
arrangements with payors. In this connection, the Company has a national
network agreement with Aetna, Inc. and is pursuing the establishment of
national and regional capitated provider agreements with other payors. The
Company has also embarked on a program called "best clinical practices"
pursuant to which it will help its affiliated physician develop the most
cost efficient protocols that provide the most favorable patient outcomes
and will make them available to all of its affiliated practices.
Integration of PPM and PBM Services. The Company believes that there
is significant opportunity for growth through the integration of the PBM
program and the PPM business. The Company expects PBM activity to increase
as payors seek to shift the responsibility for pharmacy services to PPM
entities and physician groups, and those entities look to prescription
benefit managers to control pharmaceutical costs. The Company expects its
PBM program to grow as enrollees and fee-for-service patients use the
Company's mail-order and retail pharmacy networks. In addition, the Company
expects to expand its PBM contracts with managed care organizations to
provide capitated pharmaceutical services for its prepaid enrollees.
Strategic Alliances. The Company believes that strategic alliances
with hospitals and health plans improve the delivery of managed healthcare.
The Company 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 the
Company. The Company believes that such arrangements can be enhanced
through the implementation of the Restricted License held by Pioneer
Network. Under these arrangements, the hospital is at risk in the event
that the costs of institutional care exceed the available funds, and the
Company shares in cost savings and revenue enhancements. The Company
believes that through these and other similar alliances, providers will
devote greater resources to ensuring the wellness of HMO enrollees, to
enhancing high-quality and cost-effective care and to retaining and
expanding their respective market shares. As a result, it is anticipated
that the overall cost of delivering healthcare services will be contained,
rendering both the Company and the participating providers more appealing
to both HMOs and medical care consumers. The Company and its affiliated
physicians have also established relationships with HMOs pursuant to which
the Company and the HMOs share proportionately in the risks and rewards of
local market factors.
Sophisticated Information Systems. The Company believes that
information technology is critical to the growth of integrated healthcare
delivery systems and that the availability of detailed clinical data is
fundamental to quality control and cost containment. The Company develops
and maintains sophisticated management information systems that collect and
analyze clinical and administrative data. These systems allow the Company
to control overhead expenses, maximize reimbursement and provide
utilization management more effectively. The Company evaluates the
administrative and clinical functions of affiliated practices and
re-engineers these functions as appropriate in conjunction with the
implementation of the Company's management information systems to maximize
the benefits of those systems.
The Company also utilizes a sophisticated database to provide
pharmaceutical-related information to participating physicians, payors,
affiliated physician practices and other specialty service entities. The
database is designed to provide an effective method for distributing and
administering drugs and drug therapies.
Increased Operational Efficiencies and Cost Reductions. The Company
is seeking to increase its operating efficiency through expansion of its
market area and number of HMO enrollees, increased specialization,
development of additional in-house services and increased emphasis on
outpatient care. The Company is also refining its utilization management
programs that deliver information used by
39
<PAGE> 41
participating physicians to monitor and improve their practice patterns.
The Company's physician networks attempt to achieve economies of scale
through centralizing billing, scheduling, information management and other
functions.
OPERATIONS
Prior to the acquisition of MME in November 1995, the Company concentrated
its PPM development efforts in the southeastern United States, affiliating
primarily with physician groups that practiced on a fee-for-service basis. The
Company acquired additional business models specifically designed to operate
efficiently in the capitated environment with the acquisition of the MME, PPSI,
Caremark and InPhyNet organizations. These business models, which are replicable
and flexible, allow the Company to take advantage of the full range of market
opportunities in the PPM industry and enable the Company to build integrated
physician networks attractive to payors of all types. The Company currently has
networks under development in 37 states.
To meet payor demand for price competitive, quality services, the Company
utilizes a market-based approach that incorporates primary care and specialty
physicians into a network of providers serving a targeted geographic area. The
Company engages in research and market analysis to determine the best network
configuration for a particular market. Primary care includes family practice,
internal medicine, pediatrics and obstetrics/gynecology. Key specialties include
orthopedics, cardiology, oncology, radiology, neurosciences, urology, surgery,
ophthalmology and ear, nose and throat. At certain locations, affiliated
physicians and support personnel operate centers for diagnostic imaging, urgent
care, cancer management, mental health treatment and health education. Network
physicians also treat fee-for-service patients on a per-occurrence basis.
After-hours care is available in several of the Company's clinics. Each network
is configured to contain, when complete, the physician services necessary to
capture at least a ten percent market share and to provide at least 90 percent
of the physician services required by payors. The Company markets its networks
to managed care and third-party payors, referring physicians and hospitals.
Affiliated Physicians. The relationship between the Company and its
affiliated physicians is set forth in asset purchase and practice management
agreements. Through the asset purchase agreements, the Company acquires the
assets utilized in the practices and may also assume certain leases and other
contracts of the physician practices. Under the practice management agreements,
the Company provides administrative, management and support functions to
physician practices as necessary in connection with their respective medical
practices. The Company also provides its physician practices with the equipment
and facilities necessary for the medical practices, manages practice operations
and employs substantially all of the practices' non-physician personnel, except
certain allied health professionals, such as nurses and physical therapists.
The Company consolidates physician practices that have directly entered
into contracts with HMOs or that have the right to receive payment directly from
HMOs for the provision of medical services in the Company's clinics, because it
obtains a controlling financial interest solely by virtue of a long-term
practice management agreement with physician practices. The revenue earned by
these physician practices represented 30% of PPM revenue (18% of consolidated
revenue) during the first six months of 1997. The balance of the Company's PPM
revenue (70%) is derived from contracts directly between the Company, or a
wholly owned subsidiary, and HMOs. Practice management agreements with physician
practices that hold HMO contracts or the right to receive payment directly from
HMOs provide three general types of financial arrangements regarding the
compensation of the physician-stockholders of those physician practices:
(i) Physician practices that contributed 7% of PPM revenues (4% of
consolidated revenue) during the first six months of 1997 have practice
management agreements that provide the physician-stockholders a negotiated
fixed dollar amount. The physicians may be eligible to receive a
discretionary bonus based on performance criteria and goals. The amount of
any such bonus is determined solely by the Company's management and is not
directly correlated to clinic revenue or gross profit. To the extent the
clinic's net revenue increases or decreases under these practice management
agreements, physician compensation will also increase or decrease, pro
rata, based on the practices' compensation as a percentage of the clinic's
net revenue;
40
<PAGE> 42
(ii) Physician practices that contributed 15% of PPM revenue (8% of
consolidated revenue) during the first six months of 1997 have practice
management agreements that compensate the physician-stockholder on a
fee-for-service basis. The respective clinics generally earn revenue on a
fee-for-service basis, and physician compensation typically represents
between 40 and 70 percent of the clinic's net revenue; or
(iii) Physician practices that contributed 8% of PPM revenue (5% of
consolidated revenue) during the first six months of 1997 provided
physician-stockholders with a salary, plus bonus, and a profit-sharing
payment of a percentage of the clinic's net income (i.e., contractual
revenue less base physician compensation, bonus and clinic expenses).
Under these various types of agreements, revenue is assigned to the Company
by the physician practice. The Company is responsible for the billing and
collection of all revenue for services provided at its clinics, as well as for
paying all expenses, including physician compensation. The Company is not
reimbursed for the clinic expenses, rather it is responsible and at risk for all
such expenses. In effect the Company retains any residual from operations of its
physician practices (and funds any deficit). No earnings accumulate in its
physician practices or are available for the payment of dividends to the
physician-stockholders. In addition, the legal owners of its physician practices
do not have a substantive capital investment that is at risk and the Company has
substantially all of the capital at risk. Based on the terms of the practice
management agreement, in almost all cases, there is no economic value
attributable to the capital stock of those physician practices.
The Company's practice management agreements with its physician practices
are long-term and provide the Company with unilateral control over its physician
practices. The practice management agreements include the following provisions:
(i) the initial term is 20 to 40 years; (ii) renewal provisions call for
automatic and successive extension periods; (iii) the physician practices cannot
unilaterally terminate their agreements with the Company unless the Company
fails to cure a breach of its contractual responsibilities thereunder within 30
days after notification of such breach; (iv) the Company is obligated to
maintain a continuing investment of capital; (v) the Company employs the
non-physician personnel of its physician practices; and (vi) the Company assumes
full responsibility for the operating expenses of the physician practice in
return for an assignment of the physician practice's revenue.
The Company works closely with affiliated physicians in targeting and
recruiting additional physicians and in merging sole practices or single
specialty practices into the already-affiliated physician practices. The Company
seeks to recognize and develop opportunities to provide services throughout a
market by positioning its practices so that the entire market is covered
geographically. This approach provides patients with convenient medical
facilities and services and responds to coverage criteria that are essential to
payors.
IPAs. The Company's networks include approximately 7,700 primary care and
specialist IPA physicians serving approximately 378,000 HMO enrollees. An IPA
allows individual practitioners to access patients in their respective areas
through contracts with HMOs without having to join a group practice or sign
exclusive contracts. An IPA also coordinates utilization review and quality
assurance programs for its affiliated physicians. Additionally, an IPA offers
other benefits to physicians seeking to remain independent, including economies
of scale in the marketplace, enhanced risk-sharing arrangements and access to
other strategic alliances. The Company identifies IPAs that need access to
capitated HMO contracts, and such IPA organizations typically agree to assign
their existing HMO contracts to the Company. The Company believes that the
expansion of its IPAs will enable it to increase its market share with
relatively low risk due to the low incremental investment required to recruit
additional physicians.
HMOs. The Company, through its affiliated physicians, began contracting
with HMOs to provide healthcare on a capitated reimbursement basis in 1975
(through predecessors). Under these contracts, which typically are automatically
renewed on an annual basis, the Company 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
adjustable based on the age and/or sex of the HMO enrollee. Contracts for
prepaid healthcare with HMOs accounted for approximately 31% of the Company's
net revenue for the six months ended June 30, 1997.
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To the extent that enrollees require more care than is anticipated or
require supplemental medical care that is not otherwise reimbursed by HMOs or
other payors, aggregate capitation payments may be insufficient to cover the
costs associated with the treatment of enrollees. Stop-loss coverage is
maintained, which mitigates the effect of occasional high utilization of
healthcare services. As of June 30, 1997, approximately 2.0 million prepaid HMO
enrollees were covered beneficiaries for services in the Company's networks.
These patients are covered under either commercial (typically
employer-sponsored) or senior (Medicare-funded) HMOs. Higher capitation rates
are typically received for senior patients because their medical needs are
generally greater. Consequently, the cost of their covered care is higher. As of
June 30, 1997, the Company's HMO enrollees comprised approximately 1.6 million
commercial enrollees and approximately 164,000 senior (over age 65) enrollees
and approximately 211,000 Medicaid and other enrollees. As of June 30, 1997, the
Company was receiving institutional capitation payments for approximately
959,000 enrollees. The Company is largely dependent on continued growth in the
number of HMO enrollees. This growth may come from the acquisition of other PPM
entities, affiliation with additional physicians or increased enrollment in
HMO's currently contracting with the Company. There can be no assurance that the
Company will be successful in continuing the growth of HMO enrollees.
Hospitals. The Company operates Pioneer Hospital ("Pioneer Hospital"), a
99-bed acute care hospital located in Artesia, California, U.S. Family Care
Medical Center ("USFMC"), a 102-bed acute care hospital in Montclair,
California, and Friendly Hills Hospital ("Friendly Hills"), a 274-bed acute care
hospital in La Habra, California. Many of the physicians on the professional
staff rosters of these hospitals are either employed by an affiliated
professional corporation or are under contract with the Company's IPAs. Other
physicians that are traditionally hospital-based, such as emergency room
physicians, anesthesiologists, pathologists, radiologists and cardiologists
provide services through contractual arrangements with the Company. Several of
the Company's medical clinics are located sufficiently close to hospitals where
these physicians are based to allow enrollees who use the clinics to also use
those hospitals. Under the HMO contracts, the Company, through its affiliated
medical practices or Knox-Keene licensee, is obligated to pay for inpatient
hospitalization and related services. Over 50 percent of Pioneer Hospital's,
approximately 85 percent of USFMC's and approximately 87 percent of Friendly
Hills' daily censuses are made up of the Company's affiliated medical group
enrollees. In April 1997, the Company and Tenet signed a letter of intent
pursuant to which the parties intend to form a complete healthcare contracting
network in southern California. Under the terms of the proposed agreement, Tenet
will acquire Pioneer Hospital. The Company, through its Knox-Keene licensee or
affiliated medical groups, 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, the Company
and its affiliated physicians, to the extent such services have not reached a
stop-loss threshold. The Company and these providers split any savings realized
if hospital utilization declines due to the success of the Company's programs
for early intervention, wellness and outpatient treatment.
Hospital-Based Physician Operations. The Company's HBP operations organize
and manage physicians and other healthcare professionals engaged in the delivery
of emergency, radiology and teleradiology services, other hospital-based
services and temporary staffing and support services to hospitals, clinics,
managed care organizations and physician groups. The Company currently provides
HBP services at over 320 sites including hospital emergency and radiology
departments in 28 states. Under contracts with hospitals and other clients, the
Company's HBP operations identify and recruit physicians and other healthcare
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, such as Team
Health, as a more cost-effective and reliable alternative to the development of
in-house physician staffing.
Correctional Care. The Company provides comprehensive medical services,
including mental health and dental services, to inmates in various state and
local correctional institutions. The Company provides primary care physician
services directly and typically subcontracts other services with hospitals and
medical specialists on either a capitated or discounted fee-for-service basis.
At June 30, 1997, the Company had
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contracts with 45 correctional institutions and managed the healthcare services
provided to approximately 44,000 inmates at 65 sites. Under correctional care
contracts, the Company is paid monthly on the basis of each correctional
institution's average daily inmate population. Typically, the Company is also
entitled to additional reimbursement for any healthcare related expenditures
incurred above a certain dollar amount of outside medical expenses per inmate
per year, as well as reimbursement for the cost of treating inmates in
connection with certain extraordinary events.
Department of Defense. The Company provides physicians, nurse and clerical
support services for active duty and retired military personnel and their
dependents in emergency departments, ambulatory care centers and primary care
clinics operated by the Department of Defense. Under Department of Defense
contracts, the Company is generally paid a fixed amount, per patient visit or
per hour of service, without regard to the scope of professional services
provided. Under per patient fixed fee arrangements, the Company assumes the risk
if patient volume is below expectations. At June 30, 1997, the Company's
military medical services were provided under 15 contracts with the Department
of Defense.
Pharmaceutical Services. The Company manages outpatient PBM programs
throughout the United States for corporations, insurance companies, unions,
government employee groups and managed care organizations. Prescription drug
benefit management involves the design and administration of programs for
reducing the costs and improving the safety, effectiveness and convenience of
prescription drugs. The Company has one of the nation's largest independent PBM
programs, dispensing 43,000 prescriptions daily from four mail service
pharmacies. The Company also manages patients' immediate prescription needs
through a national network of retail pharmacies. Under the Company's PBM quality
assurance program, the Company maintains rigorous quality assurance and
regulatory policies and procedures. 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. The
Company has retained the services of an independent national advisory panel of
physician specialists that advises it on the clinical analyses of its
intervention strategies and on cost-effective clinical procedures. The Company
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. The pharmacy business is
subject to heavy government regulation. Any failure to satisfy pharmacy
licensing requirements could have a material adverse effect on the operating
results and financial condition of the Company.
Disease Management. The Company delivers comprehensive long-term support
for high-cost, chronic illnesses in an effort to improve outcomes for patients
and to lower costs. The Company believes that these programs efficiently provide
for a patient's entire healthcare needs. The programs utilize advanced protocols
and eliminate unnecessary procedural steps. The Company provides therapies and
services to individuals with such conditions as hemophilia, growth disorders,
immune deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
The Company estimates that there are over 200,000 patients in the United States
suffering from these diseases. The Company's disease management services utilize
the Company's integrated health data to develop therapies to manage the high
cost of treating these patients.
International. The Company also has operations in several European
countries, Canada and Japan.
INFORMATION SYSTEMS
The Company develops and maintains integrated information systems to
support its growth and acquisition plans. The Company's overall information
systems design is open, modular and flexible. The Company is implementing a
flexible individual patient electronic medical record ("EMR") that is
continually updated to complement primary practice management and billing
functions. The Company has configured its systems to give affiliated physicians
and their staff efficient and rapid access to complex clinical data. The
Company'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. This allows physicians to
have treatments checked against pre-defined protocols at the time of service.
The Company also
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utilizes a sophisticated database to provide pharmaceutical-related information
to participating physicians, payors, affiliated physician practices and other
specialty service entities. The database is designed to provide a safe and
effective method for distributing and administering drugs and drug therapies.
Effective and efficient access to key clinical patient and pharmaceutical
data is critical in obtaining quality outcomes and improving costs as the
Company enters into more capitation contracts. The Company utilizes its existing
information systems to measure patient care satisfaction and outcomes of care,
improve productivity, manage complex reimbursement procedures and integrate
information from multiple facilities throughout the care spectrum. These systems
allow the Company to analyze clinical and cost data to determine thresholds of
profitability under various capitation arrangements.
COMPETITION
The PPM industry is highly competitive and is subject to continuing changes
in the provision of services and the selection and compensation of providers.
The Company competes for acquisition, affiliation and other expansion
opportunities with national, regional and local PPM companies and other PPM
entities including HBP groups and hospital contract management companies. In
addition, certain companies, including hospitals and insurers, are expanding
their presence in the PPM market. The Company also competes with prescription
drug benefit programs, prescription drug claims processors, regional claims
processors, providers of disease management services and insurance companies.
GOVERNMENT REGULATION
General. As a participant in the healthcare industry, the Company's
operations and relationships are subject to extensive and increasing regulation
by a number of governmental entities at the federal, state and local levels. The
Company believes its operations are in material compliance with applicable laws.
Nevertheless, because the structure of the relationship with the physician
groups is unique, many aspects of the Company's business operations have not
been the subject of state or federal regulatory interpretation. Thus, there can
be no assurance that a review of the Company's or the affiliated physicians'
businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or of
its affiliated physicians. Nor can there be any assurance that the healthcare
regulatory environment will not change so as to restrict the Company's or the
affiliated physicians' existing operations or their expansion. Any significant
restriction could have a material adverse effect on the operating results and
financial condition of the Company.
Federal Reimbursement, Fraud and Abuse and Referral Laws. Approximately 12
percent of the revenues of the Company's affiliated physician practices are
derived from payments made by government-sponsored healthcare programs
(principally, medicare and state reimbursement programs). As a result, the
Company is subject to the laws and regulations that govern reimbursement under
Medicare and Medicaid. Any change in reimbursement regulations, policies,
practices, interpretations or statutes could adversely affect the operations of
the Company. There are also state and federal civil and criminal statutes
imposing substantial penalties (including civil penalties and criminal fines and
imprisonment) on healthcare providers that fraudulently or wrongfully bill
governmental or other third-party payors for healthcare services. The Company
believes it is in material compliance with such laws, but there can be no
assurance that the Company's activities will not be challenged or scrutinized by
governmental authorities or that any such challenge or scrutiny would not have a
material adverse effect on the operating results and financial condition of the
Company.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute", prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subjected. The
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criminal penalties include fines up to $25,000 per violation and imprisonment
for five years or more. Additionally, the DHHS has the authority to exclude
anyone, including individuals or entities, who has committed any of the
prohibited acts from participation in the Medicare and Medicaid programs. If
applied to the Company or any of its subsidiaries or affiliated physicians, such
exclusion could result in a significant loss of reimbursement for the Company,
up to a maximum of the approximately 12 percent of the revenues of the Company's
affiliated physician groups, which could have a material adverse effect on the
operating results and financial condition of the Company. Although the Company
believes that it is not in violation of the Anti-Kickback Statute or similar
state statutes, its operations do not fit within any of the existing or proposed
federal safe harbors.
Federal law prohibits, with some exceptions, an entity from filing a claim
for reimbursement under the Medicare or Medicaid programs for certain designated
services if the entity has a financial relationship with the referring
physician. Federal law (the "Medicare Referral Payments Law") also prohibits the
solicitation or receipt of remuneration in exchange for, or the offer or payment
of remuneration to induce, the referral of Medicare or Medicaid beneficiaries.
Significant prohibitions against physician referrals were enacted by the United
States Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to
certain exemptions, a physician is prohibited from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician has an ownership or investment interest or with which the
physician has entered into a compensation arrangement. The provisions of the
Anti-Kickback Statute and the Medicare Referral Payments Law are complex, and
the future interpretations of these provisions and their applicability to the
Company's operations cannot be predicted or analyzed in such a way as to predict
with certainty the effect of such rules and regulations on the Company. Although
the Company seeks to arrange its business relationships to comply with these
healthcare rules and regulations, its operations do not fit within any of the
existing or published proposed federal safe harbors. As a result, there can be
no assurance that the Company's present or future operations will not be
challenged under such provisions. The Company does not believe it is in
violation of the Anti-Kickback Statute of the Medicare Referral Payment law and
associated regulations because the revenues which are assigned to the Company
pursuant to the management agreements between the Company and its affiliated
physician practices represent payments made by the HMO to satisfy claims
submitted through the Company on behalf of the affiliated physician for the
furnishing of healthcare services by the physician to an individual. The monies
retained by the Company do not exceed the aggregate amount due the Company for
the reasonable and necessary physician practice management services provided by
the Company pursuant to the management agreement between the Company and the
affiliated physician or physician practice, i.e., transfer agreement or
management services agreement. The Company believes that such payments do not
fall within the scope or the intent of such rules and regulations. Further, the
Company does not believe it is in violation of the Anti-Kickback Statute and the
Medicare Referral Payment Law because the Company does not refer, or influence
the referral of, patients or services reimbursed under governmental programs to
the physician practices. While the Company believes it is in compliance with
such legislation, future regulations and interpretations of existing regulations
could require the Company to modify the form of its relationship with physician
groups which could have a material adverse effect on the operating results and
financial condition of the Company.
The OIG of the DHHS has promulgated regulatory "safe harbors" under the
Medicare Referral Payments Law that describe payment practices between
healthcare providers and referral sources that will not be subject to criminal
prosecution and that will not provide the basis for exclusion from the Medicare
and Medicaid programs. The Company retains healthcare professionals to provide
advice and non-medical services to the Company in return for compensation
pursuant to employment, consulting or service contracts. The Company also enters
into contracts with hospitals under which the Company provides products and
administrative services for a fee. Many of the parties with whom the Company
contracts refer or are in a position to refer patients to the Company. The
breadth of these federal laws, the paucity of court decisions interpreting these
laws, the limited nature of regulatory interpretations and the absence of court
decisions interpreting the safe harbor regulations have resulted in ambiguous
and varying interpretations of these federal laws and regulations. The OIG or
the DOJ could seek a determination that the Company's past or current policies
and practices regarding contracts and relationships with healthcare providers
violate federal law. In such event, no assurance can be given that the Company's
interpretation of these laws will prevail, except with
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respect to those matters that were the subject of the OIG investigation. See
"-- Legal Proceedings". The failure of the Company's interpretation of these
laws to prevail could materially adversely affect the operating results and
financial condition of the Company.
Caremark agreed, in its settlement agreement with the OIG and DOJ prior to
the Caremark Acquisition, to continue to enforce certain compliance-related
oversight procedures. Should the oversight procedures reveal violations of
federal law, Caremark would be required to report such violations to the OIG and
DOJ. Caremark is therefore subject to increased regulatory scrutiny and, in the
event that Caremark commits legal or regulatory violations, it may be subject to
an increased risk of sanctions or penalties, including disqualification as a
provider of Medicare or Medicaid services which could have a material adverse
effect on the operating results and financial condition of the Company.
State Referral Payment Laws. The Company is also subject to state statutes
and regulations that prohibit payments for referral of patients and referrals by
physicians to healthcare providers with whom the physicians have a financial
relationship. State statutes and regulations generally apply to services
reimbursed by both governmental and private payors. Violations of these laws may
result in prohibition of payment for services rendered, loss of pharmacy or
health provider licenses as well as fines and criminal penalties. State statutes
and regulations that may affect the referral of patients to healthcare providers
range from statutes and regulations that are substantially the same as the
federal laws and the safe harbor regulations to a simple requirement that
physicians or other healthcare professionals disclose to patients any financial
relationship the physicians or healthcare professionals have with a healthcare
provider that is being recommended to the patients. These laws and regulations
vary significantly from state to state, are often vague, and, in many cases,
have not been interpreted by courts or regulatory agencies. Management believes
the Company's operations are in material compliance with existing law, but there
can be no assurance that the Company's existing business arrangements will not
be successfully challenged in one or more states. The Company is not materially
dependent upon revenues derived from any single state. Adverse judicial or
administrative interpretations of such laws in several states, taken together,
could, however, have a material adverse effect on the operating results and
financial condition of the Company. In addition, expansion of the Company's
operations to new jurisdictions could require structural and organizational
modifications of the Company's relationships with physician groups in order to
comply with new or revised state statutes. Such structural and organizational
modifications could have a material adverse effect on the operating results and
financial condition of the Company.
Corporate Practice of Medicine Laws. The laws of many states prohibit
physicians from splitting fees with non-physicians and prohibit non-physician
entities from practicing medicine. These laws and their interpretations vary
from state to state and are enforced by the courts and by regulatory authorities
with broad discretion. The Company believes that it has perpetual and unilateral
control over the assets and operations of the various affiliated professional
corporations. However, there can be no assurance that regulatory authorities
will not take the position that such control conflicts with state laws regarding
the practice of medicine or other federal restrictions. Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, there can be no assurance that the existing
organization of the Company and its contractual arrangements with affiliated
physicians will not be successfully challenged as constituting the unlicensed
practice of medicine or that the enforceability of the provisions of such
arrangements, including non-competition agreements, will not be limited. There
can be no assurance that review of the business of the Company and its
affiliates by courts or regulatory authorities will not result in a
determination that could adversely affect their operations or that the
healthcare regulatory environment will not change so as to restrict existing
operations or expansion thereof. In the event of action by any regulatory
authority limiting or prohibiting the Company or any affiliate from carrying on
its business or from expanding the operations of the Company and its affiliates
to certain jurisdictions, structural and organizational modifications of the
Company may be required, which could have a material adverse effect on the
operating results and financial condition of the Company.
Antitrust Laws. In connection with the corporate practice of medicine laws
referred to above, the physician practices with which the Company is affiliated
necessarily are organized as separate legal entities. As such, the physician
practice entities may be deemed to be persons separate both from the Company and
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from each other under the antitrust laws and, accordingly, subject to a wide
range of laws that prohibit anticompetitive conduct among separate legal
entities. The Company believes it is in compliance with these laws and intends
to comply with any state and federal laws that may affect its development of
integrated healthcare delivery networks. There can be no assurance, however,
that a review of the Company's business by courts or regulatory authorities
would not adversely affect the operations of the Company and its affiliated
physician groups.
Insurance Laws. The assumption of risk on a prepaid basis by health
provider networks is occurring with increasing frequency, and the practice is
being reviewed by various state insurance commissioners as well as the NAIC to
determine whether the practice constitutes the business of insurance. The
Company 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 the Company's activities will not be challenged or
scrutinized by governmental authorities or that future interpretations of the
insurance laws by such governmental authorities will not require licensure or
restructuring of some or all of the Company's operations in any such state. In
the event that the Company is required to become licensed under these laws, the
licensure process can be lengthy and time consuming and, unless the regulatory
authority permits the Company to continue to operate while the licensure process
is progressing, the Company could experience a material adverse change in its
operating results and financial condition while the licensure process is
pending. In addition, many of the licensing requirements mandate strict
financial and other requirements which the Company may not be able to meet.
Further, once licensed, the Company would be subject to continuing oversight by
and reporting to the respective regulatory agency.
The NAIC recently adopted the Managed Care Plan Network Adequacy Model Act
(the "Model Act") which is intended to establish standards for the creation and
maintenance of networks by health carriers. The Model Act is also intended to
establish requirements for written agreements between health carriers offering
managed care plans, participating providers and intermediaries, like the
Company, which negotiate provider contracts. An NAIC model insurance act does
not carry the force of law unless it is adopted by applicable state
legislatures. The Company does not know which states, if any, will adopt the
Model Act. There can be no assurance that the Company will be able to comply
with the Model Act if it is adopted in any state in which the Company does
business.
Other State and Local Regulation. In March 1996, the DOC issued the
Restricted License to Pioneer Network in accordance with the requirements of the
Knox-Keene Act. The Restricted License authorizes Pioneer Network to operate as
a healthcare service plan in the State of California. The Company, through
Pioneer Network, utilizes the Restricted License to contract with HMOs for a
broad range of healthcare services, including both institutional and
professional medical services. The Knox-Keene Act and the regulations
promulgated thereunder subject entities that are licensed as healthcare service
plans in California to substantial regulation by the DOC. In addition, licensees
under the Knox-Keene Act must file periodic financial data and other information
(that generally become available to the public), maintain substantial tangible
net equity on their balance sheets and maintain adequate levels of medical,
financial and operational personnel dedicated to fulfilling the licensee's
statutory and regulatory requirements. The DOC is empowered to take enforcement
actions against licensees that fail to comply with such requirements.
The operation of Pioneer Hospital, USFMC and Friendly Hills is highly
regulated, and each is accredited by the Joint Commission on Accreditation of
Healthcare Organizations. Accreditation from the Joint Commission on
Accreditation of Healthcare Organizations allows 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, USFMC and Friendly Hills
is licensed and regulated as a general acute care hospital by the State of
California Department of Health Services. Additionally, each of Pioneer
Hospital, USFMC and Friendly Hills 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.
Pharmacy Licensing and Operation. The Company is subject to federal and
state laws and regulations governing pharmacies. Federal controlled substance
laws require the Company to register its pharmacies with
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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 an applicant's personnel, the
adequacy of its prescription fulfillment and inventory control practices and the
adequacy of its facilities. In general, pharmacy licenses are renewed annually.
Pharmacists employed by each branch must also satisfy state licensing
requirements.
Several states have enacted legislation that requires mail service
pharmacies located outside such state to register with the state board of
pharmacy prior to mailing drugs into the state and to meet certain operating and
disclosure requirements. These statutes generally permit a mail service pharmacy
to operate in accordance with the laws of the state in which it is located. In
addition, various pharmacy associations and state boards of pharmacy have
promoted enactment of laws and regulations directed at restricting or
prohibiting the operation of out-of-state mail service pharmacies by, among
other things, requiring compliance with all laws of certain states into which
the mail service pharmacy dispenses medications whether or not those laws
conflict with the laws of the state in which the pharmacy is located. To the
extent that such laws or regulations are found to be applicable to the Company's
operations, the Company would be required to comply with them. Some states have
enacted laws and regulations which, if successfully enforced, would effectively
limit some of the financial incentives available to plan sponsors that offer
mail service prescription programs. The United States Department of Labor has
commented that such laws and regulations are 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 Bureau of Competition of the Federal Trade Commission
("FTC") has concluded that such laws and regulations may be anticompetitive and
not in the best interests of consumers. To date, there have been no formal
administrative or judicial efforts to enforce any of such laws against the
Company. To the extent that any of the foregoing laws or regulations prohibit or
restrict the operation of mail service pharmacies and are found to be applicable
to the Company, they could have an adverse effect on the Company's prescription
mail service operations. 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.
The PBM and disease management services of the Company are subject to state
and federal statutes and regulations governing the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances, reimbursement
under federal and state medical assistance programs, financial relationships
between healthcare providers and potential referral sources, medical waste
disposal, risk sharing by non-insurance companies and workplace health and
safety. The Company's operations may also be affected by changes in ethical
guidelines and changes in operating standards of professional and trade
associations and private accreditation commissions such as the American Medical
Association, the National Committee for Quality Assurance and the Joint
Commission on Accreditation of Healthcare Organizations.
Future Legislation, Regulation and Interpretation. As a result of the
continued escalation of healthcare costs and the inability of many individuals
to obtain health insurance, numerous proposals have been or may be introduced in
the United States Congress and state legislatures relating to healthcare reform.
There can be no assurance as to the ultimate content, timing or effect of any
healthcare reform legislation, nor it is possible at this time to estimate the
impact of potential legislation, which may be material, on the Company. Further,
although the Company exercises care in structuring its arrangements with
physicians to comply in all material respects with the above-referenced laws,
there can be no assurance that (i) government officials charged with
responsibility for enforcing such laws will not assert that the Company or
certain transactions in which the Company is involved are in violation thereof
and (ii) such laws will ultimately be interpreted by the courts in a manner
consistent with the Company's interpretation.
EMPLOYEES
As of June 30, 1997, the Company, including its affiliated professional
entities, employed approximately 26,000 people on a full-time equivalent basis.
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CORPORATE LIABILITY AND INSURANCE
The Company's business entails an inherent risk of claims of physician
professional liability. In recent years participants in the healthcare industry
have become increasingly subject to large claims based on theories of medical
malpractice that entail substantial defense costs. Through the ownership and
operation of Pioneer Hospital, USFMC and Friendly Hills, all acute care
hospitals, the Company could also be subject to allegations of negligence and
wrongful acts. To protect its overall operations from such potential
liabilities, the Company has a multi-tiered corporate structure and preserves
the operational integrity of each of its operating subsidiaries. In addition,
the Company maintains professional liability insurance, general liability and
other customary insurance on a claims-made and modified occurrence basis, in
amounts deemed appropriate by management based upon historical claims and the
nature and risks of the business, for many of the affiliated physicians,
practices and operations. There can be no assurance that a future claim will not
exceed the limits of available insurance coverage or that such coverage will
continue to be available.
Moreover, the Company requires each physician group with which it
affiliates to obtain and maintain professional liability and workers'
compensation insurance coverage. Such insurance may provide additional coverage,
subject to policy limits, in the event the Company were held liable as a
co-defendant in a lawsuit for professional malpractice against a physician. In
addition, generally, the Company is indemnified under the practice management
agreements by the affiliated physician groups for liabilities resulting from the
performance of medical services. However, there can be no assurance that any
future claim or claims will not exceed the limits of these available insurance
coverages or that indemnification will be available for all such claims.
PROPERTIES
The Company's corporate headquarters is located at 3000 Galleria Tower in
Birmingham, Alabama. Additionally, the Company has corporate offices in Long
Beach, California, Knoxville, Tennessee, Fort Lauderdale, Florida and
Northbrook, Illinois. The Company currently owns or leases facilities providing
medical services in 37 states, Puerto Rico and five other countries. The Company
also leases, subleases or occupies, pursuant to certain acquisition agreements,
the clinic facilities of the affiliated physician groups. The Company
anticipates that as the affiliated practices continue to grow and add new
services, expanded corporate facilities will be required.
LEGAL PROCEEDINGS
The Company is named as a defendant in various legal actions arising
primarily out of services rendered by physicians and others employed by its
affiliated physician entities and Pioneer Hospital, USFMC and Friendly Hills, as
well as personal injury and employment disputes. In addition, certain of its
affiliated medical groups are named as defendants in numerous actions alleging
medical negligence on the part of their physicians. In certain of these actions,
the Company'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.
Management does not view any of these actions as likely to result in an
uninsured award which would have a material adverse effect on the operating
results and financial condition of the Company.
In June 1995, Caremark agreed to settle an investigation with the DOJ, OIG,
the Veterans Administration, the Federal Employee Health Benefits Program
("FEHBP"), the Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS") and related state investigative agencies in all 50 states and the
District of Columbia (the "OIG Settlement"). Under the terms of the OIG
Settlement, which covered allegations dating back to 1986, a subsidiary of
Caremark pled guilty to two counts of mail fraud -- one each in Minnesota and
Ohio. The basis of these guilty pleas was Caremark's failure to provide certain
information to CHAMPUS and FEHBP, federally funded healthcare benefit programs,
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. The OIG Settlement allows Caremark to continue participating
in Medicare, Medicaid and other government healthcare programs. Under the OIG
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. In addition, Caremark
contributed $2.0 million to a grant program set up under the Ryan White
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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 Caremark's discontinued operations and will not
materially affect the Company's ability to pursue its long-term business
strategy. There can be no assurance, however, that the ultimate costs related to
the OIG Settlement will not exceed these estimates or that additional costs,
claims and damages will not occur, or if they occur, will not have a material
adverse effect on the operating results and financial condition of the Company.
In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory violations, Caremark
is required to report such violations to the OIG and DOJ. Caremark is,
therefore, subject to increased regulatory scrutiny and, in the event it commits
legal or regulatory violations, Caremark may be subject to an increased risk of
sanctions or penalties, including disqualification as a provider of Medicare or
Medicaid services, which would have a material adverse effect on the operating
results and financial condition of the Company.
In March 1996, Caremark agreed to settle all disputes with a number of
private payors. These disputes relate to businesses that were covered by the OIG
Settlement. The settlements resulted in an after-tax charge of approximately
$43.8 million. In addition, Caremark paid $24.1 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.
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, and may be subjected to in the future, various private
suits and claims (including stockholder derivative actions and an alleged class
action suit) being asserted in connection with matters relating to the OIG
Settlement by Caremark's stockholders, patients who received healthcare services
from Caremark and such patients' insurers. The Company cannot determine at this
time what costs or liabilities may be incurred in connection with future
disposition of non-governmental claims or litigation. Such additional costs or
liabilities, if incurred, could have a material adverse effect on the operating
results and financial condition of the Company.
In August and September 1994, stockholders of Caremark, 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 continue to engage in
discovery proceedings. The Company intends to defend these cases vigorously.
Although management believes, based on information currently available, that the
ultimate resolution of this matter is not likely to have a material adverse
effect on the operating results and financial condition of the Company, there
can be no assurance that the ultimate resolution of this matter, if adversely
determined, would not have a material adverse effect on the operating results
and financial condition of the Company.
In 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 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 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 state
complaint seeks unspecified damages, attorneys' fees and expenses
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and an award of punitive damages. In November 1996, in response to a motion by
the plaintiffs, the Court dismissed the United States District Court cases
without prejudice. On March 27, 1996, the Minnesota state court lawsuit was
dismissed with prejudice. 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. The Company intends to defend these cases vigorously. Although
management believes, based on information currently available, that the ultimate
resolution of this matter is not likely to have a material adverse effect on the
operating results and financial condition of the Company, there can be no
assurance that the ultimate resolution of this matter, if adversely determined,
would not have a material adverse effect on the operating results and financial
condition of the Company.
In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark, 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. The Company intends
to defend this case vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.
In September 1995, Coram filed a complaint in the San Francisco Superior
Court against Caremark, its subsidiary, Caremark Inc., and others. The
complaint, which arose from Caremark's sale to Coram of Caremark's home infusion
therapy business in April 1995, for approximately $209.0 million in cash and
$100.0 million in securities, alleged breach of the sale agreement and made
other related claims seeking compensatory damages, in the aggregate, of $5.2
billion. Caremark filed counterclaims against Coram and also filed a lawsuit in
the U.S. District Court in Chicago against Coram claiming securities fraud. On
July 1, 1997, the parties to the Coram litigation announced that a settlement
had been reached pursuant to which Caremark will return for cancellation all of
the securities issued by Coram in connection with the acquisition and will pay
to Coram $45 million in cash on or before September 1, 1997. The settlement
agreement also provides for the termination and resolution of all disputes and
issues between the parties and for the exchange of mutual releases. The Company
recognized an after-tax charge of $75.4 million during the second quarter of
1997 related to this settlement.
Beginning in September 1994, Caremark was named as a defendant in a series
of lawsuits added to a pending group of actions (including a class action)
brought in 1993 under the antitrust laws by local and chain retail pharmacies
against brand name pharmaceutical manufacturers, wholesalers and prescription
benefit managers other than Caremark. The lawsuits, filed in federal district
courts in at least 38 states (including the United States District Court for the
Northern District of Illinois), allege that at least 24 pharmaceutical
manufacturers provided unlawful price and service discounts to certain favored
buyers and conspired among themselves to deny similar discounts to the
complaining retail pharmacies (approximately 3,900 in number). The complaints
charge that certain defendant prescription benefit managers, including Caremark,
were favored buyers who knowingly induced or received discriminatory prices from
the manufacturers in violation of the Robinson-Patman Act. Each complaint seeks
unspecified treble damages, declaratory and equitable relief and attorneys fees
and expenses. All of these actions have been transferred by the Judicial Panel
for Multidistrict Litigation to the United States District Court for the
Northern District of Illinois for coordinated pretrial procedures. Caremark was
not named in the class action. In April 1995, the Court entered a stay of
pretrial proceedings as to certain Robinson-Patman Act claims in this
litigation, including the Robinson-Patman Act claims brought against Caremark,
pending the conclusion of a first trial of certain of such claims
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brought by a limited number of plaintiffs against five defendants not including
Caremark. On July 1, 1996, the district court directed entry of a partial final
order in the class action approving an amended settlement with certain of
pharmaceutical manufacturers. The amended settlement provides for a cash payment
by the defendants in that action of approximately $351.0 million to class
members in settlement of conspiracy claims as well as a commitment from the
settling manufacturers to abide by certain injunctive provisions. All class
action claims against non-settling manufacturers as well as all opt out and
other claims generally, including all Robinson-Patman Act claims against
Caremark, remain unaffected by the settlement. The district court also certified
to the court of appeals for interlocutory review certain orders relating to
non-settled conspiracy claims against the pharmaceutical manufacturers and
wholesalers. These interlocutory orders do not relate to any of the claims
brought against Caremark. The Company intends to defend these cases vigorously.
Although management believes, based on information currently available, that the
ultimate resolution of this matter is not likely to have a material adverse
effect on the operating results and financial condition of the Company, there
can be no assurance that the ultimate resolution of this matter, if adversely
determined, would not have a material adverse effect on the operating results
and financial condition of the Company.
In December 1994, Caremark was notified by the FTC that it was conducting a
civil investigation of the PBM 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. Although management
believes, based on information currently available, that the ultimate resolution
of this matter is not likely to have a material adverse effect on the operating
results and financial condition of the Company, there can be no assurance that
the ultimate resolution of this matter, if adversely determined, would not have
a material adverse effect on the operating results and financial condition of
the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information about the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Larry R. House.............................. 53 Chairman of the Board and Chief Executive Officer
and Director
Mark L. Wagar............................... 45 President and Chief Operating Officer
John J. Gannon.............................. 58 President -- Physician Practice Management
H. Lynn Massingale, M.D..................... 44 President -- Team Health
Harold O. Knight, Jr........................ 39 Executive Vice President and Chief Financial
Officer
Tracy P. Thrasher........................... 34 Executive Vice President, Chief Administrative
Officer and Corporate Secretary
Edward J. Novinski.......................... 38 Executive Vice President -- Managed Care
John M. Deane............................... 42 Executive Vice President -- Information Services
J. Brooke Johnston, Jr...................... 57 Senior Vice President and General Counsel
Charles C. Clark............................ 47 Senior Vice President and Chief Tax Officer
Peter J. Clemens, IV........................ 32 Vice President of Finance and Treasurer
Mark S. Weeks............................... 34 Vice President of Finance and Controller
Richard M. Scrushy.......................... 44 Director
Larry D. Striplin, Jr.(1)................... 67 Director
Charles W. Newhall, III(1).................. 52 Director
Ted H. McCourtney(2)........................ 58 Director
Walter T. Mullikin, M.D..................... 79 Director
John S. McDonald, J.D.(1)................... 64 Director
Rosalio J. Lopez, M.D....................... 44 Chief Medical Officer and Director
C.A. Lance Piccolo(2)....................... 56 Director
Roger L. Headrick(1)........................ 60 Director
Harry M. Jansen Kraemer, Jr................. 42 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Larry R. House has been Chief Executive Officer of the Company since August
1993, and has been Chairman of the Board since January 1993. Mr. House also
served as President from August 1993 until June 1997. From 1985 to 1992, he was
Chief Operating Officer of HEALTHSOUTH Rehabilitation Corporation, now
HEALTHSOUTH Corporation ("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 ("Capstone"), the American Sports Medicine
Institute, UAB Research Foundation and Monitor MedX.
Mark L. Wagar has been President and Chief Operating Officer of the Company
since June 1997. From January 1996 until June 1997, Mr. Wagar was
President -- Western Operations of the Company. From January 1995 through
December 1995, Mr. Wagar was Chief Operating Officer of MME. From March 1994 to
December 1994, he was the President of CIGNA HealthCare of California, a
healthcare plan serving enrollees in California, Oregon and Washington, 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
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the President of Managed Care Partners, Inc., a private consulting management
company specializing in managed care services. He has been involved in
healthcare management for over 20 years, including 10 years in managed care
companies.
John J. Gannon has been President -- Physician Practice Management of the
Company since June 1997. From July 1996 to June 1997, Mr. Gannon was
President -- Eastern Operations. 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
healthcare financial feasibility studies.
H. Lynn Massingale, M.D. has been President of Team Health since its
formation in March 1994. Dr. Massingale has served as President of Southeastern
Emergency Physicians, Inc., a subsidiary of Team Health, since 1981. A graduate
of the University of Tennessee Center for Health Sciences in Memphis, Dr.
Massingale is certified by the National Board of Medical Examiners, Tennessee
Board of Medical Examiners and American Board of Emergency Medicine. Dr.
Massingale's professional memberships include the Knoxville Academy of Medicine,
Tennessee Medical Association, American Medical Association and American College
of Emergency Physicians.
Harold O. Knight, Jr. has been Executive Vice President and Chief Financial
Officer of the Company since November 1994. Mr. Knight was Senior Vice President
of Finance and Treasurer of the Company from August 1993 to November 1994, and
from March 1993 to August 1993, Mr. Knight served as Vice President of Finance
of the Company. 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 was named Chief Administrative Officer of the Company in
June 1997 and has been Executive Vice President of the Company since November
1994 and Corporate Secretary since March 1994. Ms. Thrasher was Senior Vice
President of Administration from March 1994 to November 1994, and from January
1993 to March 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.
Edward J. Novinski has been Executive Vice President of Managed Care for
the Company since September 1996. Prior to joining the Company, Mr. Novinski was
most recently Vice President of Network Management for United HealthCare
Corporation in their corporate office and held various positions from August
1986 to August 1996. Mr. Novinski was responsible for United HealthCare's
network strategies for physician and hospital relationships which supported
United HealthCare's diverse managed care product line. From 1977 to 1986, Mr.
Novinski was with Lutheran General Health System in managerial and
administrative positions including Director of Physician Practice Management for
a large multi-specialty group.
John M. Deane has been Executive Vice President, Information Services of
the Company since January 1997. From January 1995 through December 1996, Mr.
Deane was Vice President Information Services and CIO of Caremark Pharmaceutical
Services Group, based in Northbrook, Illinois. Prior to 1995, Mr. Deane was
Director, Information Services -- Planning and Consulting for the Whirlpool
Corporation and a Senior Manager on large IS projects for Price Waterhouse's
Management Consulting Services practice in the Midwest, where he led large IS
engagements for various Fortune 100 companies.
J. Brooke Johnston, Jr. has been Senior Vice President and General Counsel
of the Company since April 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 services company.
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<PAGE> 56
Charles C. Clark has been Senior Vice President and Chief Tax Officer of
the Company since January 1997. Prior to that, Mr. Clark was a Partner with KPMG
Peat Marwick, having served as Tax Partner in Charge of the Birmingham, Alabama
office and leader of tax services for the Health Care & Life Sciences practice
in the Southeast. Mr. Clark was with KPMG Peat Marwick for 21 years. Mr. Clark
is a Certified Public Accountant holding memberships in the American Institute
of Certified Public Accountants and the Alabama and Mississippi Societies of
Certified Public Accountants.
Peter J. Clemens, IV has been Vice President of Finance and Treasurer of
the Company since April 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 a Masters Degree in Business
Administration from Vanderbilt University in 1991.
Mark S. Weeks has been Vice President of Finance and Controller of the
Company since June 1994. From 1985 to 1994, Mr. Weeks was with Ernst & Young
LLP, most recently as Senior Manager. Mr. Weeks is a certified public accountant
and a member of the American Institute of Certified Public Accountants.
Richard M. Scrushy has been a member of the Company's 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.
Larry D. Striplin, Jr. has been a member of the Company's 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.
Charles W. Newhall, III has been a member of the Company's 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.
Ted H. McCourtney has been a member of the Company's Board of Directors
since August 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, each of
which is publicly traded.
Walter T. Mullikin, M.D., a surgeon, has been a member of the Company's
Board of Directors since November 1995. Dr. Mullikin was Chairman of the Board
of the general partner of MME from 1989 to 1995. 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 stockholder of Mullikin
Independent Practice Association ("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 Company's Board of
Directors since November 1995. Mr. McDonald was the Chief Executive Officer of
the general partner of MME from March 1994 to 1995, and he has been an executive
of Pioneer Hospital and its related entities since 1967. Mr. McDonald was also a
director, the Secretary and a stockholder 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 Company's Board of
Directors since November 1995 and became Chief Medical Officer of the Company in
June 1997. Dr. 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
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<PAGE> 57
director and a Vice President of MME's principal professional corporation. He is
also a director and stockholder of MIPA.
C.A. Lance Piccolo has been Vice Chairman of the Company's Board of
Directors since September 1996. From August 1992 to September 1996, he was
Chairman of the Board of Directors and Chief Executive Officer of Caremark. From
1987 until November 1992, Mr. Piccolo was an Executive Vice President of Baxter
and from 1988 until November 1992, he served as a director of Baxter. Mr.
Piccolo also serves as a director of Crompton & Knowles Corporation ("CKC"),
which is publicly traded.
Roger L. Headrick has been a member of the Company's Board of Directors
since September 1996 and 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 CKC.
Harry M. Jansen Kraemer, Jr. has been a member of the Company's Board of
Directors since September 1996, and is President of Baxter, having served in
that capacity since April 1997. Mr. Kraemer served as senior vice president and
chief financial officer of Baxter from November 1993 to April 1997. He was
promoted to Baxter's three-member Office of the Chief Executive in June 1995,
and appointed to Baxter's Board of Directors in November 1995. Mr. Kraemer has
been an employee of Baxter since 1982 serving in a variety of positions,
including Vice President, Group Controller for Baxter's hospital and
alternate-site businesses, president of Baxter's Hospitex Division and Vice
President Finance and Operations for Baxter's global-business group.
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<PAGE> 58
DESCRIPTION OF THE SECURITIES
The summaries of certain provisions of documents described below do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of such documents (including the
definitions therein of certain terms), forms of which are on file with the SEC.
Wherever particular sections of, or terms defined in, such documents are
referred to herein, such sections or defined terms are incorporated by reference
herein.
GENERAL
Each Security will have a Stated Amount of $ and will be issued
under the Purchase Contract Agreement between the Company and the Purchase
Contract Agent. Each Security will consist of (a) a Purchase Contract under
which (i) the holder of the Security will purchase from the Company on the Final
Settlement Date of , 2000, for an amount in cash equal to the Stated
Amount, a number of shares of Common Stock equal to the Settlement Rate
described below and (ii) the Company will pay Yield Enhancement Payments to the
holder of the Security, and (b) Treasury Notes having a principal amount equal
to the Stated Amount and maturing on the Final Settlement Date. If the aggregate
fair market value of the Treasury Notes at the time of their purchase exceeds
their aggregate principal amount, the Company shall, for the benefit of holders
of the Securities, provide the amount of such excess as the additional purchase
price necessary to acquire Treasury Notes having a principal amount equal to the
Stated Amount (such amounts, "Initial Premium Payments"). Holders of the
Securities will not directly receive any cash as a result of any Initial Premium
Payments. The Treasury Notes will be pledged with the Collateral Agent to secure
the obligations of holders of the Securities under the Purchase Contracts to
purchase Common Stock. Unless a holder of Securities settles the underlying
Purchase Contracts either through the early delivery of cash to the Purchase
Contract Agent in the manner described below or otherwise, or unless the
Purchase Contracts are terminated (upon the occurrence of certain events of
bankruptcy, insolvency or reorganization with respect to the Company), principal
of the Treasury Notes underlying such Securities, when paid at maturity, will
automatically be applied to satisfy in full the obligations of holders of
Securities to purchase Common Stock under the Purchase Contracts. For so long as
a Purchase Contract remains in effect, such Purchase Contract and the Treasury
Notes securing it will not be separable and may be transferred only as an
integrated Security.
The semi-annual payments on the Securities set forth on the cover page of
this Prospectus will consist of interest on the Treasury Notes payable by the
United States Government at the rate of % of the Stated Amount per annum
and unsecured, subordinated Yield Enhancement Payments payable semiannually on
each Payment Date by the Company at the rate of % of the Stated Amount per
annum. The Company's obligations with respect to Yield Enhancement Payments are
subordinated and junior in right of payment to all other liabilities of the
Company and pari passu with the most senior preferred stock directly issued,
from time to time, if any, by the Company.
On , 1998, the first Payment Date with respect to the
Securities, the persons in whose names Securities are registered on the Record
Date (as hereinafter defined) with respect thereto will be entitled to receive
interest payable with respect to the Treasury Notes for the period from the date
of initial issuance of the Securities until , 1998, together with
Yield Enhancement Payments from the date of initial issuance through
, 1998. Interest payable with respect to the Treasury Notes which accrued
prior to the date of initial issuance of the Securities and which is payable on
the first interest payment date with respect to the Treasury Notes following
completion of this offering ("Treasury Accrued Interest") will be remitted by
the Collateral Agent to the Purchase Contract Agent on such interest payment
date, which will then promptly remit such Treasury Accrued Interest to the
Company. The Yield Enhancement Payments payable on the first Payment Date with
respect to the Securities will be adjusted so that the Yield Enhancement
Payments payable on such date will be the equivalent of % per annum
accruing from the date of initial issuance of the Securities to ,
1998.
The Company may, at its option, defer the payment of Yield Enhancement
Payments on the Purchase Contracts. However, deferred installments of Yield
Enhancement Payments will bear additional Yield Enhancement Payments at the rate
of % per annum (compounding on each succeeding Payment Date)
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until paid. Yield Enhancement Payments may not be deferred beyond the Final
Settlement Date. If the Purchase Contracts are terminated (upon the occurrence
of certain events of bankruptcy, insolvency or reorganization with respect to
the Company), the right to receive additional Yield Enhancement Payments and
Deferred Yield Enhancement Payments will terminate. In the event that the
Company elects to defer the payment of Yield Enhancement Payments on the
Purchase Contracts until the Final Settlement Date, each holder will receive on
the Final Settlement Date, in lieu of cash payment, a number of shares of Common
Stock (in addition to a number of shares of Common Stock equal to the Settlement
Rate) equal to (x) the aggregate amount of Deferred Yield Enhancement Payments
payable to a holder of Securities divided by (y) the Applicable Market Value.
See "Description of the Purchase Contracts -- Yield Enhancement Payments".
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
Each Purchase Contract underlying a Security (unless earlier terminated or
settled at the option of the holder of the Security) will obligate the holder of
the Security to purchase, and the Company to sell, on the Final Settlement Date,
for an amount in cash equal to the Stated Amount, a number of new shares of
Common Stock equal to the Settlement Rate. The Settlement Rate will be
calculated as follows (subject to adjustment under certain circumstances): (a)
if the Applicable Market Value is greater than the Threshold Appreciation Price
of $ , the Settlement Rate will be , (b) if the Applicable
Market Value is less than or equal to the Threshold Appreciation Price but
greater than the Stated Amount, the Settlement Rate will equal the Stated Amount
divided by the Applicable Market Value and (c) if the Applicable Market Value is
less than or equal to the Stated Amount, the Settlement Rate will be one.
"Applicable Market Value" means the average of the Closing Prices (as defined)
per share of Common Stock on each of the twenty consecutive Trading Days (as
defined) ending on the second Trading Day immediately preceding the Final
Settlement Date.
No fractional shares of Common Stock will be issued by the Company pursuant
to the Purchase Contracts. In lieu of fractional shares otherwise issuable in
respect of Purchase Contracts being settled by a holder of Securities, the
holder will be entitled to receive an amount of cash equal to the value of such
fractional shares at the Closing Price per share on the second Trading Day
immediately preceding the date of purchase.
Unless a holder of Securities settles the underlying Purchase Contracts
prior to the Final Settlement Date through the delivery of cash to the Purchase
Contract Agent in the manner described under "-- Early Settlement" below or an
event described under "-- Termination" below occurs, principal of the Treasury
Notes underlying such Securities, when paid at maturity, will automatically be
transferred to the Company to satisfy in full the holder's obligation to
purchase Common Stock under the Purchase Contracts. Such stock will then be
issued and delivered to such holder or such holder's designee, upon presentation
and surrender of the certificate evidencing such Securities (a "Security
Certificate") and payment by the holder of any transfer or similar taxes payable
in connection with the issuance of the stock to any person other than such
holder.
Prior to the date on which shares of Common Stock are issued in settlement
of a Purchase Contract, the Common Stock underlying the related Security will
not be deemed to be outstanding for any purpose and the holder thereof will not
have any voting rights, rights to dividends or other distributions or other
rights or privileges of a stockholder by virtue of holding such Security.
Each holder of Securities, by acceptance thereof, will under the terms of
the Purchase Contract Agreement and the Securities be deemed to have (a)
irrevocably agreed to be bound by the terms of the related Purchase Contracts
for so long as such holder remains a holder of such Securities and (b) duly
appointed the Purchase Contract Agent as such holder's attorney-in-fact to enter
into and perform the related Purchase Contracts on behalf of and in the name of
such holder.
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EARLY SETTLEMENT
A holder of Securities may settle the underlying Purchase Contracts prior
to the Final Settlement Date by presenting and surrendering the Security
Certificate evidencing such Securities at the offices of the Purchase Contract
Agent with the form of "Election to Settle Early" on the reverse side of the
certificate completed and executed as indicated, accompanied by payment in
immediately available funds of an amount equal to the Stated Amount times the
number of Purchase Contracts being settled. So long as the Securities are
evidenced by one or more global security certificates deposited with the
Depositary (as defined below), procedures for early settlement will also be
governed by standing arrangements between the Depositary and the Purchase
Contract Agent. HOLDERS MAY SETTLE SECURITIES EARLY ONLY IN INTEGRAL MULTIPLES
OF SECURITIES.
Upon early settlement of Purchase Contracts underlying any Securities, (a)
the holder will receive of a share of Common Stock per Security
(regardless of the market price of the Common Stock on the date of purchase),
subject to adjustment under certain circumstances, (b) the Treasury Notes
underlying such Securities will thereupon be transferred to the holder free and
clear of the Company's security interest therein, (c) the holder's right to
receive Deferred Yield Enhancement Payments, if any, on the Purchase Contracts
being settled will be forfeited and (d) the holder's right to receive additional
Yield Enhancement Payments will terminate and, except as contemplated by clause
(a) above, no adjustment will be made to or for the holder on account of current
or deferred amounts accrued in respect thereof.
If the Purchase Contract Agent receives the Security Certificate,
accompanied by the completed Election to Settle Early and requisite funds, from
a holder of Securities by 5:00 p.m., New York City time, on a Business Day, that
day will be considered the settlement date. If the Purchase Contract Agent
receives the foregoing after 5:00 p.m., New York City time, on a Business Day or
at any time on a day that is not a Business Day, the next Business Day will be
considered the settlement date.
Upon early settlement of Purchase Contracts in the manner described above,
presentation and surrender of the Security Certificate evidencing the related
Securities and payment of any transfer or similar taxes payable by the holder in
connection with the issuance of the stock to any person other than the holder of
such Securities, the Company will cause the shares of Common Stock being
purchased to be issued, and the Treasury Notes securing such Purchase Contracts
to be released from the pledge under the Pledge Agreement described below and
transferred, within three Business Days following the settlement date, to the
purchasing holder or such holder's designee.
YIELD ENHANCEMENT PAYMENTS
Yield Enhancement Payments will be payable semi-annually on each Payment
Date to the persons in whose names the related Securities are registered at the
close of business on the Business Day (as defined below) immediately preceding
such Payment Date (the "Record Date"). Yield Enhancement Payments will be
computed on the basis of actual days elapsed in a year of 365 or 366 days, as
the case may be. If a Payment Date falls on a day that is not a Business Day,
the Yield Enhancement Payment may be paid on the next succeeding Business Day
with the same force and effect as if made on such Payment Date, and no
additional amounts will accrue as a result of such delayed payment. "Business
Day" means any day that is not a Saturday, a Sunday or a day on which the NYSE
or banking institutions or trust companies in The City of New York are
authorized or obligated by law or executive order to be closed.
The Company's obligations with respect to Yield Enhancement Payments are
subordinate and junior in right of payment to all other liabilities of the
Company and pari passu with the most senior preferred stock directly issued,
from time to time, if any, by the Company.
The Company may, at its option and upon prior written notice to the holders
of Securities and the Purchase Contract Agent, defer the payment of Yield
Enhancement Payments on the Purchase Contracts. However, deferred installments
of Yield Enhancement Payments will bear additional Yield Enhancement Payments at
the rate of % per annum (compounding on each succeeding Payment Date) until
paid. Yield Enhancement Payments may not be deferred beyond the Final Settlement
Date. If the Purchase Contracts are
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terminated (upon the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company), the right to receive additional
Yield Enhancement Payments and Deferred Yield Enhancement Payments will
terminate.
In the event that the Company elects to defer the payment of Yield
Enhancement Payments on the Purchase Contracts until the Final Settlement Date,
each holder will receive on the Final Settlement Date, in lieu of a cash
payment, a number of shares of Common Stock (in addition to a number of shares
of Common Stock equal to the Settlement Rate) equal to (x) the aggregate amount
of Deferred Yield Enhancement Payments payable to a holder of Securities divided
by (y) the Applicable Market Value.
No fractional shares of Common Stock will be issued by the Company with
respect to the payment of Deferred Yield Enhancement Payments on the Final
Settlement Date. In lieu of fractional shares otherwise issuable with respect to
such payment of Deferred Yield Enhancement Payments, the holder will be entitled
to receive an amount in cash equal to the value of such fractional shares at the
Closing Price per share on the second Trading Day immediately preceding the
Final Settlement Date.
In the event the Company exercises its option to defer the payment of Yield
Enhancement Payments, then, until the Deferred Yield Enhancement Payments have
been paid, (a) the Company shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchases or acquisitions of shares of Common Stock in connection with the
satisfaction by the Company of its obligations under any employee benefit plans
or the satisfaction by the Company of its obligations pursuant to any contract
or security requiring the Company to purchase shares of Common Stock, (ii) as a
result of a reclassification of the Company's capital stock or the exchange or
conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock or (iii) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged) and (b) the Company shall not make any payment of
interest, principal or premium, if any, on or repay, repurchase or redeem any
debt securities (including guarantees) issued by the Company that rank pari
passu with or junior to such Yield Enhancement Payments and (c) the Company
shall not make any guarantee payments with respect to the foregoing.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the Settlement Rate will be subject to
adjustment upon the occurrence of certain events, including: (a) the payment of
dividends (and other distributions) of Common Stock on Common Stock; (b) the
issuance to all holders of Common Stock of rights, warrants or options entitling
them, for a period of up to 45 days, to subscribe for or purchase Common Stock
at less than the Current Market Price (as defined) thereof; (c) subdivisions,
splits and combinations of Common Stock; (d) distributions to all holders of
Common Stock of evidences of indebtedness of the Company, shares of capital
stock, securities, cash or property (excluding any dividend or distribution
covered by clause (a) or (b) above and any dividend or distribution paid
exclusively in cash); (e) distributions consisting exclusively of cash to all
holders of Common Stock in an aggregate amount that, together with (i) other
all-cash distributions made within the preceding 12 months and (ii) any cash and
the fair market value, as of the expiration of the tender or exchange offer
referred to below, of consideration payable in respect of any tender or exchange
offer by the Company or a subsidiary for the Common Stock concluded within the
preceding 12 months, exceeds 15% of the Company's aggregate market
capitalization (such aggregate market capitalization being the product of the
Current Market Price (as defined) of the Common Stock multiplied by the number
of shares of Common Stock then outstanding) on the date of such distribution;
and (f) the successful completion of a tender or exchange offer made by the
Company or any subsidiary for the Common Stock which involves an aggregate
consideration that, together with (i) any cash and the fair market value of
other consideration payable in respect of any tender or exchange offer by the
Company or a subsidiary for the Common Stock concluded within the preceding 12
months and (ii) the aggregate amount of any all-cash distributions to all
holders of the Company's Common Stock made within the preceding 12 months,
exceeds 15% of the Company's aggregate market capitalization on the expiration
of such tender or exchange offer.
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In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Stock is
converted into the right to receive other securities, cash or property, each
Purchase Contract then outstanding would, without the consent of the holders of
Securities, become a contract to purchase only the kind and amount of
securities, cash and other property receivable upon consummation of the
transaction by a holder of the number of shares of Common Stock which would have
been received by the holder of the related Security immediately prior to the
date of consummation of such transaction if such holder had then settled such
Purchase Contract.
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
federal income tax purposes (i.e., distributions of evidences of indebtedness or
assets of the Company, but generally not stock dividends or rights to subscribe
to capital stock) and, pursuant to the Settlement Rate adjustment provisions of
the Purchase Contract Agreement, the Settlement Rate is increased, such increase
may be deemed to be the receipt of taxable income to holders of Securities. See
"Certain Federal Income Tax Consequences -- Adjustment of Settlement Rate".
In addition, the Company may make such increases in the Settlement Rate as
the Board of Directors of the Company deems advisable to avoid or diminish any
income tax to holders of shares of Common Stock resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated as
such for income tax purposes or for any other reasons.
Adjustments to the Settlement Rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the Settlement Rate shall be required
unless such adjustment would require an increase or decrease of at least one
percent in the Settlement Rate; provided, however, that any adjustments which by
reason of the foregoing are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
The Company will be required, within ten Business Days following the
occurrence of an event that requires or permits an adjustment in the Settlement
Rate, to provide written notice to the Purchase Contract Agent of the occurrence
of such event and a statement in reasonable detail setting forth the method by
which the adjustment to the Settlement Rate was determined and setting forth the
revised Settlement Rate.
Each adjustment to the Settlement Rate will result in a corresponding
adjustment to the number of shares of Common Stock issuable upon early
settlement of a Purchase Contract.
TERMINATION
The Purchase Contracts, and the rights and obligations of the Company and
of the holders of the Securities thereunder (including the right to receive
accrued or deferred Yield Enhancement Payments and the right and obligation to
purchase Common Stock), will automatically terminate upon the occurrence of
certain events of bankruptcy, insolvency or reorganization with respect to the
Company. Upon such termination, the Collateral Agent will release the Treasury
Notes held by it to the Purchase Contract Agent for distribution to the holders.
Upon such termination, however, such release and termination may be subject to a
limited delay. In the event that the Company becomes the subject of a case under
the Bankruptcy Code, such delay may occur as a result of the automatic stay
under the Bankruptcy Code and continue until such automatic stay has been
lifted. During the period of any such delay, the Treasury Notes will continue to
accrue interest, payable by the United States Government, until their maturity.
TREASURY NOTES AND PLEDGE AGREEMENT; INTEREST ON TREASURY NOTES
The Treasury Notes underlying the Securities will be pledged to the
Collateral Agent, for the benefit of the Company, pursuant to a pledge
agreement, to be dated as of , 1997 (the "Pledge Agreement"), to
secure the obligations of the holders to purchase Common Stock under the
Purchase Contracts. The rights of holders of Securities to the underlying
Treasury Notes will be subject to the Company's security interest therein
created by the Pledge Agreement; no holder of Securities will be permitted to
withdraw the Treasury Notes underlying such Securities from the pledge
arrangement except upon the termination or early settlement of the related
Purchase Contracts. Subject to such security interest,
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however, holders of Securities will have full beneficial ownership of the
underlying Treasury Notes. The Company will have no interest in the Treasury
Notes other than its security interest.
The Collateral Agent will, upon receipt of interest payments on the
Treasury Notes, distribute such payments to the Purchase Contract Agent, who
will in turn distribute those payments to the persons in whose names the related
Securities are registered at the close of business on the Record Date
immediately preceding the date of such distribution.
THE TREASURY NOTES WILL BE OBLIGATIONS OF THE UNITED STATES GOVERNMENT AND
NOT OF THE COMPANY.
BOOK-ENTRY SYSTEM
DTC (the "Depositary") will act as securities depositary for the
Securities. The Securities will be issued only as fully-registered securities
registered in the name of Cede & Co. (the Depositary's nominee). One or more
fully-registered global security certificates ("Global Security Certificates"),
representing the total aggregate number of Securities, will be issued and will
be deposited with the Depositary and will bear a legend regarding the
restrictions on exchanges and registration of transfer thereof referred to
below.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the Securities so
long as such Securities are represented by Global Security Certificates.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its participants ("Participants")
deposit with the Depositary. The Depositary also facilitates the settlement
among Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). The Depositary is owned by a number of
its Direct Participants and by the New York Stock Exchange, the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc. Access
to the Depositary system is also available to others, such as securities brokers
and dealers, banks and trust companies that clear transactions through or
maintain a direct or indirect custodial relationship with a Direct Participant
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Securities and Exchange
Commission.
No Securities represented by Global Security Certificates may be exchanged
in whole or in part for Securities registered, and no transfer of Global
Security Certificates in whole or in part may be registered, in the name of any
person other than the Depositary or any nominee of the Depositary unless the
Depositary has notified the Company that it is unwilling or unable to continue
as depositary for such Global Security Certificates or has ceased to be
qualified to act as such as required by the Purchase Contract Agreement or there
shall have occurred and be continuing a default by the Company in respect of its
obligations under one or more Purchase Contracts. All Securities represented by
one or more Global Security Certificates or any portion thereof will be
registered in such names as the Depositary may direct.
As long as the Depositary, or its nominee, is the registered owner of the
Global Security Certificates, such Depositary or such nominee, as the case may
be, will be considered the sole record owner and holder of the Global Security
Certificates and all Securities represented thereby for all purposes under the
Securities and the Purchase Contract Agreement. Except in the limited
circumstances referred to above, owners of beneficial interests in Global
Security Certificates will not be entitled to have such Global Security
Certificates or the Securities represented thereby registered in their names,
will not receive or be entitled to receive physical delivery of Security
Certificates in exchange therefor and will not be considered to be record owners
or holders of such Global Security Certificates or any Securities represented
thereby for any purpose under the Securities or the Purchase Contract Agreement.
All payments on the Securities represented by the Global Security
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Certificates and all transfers and deliveries of Treasury Notes and Common Stock
with respect thereto will be made to the Depositary or its nominee, as the case
may be, as the holder thereof.
Ownership of beneficial interests in the Global Security Certificates will
be limited to Participants or persons that may hold beneficial interests through
institutions that have accounts with the Depositary or its nominee. Ownership of
beneficial interests in Global Security Certificates will be shown only on, and
the transfer of those ownership interests will be effected only through, records
maintained by the Depositary or its nominee (with respect to Participants'
interests) or any such Participant (with respect to interests of persons held by
such Participants on their behalf). Procedures for settlement of Purchase
Contracts on the Final Settlement Date or upon Early Settlement will be governed
by arrangements among the Depositary, Participants and persons that may hold
beneficial interests through Participants designed to permit such settlement
without the physical movement of certificates. Payments, transfers, deliveries,
exchanges and other matters relating to beneficial interests in Global Security
Certificates may be subject to various policies and procedures adopted by the
Depositary from time to time. None of the Company, the Purchase Contract Agent
or any agent of the Company or the Purchase Contract Agent will have any
responsibility or liability for any aspect of the Depositary's or any
Participant's records relating to, or for payments made on account of,
beneficial interests in Global Security Certificates, or for maintaining,
supervising or reviewing any of the Depositary's records or any participant's
records relating to such beneficial ownership interests.
CERTAIN PROVISIONS OF THE PURCHASE CONTRACT AGREEMENT
AND THE PLEDGE AGREEMENT
PAYMENT OF INTEREST AND YIELD ENHANCEMENT PAYMENTS; TRANSFER OF SECURITIES;
DELIVERY OF COMMON STOCK OR TREASURY NOTES
Interest on the Treasury Notes and Yield Enhancement Payments will be
payable, Purchase Contracts (and documents related thereto) will be settled and
transfers of the Securities will be registrable at the office of the Purchase
Contract Agent in the Borough of Manhattan, The City of New York. In addition,
in the event that the Securities do not remain in book-entry form, payment of
interest on the Treasury Notes and Yield Enhancement Payments may be made, at
the option of the Company, by check mailed to the address of the person entitled
thereto as shown on the Security Register.
Payments in respect of principal of the Treasury Notes on the Final
Settlement Date will be applied in satisfaction of the obligations of the
holders of the Securities under the Purchase Contracts and shares of Common
Stock will be delivered, or, if the Purchase Contracts have terminated, Treasury
Notes will be delivered potentially after a limited delay (see "Description of
the Purchase Contracts -- Termination"), in each case upon presentation and
surrender of the Security Certificates evidencing the related Securities at the
office of the Purchase Contract Agent.
If a holder of outstanding Securities fails to present and surrender the
Security Certificate evidencing such Securities to the Purchase Contract Agent
on the Final Settlement Date, the shares of Common Stock issuable in settlement
of the applicable Purchase Contract and in payment of any Deferred Yield
Enhancement Payments will be registered in the name of the Purchase Contract
Agent and, together with any distributions thereon, shall be held by the
Purchase Contract Agent as agent for the benefit of such holder, until such
Security Certificate is presented and surrendered or the holder provides
satisfactory evidence that such certificate has been destroyed, lost or stolen,
together with any indemnity that may be required by the Purchase Contract Agent
and the Company.
If the Purchase Contracts have terminated prior to the Final Settlement
Date, the Treasury Notes have been transferred to the Purchase Contract Agent
for distribution to the holders entitled thereto and a holder fails to present
and surrender the Security Certificate evidencing such holder's Securities to
the Purchase Contract Agent, the Treasury Notes delivered to the Purchase
Contract Agent and payments thereon shall be held by the Purchase Contract Agent
as agent for the benefit of such holder, until such Security Certificate is
presented or the holder provides the evidence and indemnity described above.
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The Purchase Contract Agent will have no obligation to invest or to pay
interest on any amounts held by the Purchase Contract Agent pending
distribution, as described above.
No service charge will be made for any registration of transfer or exchange
of the Securities, except for any tax or other governmental charge that may be
imposed in connection therewith.
MODIFICATION
The Purchase Contract Agreement and the Pledge Agreement will contain
provisions permitting the Company and the Purchase Contract Agent or Collateral
Agent, as the case may be, with the consent of the holders of not less than
66 2/3% of the Securities at the time outstanding, to modify the terms of the
Purchase Contracts, the Purchase Contract Agreement and the Pledge Agreement,
except that no such modification may, without the consent of the holder of each
outstanding Security affected thereby, (a) change any Payment Date, (b) change
the amount or type of Treasury Notes underlying a Security, impair the right of
the holder of any Security to receive interest payments on the underlying
Treasury Notes or otherwise adversely affect the holder's rights in or to such
Treasury Notes, (c) change the place or currency of payment or reduce any Yield
Enhancement Payments or any Deferred Yield Enhancement Payments, (d) impair the
right to institute suit for the enforcement of any Purchase Contract, (e) reduce
the amount of Common Stock purchasable under any Purchase Contract, increase the
price to purchase Common Stock on settlement of any Purchase Contract, change
the Final Settlement Date or otherwise adversely affect the holder's rights
under any Purchase Contract or (f) reduce the above-stated percentage of
outstanding Securities, the consent of whose holders is required for the
modification or amendment of the provisions of the Purchase Contracts, the
Purchase Contract Agreement or the Pledge Agreement.
NO CONSENT TO ASSUMPTION
Each holder of Securities, by acceptance thereof, will under the terms of
the Purchase Contract Agreement and the Securities be deemed expressly to have
withheld any consent to the assumption (i.e., affirmance) of the Purchase
Contracts by the Company or its trustee in the event that the Company becomes
the subject of a case under the Bankruptcy Code.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Company will covenant in the Purchase Contract Agreement that it will
not merge or consolidate with any other entity or sell, assign, transfer, lease
or convey all or substantially all of its properties and assets to any person,
firm or corporation unless the Company is the continuing corporation or the
successor corporation is a corporation organized under the laws of the United
States of America or a state thereof and such corporation expressly assumes the
obligations of the Company under the Purchase Contracts, the Purchase Contract
Agreement and the Pledge Agreement, and the Company or such successor
corporation is not, immediately after such merger, consolidation, sale,
assignment, transfer, lease or conveyance, in default in the performance of any
of its obligations thereunder.
TITLE
The Company, the Purchase Contract Agent and the Collateral Agent may treat
the registered owner of any Security as the absolute owner thereof for the
purpose of making payment and settling the Purchase Contracts and for all other
purposes.
REPLACEMENT OF SECURITY CERTIFICATES
Any mutilated Security Certificate will be replaced by the Company at the
expense of the holder upon surrender of such certificate to the Purchase
Contract Agent. Security Certificates that become destroyed, lost or stolen will
be replaced by the Company at the expense of the holder upon delivery to the
Company and the Purchase Contract Agent of evidence of the destruction, loss or
theft thereof satisfactory to the Company and the Purchase Contract Agent. In
the case of a destroyed, lost or stolen Security Certificate, an indemnity
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satisfactory to the Purchase Contract Agent and the Company may be required at
the expense of the holder of the Securities evidenced by such certificate before
a replacement will be issued.
Notwithstanding the foregoing, the Company will not be obligated to issue
any Security on or after the Final Settlement Date or after the Purchase
Contracts have terminated. The Purchase Contract Agreement will provide that, in
lieu of the delivery of a replacement Security Certificate following the Final
Settlement Date, the Purchase Contract Agent, upon delivery of the evidence and
indemnity described above, will deliver the Common Stock issuable pursuant to
the Purchase Contracts included in the Securities evidenced by such certificate,
or, if the Purchase Contracts have terminated prior to the Final Settlement
Date, transfer the principal amount of the Treasury Notes included in the
Securities evidenced by such certificate.
GOVERNING LAW
The Purchase Contract Agreement, the Pledge Agreement and the Purchase
Contracts will be governed by, and construed in accordance with, the laws of the
State of New York.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
The First National Bank of Chicago will be the Purchase Contract Agent. The
Purchase Contract Agent will act as the agent for the holders of Securities from
time to time. The Purchase Contract Agreement will not obligate the Purchase
Contract Agent to exercise any discretionary actions in connection with a
default under the terms of the Securities or the Purchase Contract Agreement.
The Purchase Contract will contain provisions limiting the liability of the
Purchase Contract Agent. The Purchase Contract Agreement will contain provisions
under which the Purchase Contract Agent may resign or be replaced. Such
resignation or replacement would be effective upon the appointment of a
successor.
INFORMATION CONCERNING THE COLLATERAL AGENT
PNC Bank, Kentucky, Inc., a Kentucky banking corporation, will be the
Collateral Agent. The Collateral Agent will act solely as the agent of the
Company and will not assume any obligation or relationship of agency or trust
for or with any of the holders of the Securities except for the obligations owed
by a pledgee of property to the owner thereof under the Pledge Agreement and
applicable law.
The Pledge Agreement will contain provisions limiting the liability of the
Collateral Agent. The Pledge Agreement will contain provisions under which the
Collateral Agent may resign or be replaced. Such resignation or replacement
would be effective upon the appointment of a successor.
VOTING RIGHTS
Holders of the Securities will have no voting rights.
LISTING OF THE SECURITIES
Application will be made to have the Securities approved for listing on the
New York Stock Exchange under the symbol " ", subject to official notice of
issuance.
NYSE SYMBOL OF COMMON STOCK
The Common Stock of the Company is listed on the NYSE under the symbol
"MDM".
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Company Certificate of Incorporation currently provides that the
Company may issue 9,500,000 shares of Preferred Stock, par value $.001 per share
(the "Company Preferred Stock"), 500,000 shares of Series C Preferred Stock, par
value $.001 per share (the "Company Series C Preferred Stock"), and 400,000,000
shares of the Common Stock.
COMMON STOCK
Holders of the Company 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 the Company Preferred Stock, holders of the Company
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Company's Board of Directors out of funds
legally available therefor. All outstanding shares of the Company Common Stock
are fully paid and nonassessable. In the event of any liquidation, dissolution
or winding-up of the affairs of the Company, holders of the Company Common Stock
will be entitled to share ratably in the assets of the Company remaining after
payment or provision for payment of all of the Company's debts and obligations
and liquidation payments to holders of any outstanding shares of the Company
Preferred Stock.
PREFERRED STOCK
The Company's Board of Directors, without further stockholder
authorization, is authorized to issue shares of the Company 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 Company Common Stock and one or more series of the Company
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 Company Common Stock and one or more series of the Company Preferred Stock.
Although the Company has no present plans to issue any shares of the Company
Preferred Stock, the issuance of shares of the Company 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 the Company or an unsolicited
acquisition proposal.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND THE DGCL
Classified Board of Directors. The Company Certificate of Incorporation
and the Company Bylaws provide for the Company's 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 1998, 1999 or 2000 annual meeting of stockholders of the Company.
The Company believes that a classified board of directors will help to
assure the continuity and stability of the Company's Board of Directors and the
Company's business strategies and policies as determined by the Company's Board
of Directors, since a majority of the directors at any given time will have had
prior experience as directors of the Company. The Company believes that this, in
turn, will permit the Company's 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 Company's Board of Directors. As a result, a provision
relating to a classified Company's Board of Directors may discourage proxy
contests for the election of directors or purchases of a substantial block of
the Company Common Stock because its provisions could operate to prevent
obtaining control of the Company's 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 the Company. Under the DGCL, unless the certificate of
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incorporation otherwise provides, a director on a classified board may be
removed by the stockholders of the corporation only for cause. The Company
Certificate of Incorporation does not provide otherwise.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. The Company Bylaws establish an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Company's 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 the Company (the "Business Procedure").
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Company's Board of
Directors to the Corporate Secretary of the Company. The requirements as to the
form and timing of that notice are specified in the Company Bylaws. If the
Chairman of the Company's 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 Corporate Secretary of the Company. The requirements as to the form and
timing of that notice are specified in the Company Bylaws. If the Chairman of
the Company's 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 Company Bylaws do not give the Company's 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 Company Bylaws (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 the Company, even if the conduct of such
solicitation or such attempt might be beneficial to the Company and its
stockholders.
Delaware Takeover Statute. The Company 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.
STOCKHOLDER RIGHTS PLAN
The following is a description of the Company's Stockholders' Rights Plan
(the "Company Rights Plan"). The description thereof set forth below is
qualified in its entirety by reference to the Company Rights Plan, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. See "Available Information".
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<PAGE> 69
The Company Rights Plan provides that one right (a "Right") will be issued
with each share of the Company Common Stock (whether originally issued or from
the Company's treasury) prior to the Rights Distribution Date (as defined
therein). 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 the Company as described
below. When exercisable, each Right will entitle the owner to purchase from the
Company one one-hundredth of a share of the Company Series C Preferred Stock at
a purchase price of $52.00 per share. The Company Series C Preferred Stock may
be issued in fractional shares.
Except as described below, the Rights will be evidenced by all the Company
Common Stock certificates and will be transferred with the Company Common Stock
certificates, and no separate Rights certificates will be distributed. The
Rights will separate from the Company 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 the Company 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 the Company Common Stock as of the Rights
Distribution Date and thereafter the separate Rights certificates alone will
represent the Rights.
The Company 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 the Company Common Stock. In the
event of liquidation, the holders of the Company 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 the Company Common Stock. Each share of the Company Series C Preferred
Stock will have 100 votes and will vote together with the shares of the Company
Common Stock. In the event of any merger, consolidation or other transaction in
which shares of the Company Common Stock are changed or exchanged, each share of
the Company Series C Preferred Stock will be entitled to receive 100 times the
amount received per share of the Company Common Stock. These rights are
protected by customary anti-dilution provisions. The Company Series C Preferred
Stock will, if issued, be junior to any other series of the Company Preferred
Stock which may be authorized and issued by the Company, unless the terms of any
such other series provide otherwise. The Company Series C Preferred Stock will
not be redeemable. Once the shares of the Company Series C Preferred Stock are
issued, the Company Certificate of Incorporation may not be amended in a manner
which would materially alter or change the powers, preferences or special rights
of the Company 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 the Company Series C Preferred Stock, voting separately as a class.
Because of the nature of the Company Series C Preferred Stock dividend,
liquidation and voting rights, the value of a share of the Company Series C
Preferred Stock purchasable upon exercise of each Right should approximate the
value of one share of the Company 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 the Company
Common Stock at a price and on terms determined by at least a majority of the
members of the Company's Board of Directors who are not officers of the Company
and who are not representatives, nominees, affiliates or associates of an
Acquiring Person, to be (a) at a price which is fair to the Company's
stockholders and (b) otherwise in the best interests of the Company and its
stockholders (a "Qualifying Offer")), (ii) an Acquiring Person engages in
certain self-dealing transactions involving the Company, such as, (a) merging or
consolidating into or with the Company where the Company survives and the
Company Common Stock remains outstanding, (b) transferring assets to the Company
in exchange for the Company's securities, or acquiring securities from the
Company other than on the same basis as from all other stockholders, (c)
transferring assets to or from the Company on terms less favorable than arm's
length, (d) transferring to or from the Company'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
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amount of the Company 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 the Company
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company) 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 Company 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 the Company as set forth below.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation or the Company Common Stock
is changed or exchanged (other than a merger which follows a Qualifying Offer
and satisfies certain other requirements), or (ii) 50% or more of the Company'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, the
Company may redeem the Rights in whole, but not in part, at a price of $.001 per
Right. Immediately upon the action of the Company's 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 the Company, 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 the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for shares of the Company 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 Company's
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
Company's 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 the Company without the prior approval of the Company's Board of Directors.
The effect of the Rights may be to inhibit a change in control of the Company
(including through a third party tender offer at a price which reflects a
premium to then prevailing trading prices) that may be beneficial to the Company
stockholders.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company Certificate of Incorporation contains a provision eliminating
or limiting director liability to the Company 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 the Company 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 Company's 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 the Company 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
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<PAGE> 71
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 Company Certificate of Incorporation and the Company
Bylaws provide for mandatory indemnification rights, subject to limited
exceptions, to any director, officer, employee, or agent of the Company who by
reason of the fact that he or she is a director, officer, employee, or agent of
the Company, 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
Company Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock, which Convertible Preferred Stock has now been converted into the Company
Common Stock, were entitled to certain rights with respect to the registration
under the Securities Act of the 7,000,562 shares of the Company Common Stock
into which the Company Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock were converted. The shares of the Company 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 the Company, most of the holders of the Company 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.
The Company has entered into a Registration Rights Agreement with certain
of the holders of the Company Common Stock pursuant to which such persons will
have the right to require that the Company register shares of the Company 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 were the only persons
deemed to be "affiliates" of the Company, following the combination of the
Company and MME. In the March 1996 public offering carried out by the Company,
1,358,921 shares of the Company's 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.
In addition, from time-to-time, the Company has granted registration
rights, both on a periodic and a piggyback basis to various persons in
connection with acquisitions made on a private placement basis. At June 30,
1997, a total of approximately 8,700,000 shares of the Company Common Stock were
subject to such registration rights.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company Common Stock is First
Chicago Trust of New York, New York, New York.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal U.S. federal income tax
consequences of the purchase, ownership and disposition of Securities. The
summary represents the opinion of Haskell Slaughter & Young, L.L.C., tax counsel
to the Company, insofar as it relates to matters of law and legal conclusions.
The summary deals only with Securities held as capital assets by purchasers who
or which are (i) citizens or residents of the United States, (ii) domestic
corporations or (iii) otherwise subject to U.S. federal income taxation on a net
income basis in respect of income and gain from securities. It does not deal
with Securities held by specially treated classes of holders, such as dealers in
securities or life insurance companies. Prospective purchasers of Securities
should consult their own tax advisors concerning the U.S. federal income tax
consequences to Security holders in their particular situations, as well as any
consequences under the laws of any other taxing jurisdiction. This summary is
based on the Code, Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof as of the date hereof, all
of which are subject to change, possibly on a retroactive basis.
INCOME FROM SECURITIES
A holder will include interest on the Treasury Notes in income when
received or accrued, in accordance with the holder's method of accounting. For
federal income tax purposes, a holder is deemed to receive interest payments on
the Treasury Notes when such payments are made to the Collateral Agent, even if
such interest payment is not distributed to the holders until a later date. See
"Description of the Securities".
There is no authority for the treatment of the Yield Enhancement Payments,
Initial Premium Payments or Deferred Yield Enhancement Payments, if any, under
current law, but the Company intends to file information returns on the basis
that the Yield Enhancement Payments are taxable income to holders and,
similarly, that the Initial Premium Payments (although a payment in the form of
an additional interest in the Treasury Notes and not a direct payment of cash)
are taxable income to holders when made (i.e., the day the Treasury Notes are
purchased). Holders should consult their own tax advisors concerning the
treatment of Yield Enhancement Payments and Initial Premium Payments, including
the possibility that Yield Enhancement Payments and Initial Premium Payments may
be treated as a reduction in the holders' basis in the Securities, rather than
included in income upon receipt (or, in the case of Initial Premium Payments,
upon the purchase of the Treasury Notes), by analogy to the treatment of rebates
or of option premiums. For example, if, as a result of having entered into the
Purchase Contracts, the holders were treated as having sold a put option, the
Yield Enhancement Payments and the Initial Premium Payments could be viewed as
premium payments for the put option reducing the holder's basis in the
Securities but not includible in gross income when received. In addition, if the
Company elects to defer a Yield Enhancement Payment in a taxable year, the
Company may determine to report the amount of such Deferred Yield Enhancement
Payment as constructive taxable income to holders for such taxable year, and
such Deferred Yield Enhancement Payment may result in holders recognizing
taxable income or gain for such taxable year prior to the receipt of cash or
additional shares of Common Stock. Accordingly, holders should consult their own
tax advisors as to whether or not Deferred Yield Enhancement Payments should be
treated as taxable constructive distributions and, if taxable, whether such
income would be recognized prior to the receipt of cash or additional shares of
Common Stock or upon the Final Settlement Date. The Company does not intend to
deduct the Yield Enhancement Payments, Initial Premium Payments or any Deferred
Yield Enhancement Payments for federal income tax purposes because it views them
as a cost of issuing the Common Stock. Yield Enhancement Payments and Initial
Premium Payments received by a regulated investment company should be treated as
income derived with respect to such company's business of investing in stock and
securities.
SALE OR DISPOSITION OF SECURITIES
If a holder sells, exchanges or otherwise disposes of a Security before the
Final Settlement Date, the holder will generally recognize capital gain or loss
equal to the difference between the holder's tax basis in the Security and the
amount realized from the disposition of the Security, except to the extent of
any non-de
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minimis market discount, which, if the holder does not have an election to
amortize such discount currently in effect, would be treated as ordinary
interest income (see "-- Gain or Loss on Maturity of the Treasury Notes: Market
Discount and Bond Premium"). A holder's tax basis in a Security will generally
equal (a) the amount paid for the Security, (b) increased by the sum of (i) the
amount of any constructive dividend included in such holder's income as a result
of an adjustment of the Settlement Rate (see "-- Adjustment of Settlement
Rate"), (ii) the amount of any market discount included in income, as set forth
below, and (iii) the amount, if any, previously included in such holder's
taxable income with respect to Deferred Yield Enhancement Payments not paid in
cash or Initial Premium Payments received (or deemed received) by the holder,
(c) reduced by the sum of (i) the amount of any Yield Enhancement Payments and
Initial Premium Payments received (or, in the case of Initial Premium Payments,
deemed received) by the holder and not previously included in income and (ii)
the amount of any bond premium amortized over the term of the Treasury Notes, as
described below. If a holder sells a Security between interest payment dates, a
portion of the sales proceeds will be treated as a receipt of interest accrued
since the last interest payment date, rather than as an amount realized from the
sale of the Security, consistent with the general treatment of proceeds from the
sale of debt instruments such as Treasury Notes.
GAIN OR LOSS ON MATURITY OF THE TREASURY NOTES: MARKET DISCOUNT AND BOND PREMIUM
The tax basis of the Treasury Notes will equal the fair market value of the
Treasury Notes at the time of purchase of a Security. If such tax basis equals
the principal amount payable at maturity of the Treasury Notes, the holder will
not realize gain or loss upon payment of the principal of the Treasury Notes at
maturity. If such tax basis is less than the principal amount payable at
maturity of the Treasury Notes, the holder will generally realize gain equal to
the difference between the payment of the principal of the Treasury Notes at
maturity and the holder's tax basis. This gain will be treated as ordinary
interest income (i.e., market discount) unless it is "de minimis," in which case
it will be treated as capital gain. The gain will be "de minimis" if it is less
than 1/4 of one percent of the amount payable at maturity of the Treasury Notes
multiplied by the number of complete years from the time of purchase until the
maturity of the Treasury Notes. A holder may instead elect to accrue market
discount into income on a current basis over the remaining life of the Treasury
Notes. An election to amortize market discount may apply to other debt
instruments acquired with market discount by the holder and a holder should
consult a tax advisor before making such an election.
If such tax basis is greater than the principal amount payable at maturity
of the Treasury Notes (as would be the case if the Company makes any Initial
Premium Payments provided that the holder has not previously reduced its basis
with respect to such payments), the excess will be "bond premium". A holder may
either recognize the bond premium as a capital loss upon payment of the
principal of the Treasury Notes at maturity or make an election to amortize it
over the term of the Treasury Notes. If the election is made, the bond premium
will generally reduce the interest income on the Treasury Notes on a constant
yield basis over the remaining term of the Treasury Notes and will reduce the
basis of the Treasury Notes by the amount of the amortization. An election to
amortize bond premium may apply to other debt instruments acquired at a premium
by the holder and a holder should consult a tax advisor before making such an
election.
TAX BASIS OF COMMON STOCK ACQUIRED UNDER THE PURCHASE CONTRACT
The tax basis of the Common Stock acquired by a holder of Securities under
the Purchase Contract will generally equal (a) the amount paid for the Security
(b) increased by the sum of (i) the amount of any gain recognized upon payment
of the principal of the Treasury Notes at maturity or market discount included
in income, as set forth above, (ii) the amount of any constructive dividend
included in such holder's income as a result of an adjustment of the Settlement
Rate (see "-- Adjustment of Settlement Rate") and (iii) the amount, if any,
previously included in such holder's taxable income with respect to Deferred
Yield Enhancement Payments not paid in cash or Initial Premium Payments received
(or deemed received) by the holder at maturity (c) reduced by the sum of (i) the
amount of any loss recognized upon payment of the principal of the Treasury
Notes at maturity, or bond premium amortized over the term of the Treasury
Notes, as set forth above, (ii) the amount of any Yield Enhancement Payments and
any Initial Premium Payments
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received (or, in the case of Initial Premium Payments, deemed received) by the
holder and not previously included in income and (iii) the amount of any cash
received in lieu of fractional shares of Common Stock.
OWNERSHIP OF COMMON STOCK ACQUIRED UNDER THE PURCHASE CONTRACT
Except as described below under the caption "-- Adjustment of Settlement
Rate", a holder of Securities who does not otherwise own Common Stock will not
include in income dividends paid on the Common Stock for periods prior to such
holder's acquisition of Common Stock under a Purchase Contract. Assuming that
the Company has current or accumulated earnings and profits at least equal to
the amount of a distribution with respect to Common Stock, a holder of Common
Stock acquired under the Purchase Contract will include a dividend on the Common
Stock in income when received, and the dividend will be eligible for the
dividends received deduction if received by an otherwise qualifying corporate
holder which meets the holding period and other requirements for the dividends
received deduction.
Upon the sale, exchange or other disposition of Common Stock, the holder
will recognize gain or loss equal to the difference between the holder's tax
basis in the Common Stock and the amount realized on the disposition. The gain
or loss will be capital gain or loss, and will be long-term capital gain or loss
if the holder has held the stock for more than one year at the time of
disposition. In the case of individuals, "net capital gain" (i.e., the excess of
net long-term capital gain over net short-term capital loss) is generally
subject to a reduced rate of Federal income tax. In addition, capital gains and
losses from property held for more than 18 months will be taken into account in
determining "adjusted net capital gain" which is subject to a further reduction
in the rate of tax pursuant to a recent amendment of the Code.
ADJUSTMENT OF SETTLEMENT RATE
Holders of Securities might be treated as receiving a constructive
distribution from the Company if (i) the Settlement Rate is adjusted and as a
result of such adjustment, the proportionate interest of holders of Securities
in the assets or earnings and profits of the Company is increased, and (ii) the
adjustment is not made pursuant to a bona fide, reasonable antidilution formula.
An adjustment in the Settlement Rate would not be considered made pursuant to
such a formula if the adjustment were made to compensate for certain taxable
distributions with respect to Common Stock. Thus, under certain circumstances,
an increase in the Settlement Rate is likely to be taxable to holders of
Securities as a dividend to the extent of the current or accumulated earnings
and profits of the Company. Holders of Securities would be required to include
their allocable share of such constructive dividend in gross income but would
not receive any cash related thereto.
STATE AND OTHER TAX CONSIDERATIONS
Under federal law, interest on Treasury obligations is generally exempt
from state and local income taxes imposed on individual investors. This
exemption generally should apply to an individual Security holder's share of
interest on the Treasury Notes to the extent that an individual's state of
residence (or other applicable state or local taxing jurisdiction) characterizes
the Security for its income tax purposes consistently with the Security's
federal income tax characterization. There can be no assurance, however, that an
individual's state of residence (or other applicable state or local taxing
jurisdiction) would so characterize the Security, and, in any event, the
exemption would not extend to gain on sale or other disposition of a Security.
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE ACQUISITION AND HOLDING OF A
SECURITY.
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UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Company has agreed to sell to such Underwriter, the number of
Securities set forth opposite each Underwriter's name.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SECURITIES
- ----------- ----------
<S> <C>
Smith Barney Inc............................................
Credit Suisse First Boston Corporation......................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Montgomery Securities.......................................
Morgan Stanley & Co. Incorporated...........................
Piper Jaffray Inc...........................................
----------
Total............................................. 17,000,000
==========
</TABLE>
The Underwriters are obligated to take and pay for all Securities offered
hereby (other than those covered by the over-allotment option described below)
if any such Securities are taken.
The Underwriters, for whom Smith Barney Inc., Credit Suisse First Boston
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Montgomery
Securities, Morgan Stanley & Co. Incorporated and Piper Jaffray Inc. are acting
as representatives, propose initially to offer the Securities to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
Security. The Underwriters may allow, and such dealers may reallow, a discount
not in excess of $ per Security on sales to certain other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days following the date of this Prospectus, to purchase up to an aggregate of
2,550,000 additional Securities at the price to the public set forth on the
cover page of this Prospectus, less the underwriting discount. The Underwriters
may exercise this option only to cover over-allotments, if any, made on the sale
of the Securities offered hereby. If Purchase Contracts underlying any such
additional Securities are entered into, the Underwriters, at the direction of
the Company, would purchase and pledge under the Pledge Agreement the Treasury
Notes underlying such Securities and the Company or the Underwriters, as
appropriate, would pay a net amount equal to the proceeds (deficit) to the
Company in respect of such Securities as set forth on the cover page of this
Prospectus. If the Underwriters exercise their over-allotment option, each of
the Underwriters has severally agreed, subject to certain conditions, to effect
the foregoing transactions with respect to approximately the same percentage of
such Securities that the respective number of Securities set forth opposite its
name in the foregoing table bears to the Securities offered hereby. The price of
the Treasury Notes underlying Securities with respect to which an over-allotment
option is exercised may be different from that set forth on the cover page of
this Prospectus. Any such difference will be for the account of the Underwriters
and will not affect the amount of the proceeds (deficit) to the Company in
respect of such Securities as shown on the cover page of this Prospectus. The
Underwriters may enter into certain hedge transactions for their own account to
reduce or eliminate their risk in this regard.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company has agreed, for a period of 90 days after the date of this
Prospectus, to not, without the prior written consent of Smith Barney Inc.,
directly or indirectly, sell, offer to sell, grant any option for the sale of or
otherwise dispose of, or enter into any agreement to sell, any Securities,
Purchase Contracts or Common Stock or any securities of the Company similar to
the Securities, Purchase Contracts or Common Stock or any security convertible
into or exchangeable or exercisable for Securities, Purchase Contracts or Common
Stock other than to the Underwriters pursuant to the Purchase Agreement, other
than shares of Common Stock or options for shares of Common Stock issued
pursuant to or sold in connection with any employee benefit,
74
<PAGE> 76
dividend reinvestment and stock option and stock purchase plans of the Company
and its subsidiaries and other than shares of Common Stock issuable upon early
settlement of the Securities or exercise of stock options. In addition, the
Company's executive officers and directors have agreed that, for a period of 90
days from the date of this Prospectus, they will not, without the prior written
consent of Smith Barney Inc., directly or indirectly, sell, offer to sell, grant
any option for the sale of, or otherwise dispose of, or enter into any agreement
to sell, any Common Stock or any security convertible into or exchangeable or
exercisable for Common Stock.
In connection with this offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Securities than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions which stabilize, maintain or otherwise affect the market
price of the Securities at levels above those which might otherwise prevail in
the open market. Such transaction may include placing bids for the Securities at
levels above those which might otherwise prevail in the open market. Such
transactions may include placing bids for the Securities or effecting purchases
of the Securities for the purpose of pegging, fixing or maintaining the price of
the Securities or for the purpose of reducing a syndicate short position created
in connection with the offering. A syndicate short position may be covered by
exercise of the option described above in lieu of or in addition to open market
purchases. In addition, the contractual arrangements among the Underwriters
include a provision whereby, if the Representatives purchase Securities in the
open market for the account of the underwriting syndicate and the Securities
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling group
member in question to purchase the Securities in question at the cost price to
the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
Securities in question. The Underwriters are not required to engage in any of
these activities and any such activities, if commenced, may be discontinued at
any time.
Prior to this offering, there has been no public market for the Securities.
The public offering price for the Securities was determined in negotiations
between the Company and the Representatives. In determining the terms of the
Securities, including the public offering price, the Company and the
Representatives considered the market price of the Company's Common Stock and
also considered the Company's recent results of operations, the future prospects
of the Company and the industry in general, market prices and terms of, and
yields on, securities of other companies considered to be comparable to the
Company and prevailing conditions in the securities markets. There can be no
assurance that an active trading market will develop for the Securities or that
the Securities will trade in the public market subsequent to the offering at or
above the initial public offering price.
Certain of the Underwriters engage in transactions with, and, from time to
time, have performed services for, the Company and its subsidiaries in the
ordinary course of business.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Haskell Slaughter & Young, L.L.C., Birmingham, Alabama, and for the
Underwriters by Dewey Ballantine, New York, New York.
EXPERTS
The consolidated financial statements of MedPartners, Inc. appearing in
MedPartners, Inc.'s Annual Report on Form 10-K/A for the year ended December 31,
1996, and the consolidated financial statements of InPhyNet Medical Management
Inc. and Subsidiaries appearing in InPhyNet Medical Management Inc. and
Subsidiaries' Annual Report on Form 10-K/A for the year ended December 31, 1996,
each have been audited by Ernst & Young LLP, as set forth in their reports
included therein and incorporated herein by reference. Such consolidated
financial statements referred to above are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
75
<PAGE> 77
AVAILABLE INFORMATION
The Company has filed a Registration Statement (the "Registration
Statement") on Form S-3 under the Securities Act with the SEC covering the
Securities. This Prospectus does not contain all the information set forth in
the Registration Statement which the Company has filed with the SEC. Certain
portions have been omitted pursuant to the rules and regulations of the SEC, and
reference is hereby made to such portions for further information with respect
to the Company and the Securities. 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 or incorporated by reference. Each such statement is qualified in its
entirety by such reference.
The Company is subject to the information requirements of the Exchange Act
(SEC File No. 0-27276), 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.
20549 and the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained at
prescribed rates by writing to the SEC, Public Reference Section, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The SEC also maintains a
Web site that contains reports, proxy statements and other information regarding
registrants that file electronically with the SEC. The address of such site is
http://www.sec.gov. The Company's Common Stock is listed on the NYSE. The
Registration Statement, reports, proxy statements and certain other information
with respect to the Company can be inspected at the office of the NYSE, 20 Broad
Street, New York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents are hereby incorporated by reference in this
Prospectus all of which were previously filed by the Company with the SEC:
1. The Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1996.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
4. The Company's Registration Statement on Form S-4 (Registration No.
333-24639).
5. The description of the Company's Common Stock contained in the
Company's Registration Statement filed with the SEC on Form 8-B under the
Exchange Act and declared effective on November 29, 1995, including any
amendment or reports filed for the purpose of updating such description.
Additionally, all documents subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of its offering of the securities
offered hereby shall be deemed to be incorporated by reference into this
Prospectus. Any statement contained in a previously filed document incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in a
subsequently filed document modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or replaced, to constitute a part of this Prospectus.
The Company undertakes to provide to any person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of any such
person, without charge, by first class mail or other equally prompt means within
one business day of receipt of such request, a copy of any or all of the
documents which have been or may be incorporated by reference into this
Prospectus, other than exhibits to such documents. Written or oral requests for
such copies should be directed to the Company at 3000 Galleria Tower, Suite
1000, Birmingham, Alabama 35244, Attention: Corporate Secretary (telephone (205)
733-8996).
76
<PAGE> 78
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Forward-Looking Statements and Factors
that May Affect Future Results...... 10
The Company........................... 11
Risk Factors.......................... 11
Use of Proceeds....................... 21
Price Range of Common Stock........... 22
Dividend Policy....................... 22
Capitalization........................ 23
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 35
Management............................ 53
Description of the Securities......... 57
Description of the Purchase
Contracts........................... 58
Certain Provisions of the Purchase
Contract Agreement and the Pledge
Agreement........................... 63
Description of Capital Stock.......... 66
Certain Federal Income Tax
Consequences........................ 71
State and Other Tax Considerations.... 73
Underwriting.......................... 74
Legal Matters......................... 75
Experts............................... 75
Available Information................. 76
Incorporation of Certain Information
by Reference........................ 76
</TABLE>
======================================================
======================================================
17,000,000 SECURITIES
(MEDPARTNERS, INC. LOGO)
% TAPS (SM)
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY DEAN WITTER
PIPER JAFFRAY INC.
(SM)SERVICE MARK OF SMITH BARNEY INC.
======================================================
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the Securities offered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $
Collateral Agent's Fee...................................... $
Blue Sky Fees and Expenses.................................. $
Legal Fees and Expenses..................................... $
Accounting Fees............................................. $
Printing Costs.............................................. $
Miscellaneous Expenses...................................... $
-----------
Total........................................ $
===========
</TABLE>
- ---------------
* Actual amount.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the General Corporation Law of Delaware ("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. The Company's Third Restated Certificate of Incorporation contains a
provision eliminating or limiting director liability to the Company and its
stockholders for monetary damages arising from acts of 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 the Company 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 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 the Company 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 the Company 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 Commission 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. The Company's Second Amended and Restated By-laws provide for
mandatory indemnification rights, subject to limited exceptions, to any
director, officer, employee, or agent of the Company who, by reason of the fact
that he or she is a director, officer, employee, or agent of the Company, 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.
The Company has agreed to indemnify all of its directors and executive
officers against liability incurred by them by reason of their services as a
director to the fullest extent allowable under applicable law. In addition, the
Company 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.
II-1
<PAGE> 80
ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
(1) -- Form of Underwriting Agreement.*
(2)-1 -- Agreement and Plan of Merger, dated as of January 20, 1997
as amended by Amendment No. 1 dated as of May 21, 1997,
among MedPartners, Inc., SeaBird Merger Corporation and
InPhyNet Medical Management Inc., filed as Exhibit (2)-1 to
the Company's Registration Statement on Form S-4
(Registration No. 333-24639), is hereby incorporated herein
by reference.
(3)-1 -- MedPartners, Inc. Third Restated Certificate of
Incorporation, filed as Exhibit (3)-1 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, is hereby incorporated herein by
reference.
(3)-2 -- MedPartners, Inc. Second Amended and Restated Bylaws, filed
as Exhibit (3)-2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-12465), is hereby
incorporated herein by reference.
(4)-1 -- MedPartners, Inc. Rights Agreement, filed as Exhibit (4)-1
to the Company's Registration Statement on Form S-4
(Registration No. 33-00774), is hereby incorporated herein
by reference.
(4)-2 -- Amendment No. 1 to the Rights Plan of MedPartners, Inc.,
filed as Exhibit (4)-2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, is hereby
incorporated herein by reference.
(4)-3 -- Amendment No. 2 to the Rights Agreement of MedPartners,
Inc., filed as Exhibit (4)-2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-17339), is
hereby incorporated herein by reference.
(4)-4 -- Form of Purchase Contract Agreement.+
(4)-5 -- Form of Pledge Agreement.+
(5) -- Opinion of Haskell Slaughter & Young L.L.C., as to the
legality of the Securities.*
(8) -- Tax opinion*
(23)-1 -- Consent of Ernst & Young LLP.+
(23)-2 -- Consent of Haskell Slaughter & Young L.L.C. (included in the
opinion filed as Exhibit (5)).
(24) -- Powers of Attorney.+
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
(b) Financial Statements Schedule:
None are applicable.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 14 hereof, 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 Securities 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
II-2
<PAGE> 81
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 of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
II-3
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and 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
26, 1997.
MEDPARTNERS, INC.
By: /s/ LARRY R. HOUSE
------------------------------------
Larry R. House
Chairman of the Board 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 and August 26, 1997
- ----------------------------------------------------- Chief Executive Officer and
Larry R. House Director
* Executive Vice President and August 26, 1997
- ----------------------------------------------------- Chief Financial Officer
Harold O. Knight, Jr. (Principal Financial and
Accounting Officer)
* Director August 26, 1997
- -----------------------------------------------------
Richard M. Scrushy
* Director August 26, 1997
- -----------------------------------------------------
Larry D. Striplin, Jr.
* Director August 26, 1997
- -----------------------------------------------------
Charles W. Newhall, III
* Director August 26, 1997
- -----------------------------------------------------
Ted H. McCourtney
* Director August 26, 1997
- -----------------------------------------------------
Walter T. Mullikin, M.D.
* Director August 26, 1997
- -----------------------------------------------------
John S. McDonald, J.D.
* Director August 26, 1997
- -----------------------------------------------------
Rosalio J. Lopez, M.D.
</TABLE>
II-4
<PAGE> 83
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
* Director August 26, 1997
- -----------------------------------------------------
C.A. Lance Picolo
* Director August 26, 1997
- -----------------------------------------------------
Roger L. Headrick
* Director August 26, 1997
- -----------------------------------------------------
Harry M. Jansen Kraemer, Jr.
*By: /s/ LARRY R. HOUSE
---------------------------------------------
Larry R. House
As Attorney-in-Fact
</TABLE>
II-5
