<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-30923
PROSPECTUS
$420,000,000
[MEDPARTNERS(TM) LOGO]
6 7/8% SENIOR SUBORDINATED NOTES DUE 2000
INTEREST PAYABLE MARCH 1 AND SEPTEMBER 1
------------------
The 6 7/8% Senior Subordinated Notes due 2000 (the "Notes") are being
offered by MedPartners, Inc. ("MedPartners" or the "Company"). Interest on the
Notes will be payable semi-annually on March 1 and September 1 of each year,
commencing March 1, 1998, at the rate of 6 7/8% per annum. The Notes will mature
on September 1, 2000. The Notes will not be redeemable by the Company prior to
maturity and will not be entitled to the benefit of any mandatory sinking fund.
The Notes will be general unsecured obligations of the Company and are
subordinate to all present and future Senior Indebtedness (as defined herein)
and will be effectively subordinated to all existing and future indebtedness and
other liabilities of the Company's subsidiaries. As of June 30, 1997, after
giving effect to the offering being made hereby and the use of proceeds
therefrom as described in "Use of Proceeds", the Company and its subsidiaries
would have had approximately $568 million of indebtedness outstanding to which
the Notes would have been subordinated. Except as set forth under "Description
of the Notes -- Restrictions on Subsidiary Indebtedness", the Indenture will not
limit the amount of indebtedness, including Senior Indebtedness, which the
Company or its subsidiaries may create, incur, assume or guarantee. See
"Capitalization" and "Description of the Notes".
The Notes will be issued in fully registered form only in denominations of
$1,000 or integral multiples thereof. The Notes initially will be represented by
one or more Global Notes registered in the name of The Depository Trust Company
(the "Depositary") or its nominee. Beneficial interests in the Notes will be
shown on, and transfers thereof will be effected only through, records
maintained by the Depositary and its participants. Owners of beneficial
interests in the Notes will be entitled to physical delivery of Notes in
certificated form equal in principal amount to their respective beneficial
interests only under the limited circumstances described herein. Settlement for
the Notes will be made in immediately available funds. The Notes will trade in
the Depositary's Same-Day Funds Settlement System until maturity, and secondary
market trading activity for the Notes therefore will settle in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds. See "Description of the Notes -- Global
Notes; Form, Exchange and Transfer".
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR A DESCRIPTION
OF CERTAIN FACTORS TO BE CONSIDERED BY INVESTORS.
------------------
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 AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note 99.916% 0.450% 99.466%
- -----------------------------------------------------------------------------------------------------------------------
Total $419,647,200 $1,890,000 $417,757,200
=======================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from the date of initial issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(3) Before estimated expenses of $400,000 payable by the Company.
------------------
The Notes are being offered by the 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 Notes will be made on or about September 19,
1997 through the facilities of the Depositary.
------------------
SMITH BARNEY INC. CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
NATIONSBANC CAPITAL MARKETS, INC.
September 16, 1997
<PAGE> 2
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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING".
2
<PAGE> 3
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. 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 over
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> 4
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
Notes offered hereby are set forth under "Risk Factors".
4
<PAGE> 5
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.......................................... 834,855 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 $ 171,162
Working capital............................................. 277,766 314,766
Total assets................................................ 2,661,509 2,698,509
Long-term debt, less current portion........................ 926,524 963,524
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> 6
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 the Notes and the application of the net
proceeds therefrom as set forth in "Use of Proceeds".
(6) Excludes the effect on stockholders' equity that will occur both upon the
issuance and upon the final settlement of the Company's Threshold
Appreciation Price Securities (approximately $420 million).
6
<PAGE> 7
THE OFFERING
Securities Offered......... $420,000,000 aggregate principal amount of 6 7/8%
Senior Subordinated Notes due 2000 (the "Notes").
Maturity Date.............. September 1, 2000
Interest Rate and Payment
Dates...................... The Notes will bear interest at a rate of 6 7/8%
per annum. Interest on the Notes will accrue from
the date of issuance and will be payable semi-
annually on March 1 and September 1 of each year,
commencing March 1, 1998.
Subordination.............. The Notes will be general unsecured obligations of
the Company and are subordinate to all present and
future Senior Indebtedness and will be effectively
subordinated to all existing and future
indebtedness and other liabilities of the Company's
subsidiaries. As of June 30, 1997, after giving
effect to the offering being made hereby and the
use of proceeds therefrom as described in "Use of
Proceeds", the Company and its subsidiaries would
have had approximately $568 million of indebtedness
outstanding to which the Notes would have been
subordinated. Except as set forth under
"Description of the Notes -- Restrictions on
Subsidiary Indebtedness", the Indenture will not
limit the amount of indebtedness, including Senior
Indebtedness, which the Company or its subsidiaries
may create, incur, assume or guarantee. See
"Capitalization" and "Description of the Notes".
Redemption................. The Notes will not be redeemable by the Company
prior to maturity.
Certain Covenants.......... The Indenture will contain certain covenants with
respect to, among others, the following matters:
(i) restriction on sale and leaseback transactions,
(ii) restrictions on additional subsidiary
indebtedness and (iii) restrictions on
consolidations, mergers and sales of all or
substantially all of the assets of the Company.
These covenants are subject to important exceptions
and qualifications. See "Description of the
Notes -- Certain Covenants" and "-- Consolidation,
Merger and Disposition of Assets".
Use of Proceeds............ To repay indebtedness outstanding under the Credit
Facility (as defined herein). See "Use of
Proceeds".
7
<PAGE> 8
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 Notes 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 Notes. 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 million of which is related to the
business combination with InPhyNet. See Note 5 to the financial statements
8
<PAGE> 9
included in the Form 10-Q for the quarter ended June 30, 1997, incorporated
herein by reference. There can be no assurance that future merger expenses will
not result in further net losses, nor can there be any assurance that: there
will not be substantial future costs associated with integrating acquired
companies; 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, including the net proceeds from the sale of
the Notes, the use of Common Stock for selected practice and other acquisitions
and available borrowings under the $1.0 billion credit facility (the "Credit
Facility" or the "Bank Credit Agreement") 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
9
<PAGE> 10
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.
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,
10
<PAGE> 11
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 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".
11
<PAGE> 12
In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory violations, Caremark
is required to report such violations to the OIG and DOJ. Caremark is,
therefore, subject to increased regulatory scrutiny and, in the event it commits
legal or regulatory violations, Caremark may be subject to an increased risk of
sanctions or penalties, including disqualification as a provider of Medicare or
Medicaid services, which would have a material adverse effect on the operating
results and financial condition of the Company.
In connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various non-governmental claims and may in
the future become subject to additional OIG-related claims. Caremark is a party
to, or the subject of, 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
12
<PAGE> 13
charge from discontinued operations of $75.4 million during the second quarter
of 1997 related to this settlement.
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
13
<PAGE> 14
practice of medicine or that the enforceability of the provisions of such
arrangements, including non-competition agreements, will not be limited. There
can be no assurance that review of the business of the Company and its
affiliates by courts or regulatory authorities will not result in a
determination that could adversely affect their operations or that the
healthcare regulatory environment will not change so as to restrict existing
operations or expansion thereof. In the event of action by any regulatory
authority limiting or prohibiting the Company or any affiliate from carrying on
its business or from expanding the operations of the Company and its affiliates
to certain jurisdictions, structural and organizational modifications of the
Company may be required, which could have a material adverse effect on the
operating results and financial condition of the Company.
In addition to the regulations referred to above, significant aspects of
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,
14
<PAGE> 15
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
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.
SUBORDINATION
The Notes will be general unsecured obligations of the Company and are
subordinate to all present and future Senior Indebtedness and will be
effectively subordinated to all existing and future indebtedness and other
liabilities of the Company's subsidiaries. As of June 30, 1997, after giving
effect to the offering being made hereby and the use of proceeds therefrom as
described in "Use of Proceeds", the Company and its subsidiaries would have had
approximately $568 million of indebtedness outstanding to which the Notes would
have been subordinated. Except as set forth under "Description of the
Notes -- Restrictions on Subsidiary Indebtedness", the Indenture will not limit
the amount of indebtedness, including Senior Indebtedness, which the Company or
its subsidiaries may create, incur, assume or guarantee. See "Capitalization"
and "Description of the Notes".
15
<PAGE> 16
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities for which there is currently no
public market, and there can be no assurance as to the liquidity of the Notes,
the ability of the holders to sell their Notes or the prices at which holders of
the Notes would be able to sell their Notes. The Company does not intend to list
the Notes on any securities exchange or to seek the admission thereof to trading
on the NASDAQ. The Notes will be tradable in the over-the-counter market, but
any such trading may be limited and sporadic. Each of the Underwriters has
advised the Company that it currently intends to make a market for the Notes,
but the Underwriters are not obligated to do so. Any such market-making may be
discontinued by the Underwriters at any time without notice in their sole
discretion. If a market for the Notes does develop, the Notes may trade at a
discount from their initial public offering price depending on prevailing
interest rates, the market for similar securities, performance of the Company,
performance of the PPM industry and other factors. No assurance can be given
that there will be a liquid trading market for the Notes or that any trading
market that does develop will continue. See "Underwriting".
USE OF PROCEEDS
The net proceeds from the offering made hereby are expected to be
approximately $417.4 million. The Company intends to apply the net proceeds of
the offering to repayment of indebtedness under the Credit Facility. Borrowings
under the Credit Facility have been, and will be, used to finance the
acquisition of certain PPM companies and physician and medical practices, to
fund deferred purchase price obligations and for working capital and other
general corporate purposes. The Company is continuously in discussions with
several potential acquisition candidates; however, there can be no assurance
that any pending acquisitions will be successfully concluded.
The Credit Facility bears interest at the rate of LIBOR plus 35 basis
points, which rate was 6.0375% as of June 30, 1997. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
Affiliates of J.P. Morgan Securities Inc. and NationsBanc Capital Markets,
Inc. are lenders under the Credit Facility. As of June 30, 1997, $34.1 million
was owed under the Credit Facility to Morgan Guaranty Trust Company of New York,
a wholly-owned subsidiary of J.P. Morgan Securities Inc., and $38.0 million was
owed to NationsBank, National Association (South), an affiliate of NationsBanc
Capital Markets, Inc.
16
<PAGE> 17
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 concurrent offering of the Company's
Threshold Appreciation Price Securities. (Neither the sale of the Notes nor the
sale of the Company's Threshold Appreciation Price Securities is dependent on
the consummation of the other sale.)
<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
6 7/8% Senior Subordinated Notes due 2000................... -- 420,000
7 3/8% Senior Notes due 2006................................ 450,000 450,000
Credit Facility............................................. 383,000 --
Other long-term debt........................................ 93,524 93,524
Stockholders' equity:
Preferred stock, $.001 par value, 9,500 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 $1,841,538
========== ==========
</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 effect on stockholders' equity that will occur both upon the
issuance and upon the final settlement of the Company's Threshold
Appreciation Price Securities (approximately $420 million).
17
<PAGE> 18
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.
18
<PAGE> 19
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.
19
<PAGE> 20
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
20
<PAGE> 21
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.
21
<PAGE> 22
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
22
<PAGE> 23
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.
23
<PAGE> 24
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
24
<PAGE> 25
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
25
<PAGE> 26
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 Threshold Appreciation Price
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 Threshold Appreciation Price 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 Threshold Appreciation Price 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 Threshold Appreciation Price 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 Threshold Appreciation Price 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
26
<PAGE> 27
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.
27
<PAGE> 28
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
------------ ---------- ----------
(IN THOUSANDS)
<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>
28
<PAGE> 29
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.
29
<PAGE> 30
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
30
<PAGE> 31
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
31
<PAGE> 32
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
32
<PAGE> 33
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
33
<PAGE> 34
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;
34
<PAGE> 35
(ii) Physician practices that contributed 15% of PPM revenue (9% 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.
35
<PAGE> 36
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
36
<PAGE> 37
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
37
<PAGE> 38
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
38
<PAGE> 39
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
39
<PAGE> 40
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
40
<PAGE> 41
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
41
<PAGE> 42
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.
42
<PAGE> 43
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
43
<PAGE> 44
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 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. 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
44
<PAGE> 45
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. The plaintiffs appealed this decision and the matter
is scheduled for oral argument. 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
45
<PAGE> 46
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.
46
<PAGE> 47
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
47
<PAGE> 48
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.
48
<PAGE> 49
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
49
<PAGE> 50
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.
50
<PAGE> 51
DESCRIPTION OF THE NOTES
The Notes will be issued under an indenture to be dated as of September 15,
1997 (the "Indenture") between the Company and PNC Bank, Kentucky, Inc., a
Kentucky banking corporation, as trustee (the "Trustee"). The following summary
of certain provisions of the Indenture does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
Indenture (the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part), including the definitions of
certain terms contained therein and those terms made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended, as in effect on the
date of the Indenture.
GENERAL
The Notes will be general unsecured obligations of the Company limited to
$420,000,000 aggregate principal amount. The Notes will mature on September 1,
2000. Interest on the Notes will accrue at the rate of 6 7/8% per annum and will
be payable semi-annually on March 1 and September 1 of each year, commencing
March 1, 1998, to the Holders of record of Notes at the close of business on the
February 15 and August 15 immediately preceding such interest payment date.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the original date of
issuance of the Notes. Interest will be computed on the basis of a 360-day year
of twelve 30-day months.
The Notes are not redeemable prior to maturity and will not be entitled to
the benefit of any mandatory sinking fund.
The Notes will be issued only in registered form without coupons, in
denominations of $1,000 and integral multiples thereof. The Notes will be
initially issued in the form of one or more book-entry notes (each, a "Global
Note"). Principal of and interest on the Global Notes will be payable, and the
Global Notes will be transferable and exchangeable, only as provided for below
under the caption "-- Global Notes; Form, Exchange and Transfer". Principal of
and interest on Notes subsequently issued in a form other than as a Global Note
will be payable, and such Notes will be transferable and exchangeable, at the
corporate trust office of the Trustee. In addition, interest payable with
respect to Notes subsequently issued in a form other than as a Global Note may
be paid, at the option of the Company, by check mailed to the Person entitled
thereto as shown on the security register of the Notes. No service charge will
be made for any transfer or exchange of Notes, except in certain circumstances
for any tax or other governmental charge that may be imposed in connection
therewith.
SUBORDINATION
Payment of the principal of, premium, if any, and interest, on the Notes is
expressly subordinated in right of payment, as set forth in the Indenture, to
payment when due of all Senior Indebtedness of the Company. "Senior
Indebtedness" is defined as (a) all indebtedness of the Company under the Credit
Facility dated September 5, 1996, as amended, by and among the Company and
NationsBank, National Association (South), as administrative agent for a group
of lenders, and any successor credit facilities thereto, whether outstanding on
the date of execution of the Indenture or thereafter created, incurred or
assumed, (b) the Company's 7 3/8% Senior Notes due 2006 (the "1996 Notes")
issued pursuant to that certain Indenture dated as of October 8, 1996, between
the Company and The First National Bank of Chicago, as trustee, (c) any
promissory notes (other than any referred to in the foregoing clauses (a) and
(b)) issued by the Company pursuant to any agreement between the Company and any
bank or banks and any commercial paper issued by the Company, (d) all
indebtedness incurred by the Company after the date of the Indenture for money
borrowed which is, in the discretion of the Company, specifically designated by
the Company as superior to subordinated debt (senior debt) of the Company in the
instruments evidencing said indebtedness at the time of the issuance thereof,
(e) all indebtedness of the Company in addition to the indebtedness referred to
in the preceding clauses (a) through (d) for money borrowed from or guaranteed
to persons, firms or corporations which engage in lending money, including,
without limitation, banks, trust companies, insurance companies and other
financing institutions and charitable trusts, pension trusts and other investing
organizations, evidenced by notes or similar obligations, unless such
indebtedness shall, in the instrument evidencing the
51
<PAGE> 52
same, be specifically designated as not being superior to the Notes and (f) any
amendments, modifications, supplements, deferrals, renewals or extensions of any
such Senior Indebtedness.
No payment on account of principal, premium, if any, or interest on the
Notes may be made, nor may any property or assets of the Company be applied to
the purchase or other acquisition or retirement of the Notes, unless full
payment of amounts then due for principal, premium, if any, and interest on
Senior Indebtedness has been made or duly provided for in money or money's
worth. No payment by the Company on account of principal, premium, if any, or
interest on the Notes may be made, nor may any property or assets of the Company
be applied to the purchase or other acquisition or retirement of the Notes, if,
at the time of such payment or application or immediately after giving effect
thereto, there exists under any Senior Indebtedness or any agreement pursuant to
which such Senior Indebtedness is issued any event of default permitting the
holders of such Senior Indebtedness (or a trustee on behalf of such holders) to
accelerate the maturity thereof provided, however, that in the case of such an
event of default (other than in payment of such Senior Indebtedness when due)
the foregoing will not prevent any such payment or application for a period
longer than 90 days after the date on which the holders of such Senior
Indebtedness (or such trustee) shall have first obtained written notice of such
event of default from the Company or the holder of any Notes, if the maturity of
such Senior Indebtedness is not so accelerated within such 90-day period.
Subject to the foregoing, if there shall have occurred any Event of Default
on the Notes as described below under "Events of Default", other than with
respect to certain events of bankruptcy, insolvency or reorganization, then
unless and until either such Event of Default shall have been cured or waived or
shall have ceased to exist or the principal of, premium, if any, and interest on
all Senior Indebtedness shall have been paid in full in money or money's worth,
no payment shall be made by the Company on account of the principal of, premium,
if any, or interest on the Notes or on account of the purchase or other
acquisition of Notes, except (a) payments at the expressed maturity of the Notes
(subject to the next paragraph), (b) current interest payments as provided in
the Notes and (c) payments for the purpose of curing any such Event of Default.
Upon any payment or distribution of assets of the Company to creditors upon
any dissolution or winding-up or total or partial liquidation or reorganization
of the Company or similar proceeding relating to the Company or its property,
whether voluntary or involuntary and whether or not the Company is a party
thereto, or in bankruptcy, insolvency, receivership or other proceedings, all
principal, premium, if any, and interest due upon all Senior Indebtedness must
be paid in full before the holders of the Notes are entitled to receive or
retain any assets so paid or distributed. Subject to the payment in full of all
Senior Indebtedness, the holders of the Notes are to be subrogated to the rights
of holders of Senior Indebtedness to receive payments or distributions of assets
of the Company or other payments applicable to Senior Indebtedness to the extent
of the application to Senior Indebtedness of moneys or other assets which would
have been received by the holders of the Notes but for the subordination
provisions contained in the Indenture until the Notes are paid in full.
The Notes are obligations exclusively of the Company. The operations of the
Company are currently conducted principally through subsidiaries, which are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Notes or to make any funds
available therefor, whether by dividends, loans or other payments. In addition,
the payment of dividends and certain loans and advances to the Company by such
subsidiaries may be subject to certain statutory or contractual restrictions,
are contingent upon the earnings of such subsidiaries and are subject to various
business considerations.
The Notes will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's subsidiaries to the extent of the assets of such subsidiaries. Any
right of the Company to receive assets of any such subsidiary upon the
liquidation or reorganization of any such subsidiary (and the consequent right
of the Holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such subsidiary, in which
case the claims of the
52
<PAGE> 53
Company would still be subordinate to any security in the assets of such
subsidiary and any indebtedness of such subsidiary senior to that held by the
Company.
Except as set forth under "Restrictions on Subsidiary Indebtedness" below,
the Indenture does not contain any restrictions on the incurrence of
indebtedness by the Company or its subsidiaries or the payment of dividends or
financial covenants. As of June 30, 1997, after giving effect to the offering
being made hereby and the use of proceeds therefrom as described in "Use of
Proceeds", the Company and its subsidiaries would have had approximately $568
million in indebtedness outstanding to which the Notes would have been
subordinated. The Company also expects to incur Senior Indebtedness, and that
its subsidiaries will incur indebtedness, to which the Notes will be effectively
subordinated, from time to time in the future.
By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness, as well as certain general creditors of the Company, may recover
more, ratably, than the holders of the Notes.
The Indenture does not contain provisions which would afford the holders of
Notes protection in the event of a decline in the Company's credit quality
resulting from highly leveraged or other similar transactions involving the
Company.
GLOBAL NOTES; FORM, EXCHANGE AND TRANSFER
The Notes will be initially issued in the form of fully registered Global
Notes deposited with or on behalf of, and registered in the name of, The
Depository Trust Company (the "Depositary") or a nominee thereof. Unless and
until it is exchanged in whole or in part for Notes in definitive registered
form, a Global Note may not be transferred, except as a whole: (i) by the
Depositary to a nominee of such Depositary, or (ii) by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or (iii) by
such Depositary or any such nominee to a successor of such Depositary or a
nominee of such successor.
Ownership of beneficial interests in a Global Note will be limited to
Persons that have accounts with the Depositary ("participants") or Persons that
may hold interests through participants. Upon the issuance of a Global Note, the
Depositary will credit, on its book-entry registration and transfer system, the
participants' accounts with the respective principal amounts of the Notes
represented by such Global Note beneficially owned by such participants. The
accounts to be credited will initially be designated by the Underwriters.
Ownership of beneficial interests in such Global Note will be shown on, and the
transfer of such ownership interests will be effected only through, records
maintained by the Depositary or its nominee (with respect to interests of
participants) and on the records of participants (with respect to interests of
Persons holding through participants). The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and such laws may impair the ability to own,
transfer or pledge beneficial interests in Global Notes.
So long as the Depositary, or its nominee, is the owner of record of a
Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole record owner or holder of Notes represented by such Global
Note for all purposes under the Indenture. Except as set forth below, owners of
beneficial interests in a Global Note will not be entitled to have Notes
represented by such Global Note registered in their names, and will not receive
or be entitled to receive physical delivery of such Notes in definitive form and
will not be considered the record owners or holders thereof under the Indenture.
Accordingly, each Person owning a beneficial interest in a Global Note must rely
on the procedures of the Depositary and, if such Person is not a participant, on
the procedures of the participant through which such Person owns its interest,
to exercise any rights of a holder of record under the Indenture. The Company
understands that under existing industry practices, if the Company requests any
action of holders, or if any owner of a beneficial interest in a Global Note
desires to give or take any action which a holder is entitled to give or take
under the Indenture, the Depositary would authorize the participants holding the
relevant beneficial interests to give or take such action, and such participants
would authorize beneficial owners owning through such participants to give or
take such action or would otherwise act upon the instruction of beneficial
owners holding through them. No beneficial owner of an interest in a Global Note
will be able to transfer that interest except in accordance with the
Depositary's applicable procedures, in addition to those provided for in the
Indenture.
53
<PAGE> 54
Payments of principal and interest on Notes represented by a Global Note
registered in the name of the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner of such
Global Note. None of the Company, the Trustee or any other agent of the Company
or agent of the Trustee will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in such Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of a Global Note, will immediately
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in such Global Note as shown on the records of
the Depositary or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in such Global Note held through
such participants will be governed by standing customer instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such participants.
If the Depositary notifies the Company that it is at any time unwilling or
unable to continue as Depositary or ceases to be eligible under applicable law,
and a successor Depositary eligible under applicable law is not appointed by the
Company within 90 days, the Company will issue Notes in definitive form in
exchange for Global Notes representing such Notes. In addition, the Company may
at any time and in its sole discretion determine not to have any of the Notes
represented by one or more Global Notes and, in such event, will issue Notes in
definitive form in exchange for Global Notes representing such Notes. Any Notes
issued in definitive form in exchange for any Global Notes will be registered in
such name or names as the Depositary shall instruct the Trustee. It is expected
that such instructions will be based upon directions received by the Depositary
from participants with respect to ownership of beneficial interests in such
Global Note.
The Depositary has advised the Company as follows: the Depositary is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a "banking organization" within the meaning of the Banking Law of the
State of New York, 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 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. Participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations.
The Depositary is owned by a number of its participants and by the New York
Stock Exchange, Inc., the American Stock Exchange Inc. and the National
Association of Securities Dealers, Inc. Access to the Depositary's system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. The rules applicable to the
Depositary and its participants are on file with the Commission.
Although the Depositary and its participants are expected to follow the
foregoing procedures in order to facilitate transfers of interests in a Global
Note among participants, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Company nor the Trustee will have any responsibility for the
performance by the Depositary or the participants of their respective
obligations under the rules and procedures governing their operations.
SAME-DAY SETTLEMENT IN RESPECT OF GLOBAL NOTES
So long as any Notes are represented by Global Notes registered in the name
of the Depositary or its nominee, such Notes will trade in the Depositary's
Same-Day Funds Settlement System, and secondary market trading activity in such
Notes will therefore be required by the Depositary to settle in immediately
available funds.
54
<PAGE> 55
CERTAIN COVENANTS
Restrictions on Sale and Leaseback Transactions
The Indenture will contain a covenant providing that so long as any of the
Notes are outstanding, the Company will not, nor will it permit any Subsidiary
to, enter into any arrangement with any Person (other than the Company or a
Subsidiary) providing for the leasing by the Company or any Subsidiary of any
property or assets, whether now owned or hereafter acquired, which has been or
is to be sold or transferred by the Company or such Subsidiary to such Person
with the intention of taking back a lease on such property or assets and which
arrangement would be characterized or qualified as either a Capital Lease or
Off-Balance Sheet Liability (a "Sale and Leaseback Transaction"), if, at the
time of entering into such Sale and Leaseback Transaction, and after giving
effect thereto, the amount of Attributable Debt in respect of such Sale and
Leaseback Transaction, together with all such other Attributable Debt
outstanding exceeds the greater of (i) $25,000,000 or (ii) together with all
Indebtedness of Subsidiaries (not including Indebtedness permitted to be issued,
assumed, incurred or guaranteed under clauses (a) through (j) under
"Restrictions on Subsidiary Indebtedness" below), 15% of Consolidated Net Worth
of the Company.
Restrictions on Subsidiary Indebtedness
The Indenture will provide that so long as any of the Notes are
outstanding, the Company will not permit any of its Subsidiaries to issue,
assume, incur or guarantee any Indebtedness, except that the foregoing
restrictions shall not apply to:
(a) Indebtedness existing as of the date of the Indenture, including
all existing or available borrowings under the Bank Credit Agreement and
the 1996 Notes;
(b) Indebtedness of a corporation or other entity existing at the time
it becomes a Subsidiary and not incurred as a result of, or in connection
with or in anticipation of, such Subsidiary becoming a Subsidiary;
(c) Indebtedness of a corporation or other entity assumed at the time
of its acquisition by a Subsidiary (including acquisition through merger or
consolidation) and not incurred as a result of, or in connection with or in
anticipation of, such acquisition;
(d) unsecured intercompany Indebtedness of a Subsidiary for loans or
advances made to such Subsidiary by the Company or another Subsidiary
provided that upon either (i) the transfer or other disposition by the
Company or a Subsidiary of any Indebtedness so permitted to a Person other
than the Company or another Subsidiary or (ii) the issuance, sale, transfer
or other disposition (other than a pledge of the shares of such Subsidiary)
of shares of capital stock (including acquisition through merger or
consolidation) of such Subsidiary to a Person other than the Company or
another Subsidiary which, after giving effect thereto, results in such
Subsidiary ceasing to be a Subsidiary of the Company, the provisions of
this clause (d) shall no longer be applicable to such Indebtedness and such
Indebtedness shall be deemed to have been issued, assumed, incurred or
guaranteed at the time of such transfer or other disposition;
(e) the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
(f) Purchase Money Indebtedness and Capital Leases incurred or entered
into by a Subsidiary not to exceed an aggregate outstanding principal
amount at any time of $25,000,000 provided, however, that the aggregate
outstanding principal amount of Purchase Money Indebtedness and Capital
Leases permissible under this clause (f) shall be increased or decreased to
such amount as is permissible under the Bank Credit Agreement;
(g) Permitted Receivables Securitizations;
(h) Off-Balance Sheet Liabilities (other than Permitted Receivables
Securitizations) not to exceed an aggregate outstanding principal amount of
$25 million reduced by the amount, if any, of secured
55
<PAGE> 56
Indebtedness of a Subsidiary; provided, however, that the aggregate
outstanding principle amount of Off-Balance Sheet Liabilities shall be
increased or decreased to such amount as is permitted from time to time
under the Bank Credit Agreement;
(i) Indebtedness arising from Rate Hedging Obligations incurred to
limit risks of currency or interest rate fluctuations to which a Subsidiary
is otherwise subject by virtue of the operations of its business, and not
for speculative purposes provided, however, that the aggregate notional
amount of all such Rate Hedging Obligations shall not exceed at any time
$500,000,000 and, provided further, that the aggregate outstanding
principal amount of Indebtedness arising from Rate Hedging Obligations
under this clause (i) shall be increased or decreased to such amount as is
permissible under the Bank Credit Agreement; and
(j) the extension, renewal, refinancing or replacement (or successive
extensions, renewals, refinancings or replacements), in whole or in part,
of any Indebtedness referred to in the foregoing clauses (a) through (i)
provided, however, (i) that the Indebtedness so issued has (A) a principal
amount not in excess of the principal amount of the Indebtedness being
extended, renewed, refinanced or replaced (which amount shall be deemed to
include the amount of any undrawn or available amounts under any committed
credit or lease facility to be so extended, renewed, refinanced or
replaced), (B) a final redemption date later than the final stated maturity
or final redemption date, if any, of the Indebtedness being extended,
renewed, refinanced or replaced and (C) an Average Life at the time of
issuance of such Indebtedness that is greater than the Average Life of the
Indebtedness being extended, renewed refinanced or replaced; (ii) the group
of direct or contingent obligors on such Indebtedness shall not be expanded
as a result of any such action; and (iii) immediately prior to and
immediately after giving effect to any such extension, renewal or
replacement, no Event of Default shall have occurred and be continuing.
Notwithstanding the foregoing, any Subsidiary may issue, assume, incur or
guarantee Indebtedness which otherwise would be subject to the foregoing
restrictions in an aggregate amount, that together with all other such
Indebtedness of any Subsidiaries outstanding which would otherwise be subject to
the foregoing restrictions (not including Indebtedness permitted to be issued,
assumed, incurred or guaranteed under clauses (a) through (j) above), that does
not exceed 15% of Consolidated Net Worth of the Company.
Certain Definitions
"Attributable Debt" in respect of a Sale and Leaseback Transaction means,
at the time of determination, the then present value (discounted at the actual
rate of interest of such transaction) of the obligation of the lessee for net
rental payments during the remaining term of the lease included in such Sale and
Leaseback Transaction (including any period for which such lease has been
extended or may, at the option of the lessor, be extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness multiplied by the
amount of such principal payment by (ii) the sum of all such principal payments.
"Bank Credit Agreement" means the Credit Agreement, dated as of September
5, 1996 and as amended by Amendment No. 1 and Amendment No. 2 thereto, by and
among MedPartners, Inc. and NationsBank, National Association (South), as
administrative agent for a group of lenders, as such agreement may be amended,
renewed, extended, substituted, refinanced, restructured, replaced or
supplemented or otherwise modified from time to time (including without
limitation, any successive renewals, extensions, substitutions, refinancings,
restructurings, replacements or supplementations or other modifications of the
foregoing).
"Capital Leases" means all leases which have been or should be capitalized
in accordance with GAAP as in effect from time to time including the provisions
of FAS No. 13 and any successor thereof.
"Consolidated Net Worth" means the excess of (i) the consolidated net book
value of the assets of the Company and its Subsidiaries after all appropriate
deductions in accordance with GAAP as in effect on the
56
<PAGE> 57
date of the Indenture (including without limitation, reserves for doubtful
receivables, obsolescence, depreciation and amortization) less (ii) the
consolidated liabilities (including tax and other proper accruals, but
excluding, if applicable, the accumulated postretirement benefit obligation
resulting from the application of the provisions of FAS No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions") of the Company and
its Subsidiaries, in each case computed and consolidated in accordance with GAAP
in effect on the date of the Indenture.
"GAAP" means, unless otherwise specified in the Indenture, such accounting
principles as are generally accepted in the United States as of the date of the
relevant calculation.
"Indebtedness" with respect to any Person is defined to mean, at any time,
without duplication, (i) any debt (a) for money borrowed, or (b) evidenced by a
bond, note, debenture, or similar instrument for the payment of which such
Person is responsible or liable, or (c) which is a direct or indirect obligation
which arises as a result of banker's acceptances; (ii) any Off-Balance Sheet
Liability, (iii) any debt of others described in the preceding clause (i) which
such Person has guaranteed or for which it is otherwise directly liable; (iv)
the obligation of such Person as lessee under any lease of property which is
reflected on such Person's balance sheet as a capitalized lease; (v) to the
extent not otherwise included in this definition, net obligations under any Rate
Hedging Obligations; and (vi) any deferral, amendment, renewal, extension,
supplement or refunding of any liability of the kind described in any of the
preceding clauses (i), (ii), (iii), (iv) and (v) provided, however, that, in
computing the Indebtedness of any Person, there shall be excluded any particular
Indebtedness if, upon or prior to the maturity thereof, there shall have been
deposited with a depository in trust money (or evidence of Indebtedness if
permitted by the instrument creating such Indebtedness) in the necessary amount
to pay, redeem or satisfy such Indebtedness as it becomes due, and the amount so
deposited shall not be included in any computation of the assets of such Person.
"Off-Balance Sheet Liabilities" means, with respect to any Person, (i) any
repurchase obligation or liability of such Person with respect to accounts or
notes receivable sold by such Person, (ii) the face amount of accounts
receivable pursuant to a Permitted Receivables Securitization, (iii) any
repurchase obligation or liability of such Person with respect to property
leased by such Person as lessee, (iv) obligations arising with respect to any
other transaction which is the functional equivalent of or takes the place of
borrowing but which does not constitute a liability on the consolidated balance
sheets of such Person excluding therefrom operating leases which do not require
payment by or due from such Person: (a) at the scheduled termination of such
operating lease, (b) pursuant to a required purchase by such Person of the
leased property, or (c) under any guaranty by such Person of the value of the
leased property, or (v) net liabilities under any Rate Hedging Obligations.
"Permitted Receivables Securitization" means limited recourse or
non-recourse sales and assignments of accounts receivable of a Person to one or
more entities, the proceeds of which shall be made available to such Person
provided, however, that the maximum face amount of accounts receivable which may
be sold is $100,000,000 and the minimum price which shall be paid for
receivables is 70% of the face amount thereof; provided, further that
notwithstanding the immediately preceding proviso the maximum face amount of
accounts receivable which may be sold and the minimum price which shall be paid
for receivables shall be increased or decreased to such amount and percentages
as is permissible under the Bank Credit Agreement.
"Purchase Money Indebtedness" means Indebtedness incurred to finance all or
any part of the purchase price or cost of construction of improvements in
respect of property or assets acquired by a Person after the date of the
Indenture and incurred prior to, at the time of, or within 90 days after, the
acquisition of any such property or assets or the completion of any such
construction or improvements.
"Rate Hedging Obligations" means any and all obligations of any Person,
whether absolute or contingent and howsoever and whensoever created, arising,
evidenced or acquired (including all renewals, extensions and modifications
thereof and substitutions therefor), under (i) any and all agreements, devices
or arrangements designed to protect at least one of the parties thereto from the
fluctuations of interest rates, exchange rates or forward rates applicable to
such party's assets, liabilities or exchange transactions, including, but not
limited to, Dollar-denominated or cross-currency interest rate exchange
agreements, forward currency exchange agreements, interest rate cap or collar
protection agreements, forward rate currency or interest rate options,
57
<PAGE> 58
puts, warrants and those commonly known as interest rate "swap" agreements; and
(ii) any and all cancellations, buybacks, reversals, terminations or assignments
of any of the foregoing.
"Subsidiary" means any corporation, partnership, association or other
business entity of which more than 50% of the outstanding voting stock is owned,
directly or indirectly, by the Company or by one or more other Subsidiaries, or
by the Company and one or more other Subsidiaries. For the purposes of this
definition, "voting stock" means stock (or a similar interest) which ordinarily
has voting power for the election of directors, managers or trustees, whether at
all times or only so long as no senior class of stock (or similar interest) has
such voting power by reason of any contingency.
CONSOLIDATION, MERGER AND DISPOSITION OF ASSETS
The Company may not consolidate with or merge into, or convey, transfer or
lease its properties and assets substantially as an entirety to, any Person, and
may not permit any Person, to consolidate with or merge into, or convey,
transfer or lease its properties and assets substantially as an entirety to, the
Company, unless (a) the successor, if other than the Company, is a Person
organized and validly existing under the laws of the United States of America or
any jurisdiction thereof and such successor, if other than the Company,
expressly assumes the Company's obligations under the Indenture and the Notes,
(b) immediately after giving effect to such transaction, no Event of Default
under the Indenture or event which, after notice or lapse of time or both, would
become an Event of Default thereunder would exist and be continuing, and (c) the
Company has delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such transaction complies with the Indenture. Upon
compliance with these provisions, the successor Person will succeed to, and be
substituted for, the Company under the Indenture, and the Company will be
relieved (except in the case of a lease) of its obligations under the Indenture
and the Notes.
EVENTS OF DEFAULT
Each of the following will constitute an "Event of Default" under the
Indenture with respect to the Notes: (a) default in the payment of principal on
any Note, (b) default in the payment of any interest upon any Note when due,
which default continues for 30 days, (c) default in the performance, or breach,
of any other covenant or warranty contained in the Indenture, which default
continues for 60 days after written notice to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 25% in principal amount
of the Outstanding Notes, (d) default in the payment of principal at maturity
(subject to any applicable grace period) of any Indebtedness for money borrowed
by the Company or any Subsidiary in an aggregate principal amount of $25 million
or more or the acceleration of such indebtedness, if such acceleration is not
rescinded or annulled within 30 days after written notice as specified in clause
(c) and requiring the Company to cause such indebtedness to be discharged or
cause such acceleration to be rescinded or annulled, and (e) certain events of
bankruptcy, insolvency or reorganization.
If an Event of Default (other than an Event of Default described in clause
(e) above) with respect to the Outstanding Notes shall occur and be continuing,
either the Trustee or the Holders of not less than 25% in aggregate principal
amount of the Outstanding Notes may, by notice in writing to the Company (and to
the Trustee if given by Holders), declare the principal amount of all Notes to
be due and payable immediately. If an Event of Default described in clause (e)
above with respect to the Notes shall occur, the principal amount of all the
Notes will automatically, and without any action by the Trustee or any Holder,
become immediately due and payable. After any such acceleration, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the non-payment of accelerated
principal, have been cured or waived as provided in the Indenture.
The Indenture will provide that the Trustee shall, within 90 days after the
occurrence of a default with respect to the Notes, give to the Holders of the
Notes notice of such default known to it, unless such default shall have been
cured or waived provided, however, that, except in the case of a default in the
payment of the principal of or interest on any of the Notes, the Trustee shall
be protected in withholding such notice if in good faith it determines that the
withholding of such notice is in the interest of such Holders. The Indenture
58
<PAGE> 59
provides that, subject to the duty of the Trustee during a default to act with
the required standard of care, the Trustee will not be under an obligation to
exercise any right or power under the Indenture at the request or direction of
any of the Holders, unless the Holders shall have offered to the Trustee
reasonable security or indemnity. The Indenture provides that the Holders of a
majority in aggregate principal amount of the Outstanding Notes may direct the
time, method and place of conducting proceedings for remedies available to the
Trustee or exercising any trust or power conferred on the Trustee with respect
to the Notes.
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or a trustee, or
for any other remedy thereunder, unless (a) such Holder shall have previously
given to the Trustee written notice of a continuing Event of Default with
respect to the Notes, (b) the Holders of not less than 25% in aggregate
principal amount of the Outstanding Notes shall have made written request to the
Trustee to institute proceedings as Trustee, (c) such Holder or Holders shall
have offered to the Trustee reasonable security or indemnity, (d) the Trustee
shall have failed to institute such proceeding within 60 days thereafter and (e)
the Trustee shall not have received from the Holders of a majority in aggregate
principal amount of the Outstanding Notes a direction inconsistent with such
request. However, such limitations do not apply to a suit instituted by a Holder
of a Note for the enforcement of payment of the principal of or interest on such
Note on or after the applicable due date specified in such Note.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of its obligations under the Indenture and
as to any default in such performance.
MODIFICATION AND WAIVERS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee without the consent of the Holders to: (a) evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company herein and in the Notes; (b) add to
the covenants of the Company for the benefit of the Holders or an additional
Event of Default or surrender any right or power conferred upon the Company; (c)
secure the Notes; (d) cause the Notes to comply with applicable law; (e)
evidence and provide for the acceptance of appointment by a successor Trustee
with respect to the Notes; and (f) cure any defect or ambiguity or correct or
supplement any provision which may be defective or inconsistent with any other
provision, or make any other provisions with respect to matters or questions
arising under the Indenture which shall not be inconsistent with the provisions
of the Indenture provided, however, that no such modification or amendment may
adversely affect the interest of the Holders in any material respect.
Modifications and amendments of the Indenture may be made by the Company
and the Trustee, with the consent of the Holders of at least a majority in
aggregate principal amount of the Outstanding Notes, by executing supplemental
indentures for the purpose of adding any provisions to, or changing in any
manner or eliminating any of the provisions of, the Indenture or modifying in
any manner the rights of the Holders of the Outstanding Notes provided that no
such modification or amendment may, without the consent of the Holders of each
Outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of or interest on, any Note, (c) change the place or currency
of payment of principal of, or any interest on, any Note, (d) impair the right
to institute suit for the enforcement of any payment on or with respect to any
Note when due, (e) modify the subordination provisions in a manner adverse to
the Holders, (f) reduce the percentage of aggregate principal amount of
Outstanding Notes necessary to modify or amend the Indenture or for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults, or (g) modify certain provisions of the Indenture with respect to
modification and waiver.
The Holders of at least a majority in aggregate principal amount of the
Outstanding Notes may waive compliance by the Company with certain restrictive
provisions of the Indenture. The Holders of at least a majority in aggregate
principal amount of the Outstanding Notes may waive any past default under the
Indenture, except a default in the payment of the principal of or interest on
any Note and certain covenants and provisions of the Indenture which cannot be
modified or amended without the consent of the Holder of each Outstanding Note.
59
<PAGE> 60
SATISFACTION AND DISCHARGE; DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will provide that the Company may discharge its obligations
under the Indenture while Notes remain Outstanding if all Outstanding Notes will
become due and payable at their scheduled maturity within one year and the
Company has deposited with the Trustee an amount sufficient to pay and discharge
all Outstanding Notes on the date of their scheduled maturity. The Indenture
will further provide that the Company, at its option, (a) will be discharged
from any and all obligations with respect to the Notes (except for certain
obligations which include exchanging or registering the transfer of the Notes,
replacing stolen, lost or mutilated Notes, maintaining paying agencies and
holding monies for payment in trust) ("defeasance"), or (b) need not comply with
certain restrictive covenants of the Indenture ("covenant defeasance"), and the
occurrence of certain events which would otherwise be or result in an Event of
Default will be deemed not to be or result in an Event of Default with respect
to the Notes, upon the deposit with the Trustee, in trust for the benefit of the
Holders of the Notes, of money or U.S. Government Obligations, or both, which
through the payment of principal of and interest in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
principal of and interest on the Notes on the dates such payments are due in
accordance with the terms of the Indenture. To establish such defeasance or
covenant defeasance, the Company will be required to meet certain conditions,
including delivery to the Trustee of an Opinion of Counsel to the effect that
the Holders of the Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance or covenant defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such defeasance or covenant
defeasance had not occurred. In the case of defeasance pursuant to clause (a),
such Opinion of Counsel must refer to and be based upon either (i) a ruling
received by the Company from, or published by, the Internal Revenue Service or
(ii) a change in applicable federal income tax law after the date of the
Indenture.
INFORMATION CONCERNING THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent Person would exercise under the circumstances in the conduct of such
Person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein, contain limitations on the rights of
the Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions with the Company provided, however,
that if it acquires any conflicting interest (as defined in the Trust Indenture
Act of 1939, as amended) it must eliminate such conflict or resign. The Company
and its subsidiaries may maintain deposit accounts and conduct other banking
transactions with the Trustee in the ordinary course of business.
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York, without regard to principles of conflicts of law.
60
<PAGE> 61
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, each Underwriter named below has severally agreed to purchase, and
the Company has agreed to sell to each Underwriter, the principal amount of
Notes set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
NAME OF NOTES
- ---- ------------
<S> <C>
Smith Barney Inc............................................ $105,000,000
Credit Suisse First Boston Corporation...................... 105,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 70,000,000
J.P. Morgan Securities Inc.................................. 70,000,000
NationsBanc Capital Markets, Inc............................ 70,000,000
------------
Total............................................. $420,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes are subject to approval
of certain legal matters by counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all of the Notes offered hereby
if any such Notes are taken.
The Underwriters have advised the Company that they propose initially to
offer part of the Notes directly to the public at the public offering price set
forth on the cover page of this Prospectus and part to certain dealers at a
price that represents a concession not in excess of 0.25% of the public offering
price of the Notes. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of 0.15% of the public offering price of the Notes to
certain other dealers. After the offering, the public offering price and such
concessions may be changed from time to time by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
In connection with this offering and in compliance with applicable law, the
Underwriters may effect transactions which stabilize, maintain or otherwise
affect the market price of the Notes at levels above those which might otherwise
prevail in the open market. Such transactions may include placing bids for the
Notes at levels above those which might otherwise prevail in the open market.
Such transactions may include placing bids for the Notes or effecting purchases
of the Notes for the purpose of pegging, fixing or maintaining the price of the
Notes or for the purpose of reducing a short position created in connection with
the offering. In addition, the contractual arrangements among the Underwriters
include a provision whereby, if the Underwriters purchase Notes in the open
market for the account of the underwriting group and the Notes purchased can be
traced to a particular Underwriter or selling group member, the Underwriters may
require the Underwriter or selling group member in question to purchase the
Notes in question at the cost price to the Underwriters or may recover from (or
decline to pay to) the Underwriter or selling group member in question the
selling concession applicable to the Notes 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.
The Underwriters have informed the Company that the Underwriters intend to
make a market in the Notes, as permitted by applicable laws and regulations;
however, the Underwriters are not obligated to do so, and any such market
activity may be terminated at any time without notice to the Holders. No
assurance can be given as to the liquidity of or the trading market for the
Notes. See "Risk Factors -- Absence of Public Market for the Notes".
The net proceeds from the offering are expected to be used to repay
outstanding indebtedness under the Credit Facility under which affiliates of
J.P. Morgan Securities Inc. and NationsBanc Capital Markets, Inc. are lenders.
See "Use of Proceeds".
61
<PAGE> 62
In the ordinary course of their respective businesses, the Underwriters or
their affiliates have engaged and may in the future engage, in commercial
banking or investment banking transactions with the Company and its affiliates.
LEGAL MATTERS
The validity of the Notes 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 and the Current Report on Form
8-K dated August 27, 1997, 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.
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
Notes. 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 Notes. 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 therein 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.
62
<PAGE> 63
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
4. The Company's Current Report on Form 8-K filed August 27, 1997
(containing audited consolidated financial statements of the Company at
December 31, 1996 and for the three years then ended reflecting the
combined operations of the Company and InPhyNet Medical Management Inc.)
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 the offering made 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).
63
<PAGE> 64
======================================================
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>
Forward-Looking Statements and Factors
That May Affect Future Results...... 2
Prospectus Summary.................... 3
The Company........................... 8
Risk Factors.......................... 8
Use of Proceeds....................... 16
Capitalization........................ 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 29
Management............................ 47
Description of the Notes.............. 51
Underwriting.......................... 61
Legal Matters......................... 62
Experts............................... 62
Available Information................. 62
Incorporation of Certain Information
by Reference........................ 62
</TABLE>
======================================================
======================================================
$420,000,000
6 7/8% SENIOR SUBORDINATED
NOTES DUE 2000
[MEDPARTNERS(TM) LOGO]
------------
PROSPECTUS
SEPTEMBER 16, 1997
------------
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
NATIONSBANC CAPITAL
MARKETS, INC.
======================================================
