<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MEDPARTNERS, INC.
(Exact Name of Registrant as Specified in its Charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 8099 63-1151076
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
3000 GALLERIA TOWER, SUITE 1000, BIRMINGHAM, ALABAMA 35244-2331
(205) 733-8996
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
J. BROOKE JOHNSTON, JR., ESQ.
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
MEDPARTNERS, INC.
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244-2331
(205) 733-8996
(Name, Address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
COPIES TO:
<TABLE>
<C> <C>
FREDERICK W. KANNER, ESQ. ROBERT E. LEE GARNER, ESQ.
DEWEY BALLANTINE F. HAMPTON MCFADDEN, JR., ESQ.
1301 AVENUE OF THE AMERICAS HASKELL SLAUGHTER & YOUNG, L.L.C.
NEW YORK, NEW YORK 10019-6092 1200 AMSOUTH/HARBERT PLAZA
(212) 259-7300 1901 SIXTH AVENUE NORTH
BIRMINGHAM, ALABAMA 35203
(205) 251-1000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Senior Subordinated Notes due 2000........... $402,500,000 100% $350,000,000 $121,970(1)
==============================================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457 of the Securities Act of 1933.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 9, 1997
PROSPECTUS
$350,000,000
[MEDPARTNERS(TM) LOGO]
% SENIOR SUBORDINATED NOTES DUE 2000
INTEREST PAYABLE JANUARY 31 AND JULY 31
------------------
The % 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 January 31 and July 31 of each year, commencing
January 31, 1998, at the rate of % per annum. The Notes will mature on July
31, 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 March 31, 1997, after
giving effect to the offering made hereby and the use of proceeds therefrom as
described in "Use of Proceeds", the Company would have had approximately $523
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 unsecured 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 % % %
- -----------------------------------------------------------------------------------------------------------------------
Total(4) $ $ $
=======================================================================================================================
</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 $ million payable by the Company.
(4) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an additional $52,500,000
aggregate principal amount of Notes on the same terms as set forth above
solely to cover over-allotments, if any. If the Underwriters exercise such
option in full, the total "Price to Public", "Underwriting Discounts and
Commissions" and "Proceeds to Company" will be $ , $ and
$ , respectively. See "Underwriting".
------------------
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 at the offices of Smith
Barney Inc., 333 West 34th Street, New York, New York 10001 on or about
, 1997.
------------------
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
NATIONSBANC CAPITAL MARKETS, INC.
, 1997
<PAGE> 3
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> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus
and in the documents incorporated herein by reference. Except as otherwise
noted, all information in this Prospectus assumes that the over-allotment option
granted to the Underwriters will not be exercised. Unless the context otherwise
requires, references in this Prospectus to "MedPartners" or the "Company"
include the Company and its subsidiaries and affiliates. Unless otherwise
indicated, the information contained in this Prospectus gives retroactive effect
to the acquisition of InPhyNet Medical Management Inc. ("InPhyNet") which was
completed on June 26, 1997. See "Business -- Acquisition Program".
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 34 states through its network of over
12,400 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 44,000 prescriptions daily through four mail service
pharmacies and manages patients' immediate prescription needs through a network
of retail pharmacies. The Company is in the process of integrating its PBM
program with the PPM business by providing pharmaceutical services to affiliated
physicians, clinics and HMOs. The Company's disease management services are
intended to meet the healthcare needs of individuals with chronic diseases or
conditions. These services include the design, development and management of
comprehensive programs that comprise drug therapies, physician support and
patient education. The Company currently provides therapies and services for
individuals with such conditions as hemophilia, growth disorders, immune
deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis. See
"Business -- Operations".
3
<PAGE> 5
SIGNIFICANT HISTORICAL EVENTS
The Company has experienced substantial growth through acquisitions since
1995. The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The Company implements this strategy
through growth in its existing markets, expansion into new markets through
acquisitions and affiliations and through the implementation of comprehensive
healthcare solutions for patients, physicians and payors. In pursuing its
acquisition strategy, the Company creates strategic alliances with hospital
partners and HMOs. As an integral element of these alliances, the Company
utilizes sophisticated information systems to improve the operational efficiency
of, and to reduce the operating costs associated with, the Company's networks
and the practices of affiliated physicians. The Company's principal methods of
expansion are the acquisition of PPM businesses and affiliations with physician
and medical groups, including the acquisition of HBP groups and contract
management companies providing emergency department and other hospital-based
services.
The Company acquired Mullikin Medical Enterprises, L.P. ("MME") in November
1995 for $413 million in Common Stock, par value $.001 per share ("Common
Stock") of the Company, 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 for $413
million in Common Stock creating the largest HBP group in the country.
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 ** ** ** - Acquisition of assets and business of
Aetna Professional Management Corporation.
- Acquisition of InPhyNet Medical
Management Inc.
</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.
(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> 6
SUMMARY PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION AND OPERATING DATA
The following selected pro forma financial information and operating data
for the Company is derived from the Pro Forma Condensed Combined Financial
Statements found elsewhere in this Prospectus and gives effect to the
acquisition of InPhyNet as a pooling of interests. All of the following selected
pro forma financial information should be read in conjunction with the
historical financial information, including the notes thereto, incorporated
herein by reference and the pro forma financial information set forth elsewhere
herein. The pro forma financial information set forth below is not necessarily
indicative of the results that actually would have occurred had the acquisition
of InPhyNet been consummated on the date indicated or that may be obtained in
the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
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 $1,237,715 $1,454,778
Operating expenses:
Clinic expenses.......................................... 1,200,291 1,785,564 2,683,107 637,117 747,171
Non-clinic goods and services............................ 1,365,203 1,688,075 2,019,895 477,264 555,818
General and administrative expenses...................... 169,273 172,896 173,428 46,032 44,587
Depreciation and amortization............................ 44,384 62,394 86,579 20,651 26,610
Net interest expense..................................... 16,214 19,114 24,715 7,030 9,781
Merger expenses.......................................... -- 69,064 308,945 34,448 --
Loss on investments...................................... -- 86,600 -- -- --
Other, net............................................... (143) (192) (1,075) (107) (39)
---------- ---------- ---------- ---------- ----------
Net operating expenses............................. 2,795,222 3,883,515 5,295,594 1,222,435 1,383,928
---------- ---------- ---------- ---------- ----------
Income (loss) before pro forma income taxes and
discontinued operations.................................. 113,802 25,202 (73,575) 15,280 70,850
Pro forma income tax expense (benefit)..................... 50,292 (6,987) 3,215 8,878 27,074
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations................... 63,510 32,189 (76,790) 6,402 43,776
Loss (income) from discontinued operations................. (25,902) 136,528 68,698 68,698 --
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)................................ $ 89,412 $ (104,339) $ (145,488) $ (62,296) $ 43,776
========== ========== ========== ========== ==========
Pro forma net income (loss) per share(1)................... $ 0.61 $ (0.66) $ (0.83) $ (0.37) $ 0.24
========== ========== ========== ========== ==========
Number of shares used in pro forma net income (loss) per
share calculations(1)(2)................................. 146,773 158,109 174,269 169,381 184,579
========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA(3).................................................. $ 174,400 $ 262,374 $ 346,664 $ 77,409 $ 107,241
Capital expenditures(4).................................... 106,156 128,428 126,873 32,092 18,703
Income per share, excluding merger expense, loss on
investment and discontinued operations................... $ 0.43 $ 0.70 $ 0.84 $ 0.18 $ 0.24
Ratio of earnings to fixed charges(5)...................... 3.91x 4.21x 4.70x 3.78x 4.25x
CERTAIN OPERATING DATA (AT PERIOD END):
Group physicians........................................... 900 1,264 2,398 1,701 2,762
Total physicians........................................... 2,027 7,596 10,775 9,124 11,523
Prepaid enrollees.......................................... 1,088,154 1,344,855 1,746,653 1,568,348 1,808,982
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED(6)
---------- -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 148,375 $ 232,375
Working capital............................................. 257,173 341,173
Total assets................................................ 2,515,376 2,599,376
Long-term debt, less current portion........................ 764,202 848,202
Total stockholders' equity.................................. 864,276 864,276(7)
</TABLE>
- ---------------
(1) Pro forma net income (loss) per share is computed by dividing net income
(loss) by the number of common equivalent shares outstanding during the
periods in accordance with the applicable rules of the SEC. All stock
options and warrants issued have been considered as outstanding common share
equivalents for all 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.
5
<PAGE> 7
(2) Number of shares used in pro forma net income (loss) per share gives effect
to the acquisition of InPhyNet by using the fixed Exchange Ratio of 1.18
shares of Common Stock for each share of common stock of InPhyNet.
(3) 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
cash flow data prepared in accordance with generally accepted accounting
principles ("GAAP") as a measure of the profitability or liquidity of the
Company.
(4) Excludes capital expenditures related to acquisitions.
(5) 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).
(6) Adjusted to reflect the offering and the application of the net proceeds
therefrom as set forth in "Use of Proceeds".
(7) 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 $350 million).
6
<PAGE> 8
THE OFFERING
Securities Offered......... $350,000,000 aggregate principal amount of %
Senior Subordinated Notes due 2000 (the "Notes").
Maturity Date.............. July 31, 2000
Interest Rate and Payment
Dates...................... The Notes will bear interest at a rate of %
per annum. Interest on the Notes will accrue from
the date of issuance and will be payable semi-
annually on January 31 and July 31 of each year,
commencing January 31, 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 March 31, 1997, after giving
effect to the offering made hereby and the use of
proceeds therefrom as described in "Use of
Proceeds", the Company would have had approximately
$523 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
unsecured 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) restrictions on additional indebtedness secured
by liens, (ii) restriction on sale and leaseback
transactions, (iii) restrictions on additional
subsidiary indebtedness and (iv) 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> 9
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. There will be a merger charge in connection with the acquisition of
InPhyNet during the quarter ended June 30, 1997. See "Pro Forma Combined
Financial Information". There can be no assurance that future
8
<PAGE> 10
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") 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 34% and 35% of the Company's net revenue and operating
expenses, respectively, at March 31, 1997. Specialty Services, which include
disease management comprised 8% of the Company's net revenue and 7% of the
Company's operating expenses at March 31, 1997.
Physician Compensation. Approximately 68% of the Company's PPM revenue at
March 31, 1997, was derived from or through contracts between the Company and
hospitals or HMOs. The balance of the Company's PPM revenue is generated through
professional corporations ("PCs") that have entered into contracts directly with
HMOs or have the right to receive payment directly from HMOs for the provision
of medical services. The Company has a controlling financial interest in these
PCs by virtue of a long-term management agreement that also provides for
physician compensation.
9
<PAGE> 11
The most significant clinic expense, physician compensation, accounted for
41% of total expenses in the Company's PPM service area in the first quarter of
1997. Physicians that generated 9% of PPM revenue in 1996 received a
fixed-dollar amount plus a discretionary bonus based on performance criteria
goals. Physician compensation expense was 55% of this first category of PCs'
total net revenue in the first quarter of 1997. Physicians that were compensated
on a fee-for-service basis produced approximately 14% of the Company's PPM
revenue in the first quarter of 1997. Physician compensation expense pursuant to
such agreements represented 50% of this second category of PCs' total net
revenue in the first quarter of 1997. The remaining 9% 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 45% of this third category of PCs' total net revenue
in the first quarter of 1997. Under each of these arrangements, revenue is
assigned to MedPartners by the PC, and MedPartners is responsible and at risk
for all clinic expenses. See "Business -- Operations". The profitability of the
Company is largely dependent on its ability to develop and integrate networks of
physicians from the affiliated practices, to manage and control costs and to
realize economies of scale. The Company's operating results could be adversely
affected in the event the Company incurs costs associated with developing
networks without generating sufficient revenues from such networks.
Dependence on HMO Enrollee Growth. The Company is also largely dependent
on the continued increase in the number of HMO enrollees who use its physician
networks. This growth may come from development or acquisition of other PPM
entities, affiliation with additional physicians, increased enrollment in HMOs
currently contracting with MedPartners through its affiliated physicians and
additional agreements with HMOs. There can be no assurance that the Company will
be successful in identifying, acquiring and integrating additional medical
groups or other PPM companies or in increasing the number of enrollees. A
decline in enrollees in HMOs could have a material adverse effect on the
operating results and financial condition of the Company.
Dependence on Affiliated Physicians. MedPartners' revenue depends on
revenues generated by the physicians with whom MedPartners has practice
management agreements. These agreements define the responsibilities of the
physicians and MedPartners and govern all terms and conditions of their
relationship. The practice management agreements have terms generally of 20 to
40 years, subject to termination for cause, which includes bankruptcy or a
material breach. Practice management agreements with certain of the affiliated
practices contain provisions giving the physician practice the option to
terminate the agreement without cause, subject to significant limitations.
Because MedPartners cannot control the provision of medical services by its
affiliated physicians contractually or otherwise under the laws of California
and most other states in which MedPartners operates, affiliated physicians may
decline to enter into HMO agreements that are negotiated for them by MedPartners
or may enter into contracts for the provision of medical services or make other
financial commitments which are not intended to benefit MedPartners and which
could have a material adverse effect on the operating results and financial
condition of MedPartners. See "Business -- Operations -- Affiliated Physicians".
RISKS RELATING TO CAPITATED NATURE OF REVENUES; CONTROL OF HEALTHCARE COSTS
A substantial portion of MedPartners' revenue is derived from agreements
with HMOs that provide for the receipt of capitated fees. Under these
agreements, the Company, through its affiliated physicians, is generally
responsible for the provision of all covered outpatient benefits, regardless of
whether the affiliated physicians directly provide the medical services
associated with the covered benefits. MedPartners is statutorily and
contractually prohibited from controlling any medical decisions made by any
healthcare provider. To the extent that enrollees require more care than is
anticipated or require supplemental medical care that is not otherwise
reimbursed by the HMO, aggregate capitation rates may be insufficient to cover
the costs associated with the treatment of enrollees. If revenue is insufficient
to cover costs, the operating results and financial condition of the Company
could be materially adversely affected. As a result, MedPartners' success will
depend in large part on the effective management of healthcare costs through
various methods, including utilization management, competitive pricing for
purchased services and favorable agreements with payors. Recently, many
providers, including MedPartners, have experienced pricing pressures with
respect to
10
<PAGE> 12
negotiations with HMOs. In addition, employer groups are becoming increasingly
successful in negotiating reductions in the growth of premiums paid for their
employees' health insurance, which tends to depress the reimbursement for
healthcare services. At the same time, employer groups are demanding higher
accountability from payors and providers of healthcare services with respect to
measurable accessibility, quality and service. If these trends continue, the
cost of providing physician services could increase while the level of
reimbursement could grow at a lower rate or could decrease. There can be no
assurance that these pricing pressures will not have a material adverse effect
on the operating results and financial condition of MedPartners. In addition,
changes in healthcare practices, inflation, new technologies, major epidemics,
natural disasters and numerous other factors affecting the delivery and cost of
healthcare could have a material adverse effect on the operating results and
financial condition of the Company.
The Company's financial statements include estimates of costs for covered
medical benefits incurred by HMO enrollees, but not yet reported. While these
estimates are based on information available at the time of calculation, there
can be no assurance that actual costs will approximate the estimates of such
amounts. If the actual costs significantly exceed the amounts estimated and
accrued, such additional costs could have a material adverse effect on the
operating results and financial condition of the Company.
The HMO agreements often contain shared-risk provisions under which
additional revenue can be earned or economic penalties can be incurred based
upon the utilization of hospital and non-professional services by HMO enrollees.
MedPartners' financial statements contain accruals for estimates of shared-risk
amounts receivable from or payable to the HMOs that contract with their
affiliated physicians. These estimates are based upon inpatient utilization and
associated costs incurred by HMO enrollees compared to budgeted costs.
Differences between actual contract settlements and amounts estimated as
receivable or payable relating to HMO risk-sharing arrangements are generally
reconciled annually. This may cause fluctuations from amounts previously
accrued. To the extent that HMO enrollees require more care than is anticipated
or require supplemental care that is not otherwise reimbursed by the HMOs,
aggregate capitation rates may be insufficient to cover the costs associated
with the treatment of enrollees. Any such insufficiency could have a material
adverse effect on the operating results and financial condition of the Company.
Physician groups that render services on a fee-for-service basis (as
opposed to a capitated plan) typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, for the healthcare services provided to their patients. A
significant portion of the revenue of MedPartners is derived from payments made
by these third-party payors. There can be no assurance that payments under
governmental programs or from other third-party payors will remain at present
levels. In addition, third-party payors can deny reimbursement if they determine
that treatment was not performed in accordance with the cost-effective treatment
methods established by such payors or was experimental or for other reasons. Any
material decrease in payments received from such third-party payors could have a
material adverse effect on the operating results and financial condition of the
Company.
RISKS RELATING TO CERTAIN CAREMARK LEGAL MATTERS
OIG Settlement and Related Claims. Caremark agreed in June 1995 to settle
with the Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services (the "DHHS"), the United States
Department of Justice (the "DOJ"), the Veteran's Administration, the Federal
Employee Health Benefits Program ("FEHBP"), the Civilian Health and Medical
Program of the Uniformed Services ("CHAMPUS") and related state investigative
agencies in all 50 states and the District of Columbia a four-year-long
investigation of Caremark (the "OIG Settlement"). Under the terms of the OIG
Settlement, which covered allegations dating back to 1986, a subsidiary of
Caremark pled guilty to two counts of mail fraud -- one each in Minnesota and
Ohio -- resulting in the payment of civil penalties and criminal fines. The
basis of these guilty pleas was Caremark's failure to provide certain
information to CHAMPUS, FEHBP and federally funded healthcare benefit programs
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. See "Business -- Legal Proceedings".
In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory
11
<PAGE> 13
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
settlement will result in a second quarter after-tax charge from discontinued
operations of approximately $75 million.
12
<PAGE> 14
RISKS RELATING TO EXPOSURE TO PROFESSIONAL LIABILITY; LIABILITY INSURANCE
In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. Although the Company does
not engage in the practice of medicine or provide medical services, and does not
control the practice of medicine by its affiliated physicians or the compliance
with regulatory requirements directly applicable to the affiliated physicians
and physician groups, there can be no assurance that the Company will not become
involved in such litigation in the future. Through the ownership and operation
of Pioneer Hospital ("Pioneer Hospital"), U.S. Family Care Medical Center
("USFMC") and Friendly Hills Hospital ("Friendly Hills"), acute care hospitals
located in Artesia, Montclair and La Habra, California, respectively, and its
hospital-based operations, the Company is subject to allegations of negligence
and wrongful acts by its hospital-based physicians or arising out of providing
nursing care, hospital-based medical care, credentialing of medical staff
members and other activities incident to the operation of an acute care
hospital. In addition, through its management of clinic locations and provision
of non-physician health care personnel, the Company could be named in actions
involving care rendered to patients by physicians employed by or contracting
with affiliated medical organizations and physician groups.
The Company maintains professional and general liability insurance and
other coverage deemed necessary by the Company. Nevertheless, certain types of
risks and liabilities are not covered by insurance and there can be no assurance
that the limits of coverage will be adequate to cover losses in all instances.
In addition, the Company's practice management agreements require the affiliated
physicians to maintain professional liability and workers' compensation
insurance coverage on the practice and on each employee and agent of the
practice, and the Company generally is indemnified under each of the practice
management agreements by the affiliated physicians for liabilities resulting
from the performance of medical services. However, there can be no assurance
that a future claim or claims will not exceed the limits of these available
insurance coverages or that indemnification will be available for all such
claims. See "Business -- Corporate Liability and Insurance".
RISKS RELATING TO GOVERNMENT REGULATION
Federal and state laws regulate the relationships among providers of
healthcare services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid statutes, which prohibit
the solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for
recommendation, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services, as well as laws that impose significant penalties for
false or improper billings for physician services. These laws also impose
restrictions on physicians' referrals for designated health services to entities
with which they have financial relationships. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare and Medicaid programs. Such exclusion and penalties, if applied to the
Company's affiliated physicians, could result in significant loss of
reimbursement.
Moreover, the laws of many states, including California (from which a
significant portion of the Company's revenues are derived), prohibit physicians
from splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine. These laws and their interpretations vary from state to
state and are enforced by the courts and by regulatory authorities with broad
discretion. The Company believes that it has perpetual and unilateral control
over the assets and operations of the various affiliated professional
corporations. There can be no assurance that regulatory authorities will not
take the position that such control conflicts with state laws regarding the
practice of medicine or other federal restrictions. Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, there can be no assurance that the existing
organization of the Company and its contractual arrangements with affiliated
physicians will not be successfully challenged as constituting the unlicensed
practice of medicine or that the enforceability of the provisions of such
arrangements, including non-competition agreements, will not be limited. There
can be no assurance that review of the business of the Company and its
affiliates by courts or regulatory authorities will not result in a
determination that could
13
<PAGE> 15
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".
As of March 31, 1997, approximately 13% 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 13%
of the revenues of the Company's affiliated physician groups, which could have a
material adverse effect on the operating results and financial condition of the
Company. Although the Company believes that it is not in violation of the
Anti-Kickback Statute or similar state statutes, its operations do not fit
within any of the existing or proposed federal safe harbors.
Significant prohibitions against physician referrals were enacted by the
federal Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his immediate family is prohibited from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
the Company believes it is in compliance with such legislation, future
regulations could require the Company to modify the form of its relationships
with physician groups. Some states have also enacted similar self-referral laws,
and the Company believes it is likely that more states will follow. MedPartners
believes that its practices fit within exemptions contained in such statutes.
Nevertheless, expansion of the operations of MedPartners into certain
jurisdictions may require structural and organizational modifications of
MedPartners' relationships with physician groups to comply with new or revised
state
14
<PAGE> 16
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 March 31, 1997, after giving
effect to the offering being made hereby and the use of proceeds therefrom as
described in "Use of Proceeds", the Company would have had approximately $523
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 unsecured indebtedness, including Senior Indebtedness, which the
Company or its subsidiaries may create, incur assure or guarantee. See
"Capitalization" and "Description of the Notes".
15
<PAGE> 17
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 $ million. The Company intends to apply the net
proceeds of the offering to repayment of indebtedness then outstanding under the
Credit Facility which was approximately $383 million as of June 30, 1997.
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 5.6875% 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 & Co. Incorporated 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 & Co. Incorporated, and $38.0
million was owed to NationsBank, National Association (South), an affiliate of
NationsBanc Capital Markets, Inc.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth as of March 31, 1997, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization that gives
effect to the acquisition of InPhyNet (see "Pro Forma Condensed Combined
Financial Information" included elsewhere in this Prospectus), and (iii) the pro
forma 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>
MARCH 31, 1997
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt and current portion of long-term debt... $ 24,224 $ 24,758 $ 24,758
Senior subordinated notes due 2000...................... -- -- 350,000
7 3/8% Senior Notes due 2006............................ 450,000 450,000 450,000
Credit Facility(1)...................................... 266,000 266,000 --
Other long-term debt.................................... 47,893 48,202 48,202
Stockholders' equity:
Preferred stock, $.001 par value, 95,000 shares
authorized; no shares issued and outstanding....... -- -- --
Series C Junior Participating Preferred Stock, $.001
par value; 500 shares authorized; no share issued
and outstanding.................................... -- -- --
Common Stock, $.001 par value; 400,000 shares
authorized; 171,537, 191,275, and 191,275 shares
issued and outstanding, respectively(2)............ 172 191 191
Additional paid-in capital............................ 822,472 893,004 893,004
Shares held in trust.................................. (150,200) (150,200) (150,200)
Notes receivable from stockholders.................... (1,590) (1,590) (1,590)
Retained earnings..................................... 138,220 122,871 122,871
---------- ---------- ----------
Total stockholders' equity.................... 809,074 864,276 864,276(3)
---------- ---------- ----------
Total capitalization.......................... $1,597,191 $1,653,236 $1,737,236
========== ========== ==========
</TABLE>
- ---------------
(1) Excludes approximately $117.0 million borrowed since March 31, 1997 under
the Credit Facility.
(2) Excludes approximately 18.7 million shares of Common Stock reserved for
issuance pursuant to outstanding stock options as of March 31, 1997.
(3) 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 $350 million).
17
<PAGE> 19
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 (without giving effect to the acquisition of InPhyNet). The selected
consolidated financial data for each of the three months ended March 31, 1996
and 1997, and as of March 31, 1997, have been derived from the unaudited
consolidated financial statements of the Company (without giving effect to the
acquisition of InPhyNet), 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue.............. $1,287,526 $1,756,762 $2,638,654 $3,583,377 $4,813,499 $1,149,812 $1,332,271
Income (loss) from
continuing
operations............. $ 20,417 $ 47,881 $ 54,144 $ 20,901 $ (89,831) $ 2,752 $ 40,486
Income (loss) from
discontinued
operations............. $ 5,858 $ 30,808 $ 25,902 $ (136,528) $ (68,698) $ (68,698) $ --
Net income (loss)........ $ 26,275 $ 78,689 $ 80,046 $ (115,627) $ (158,529) $ (65,946) $ 40,486
Income (loss) per share
from continuing
operations(1).......... $ 0.21 $ 0.40 $ 0.41 $ 0.15 $ (0.58) $ 0.02 $ 0.25
Income (loss) per share
from discontinued
operations(1).......... $ 0.06 $ 0.26 $ 0.20 $ (0.97) $ (0.44) $ (0.46) $ --
Net income (loss) per
share(1)............... $ 0.27 $ 0.66 $ 0.61 $ (0.82) $ (1.02) $ (0.44) $ 0.25
Number of shares used in
net income (loss) per
share.................. 98,798 119,380 131,783 140,364 155,364 150,422 164,841
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 22,312 $ 43,367 $ 99,679 $ 86,276 $ 123,779 $ 141,578
Working capital..................... 139,642 240,023 150,977 234,630 170,313 236,331
Total assets........................ 777,632 1,049,258 1,585,643 1,840,914 2,265,969 2,366,605
Long-term debt, less current
portion........................... 80,378 164,040 385,258 531,774 715,657 763,893
Total stockholders' equity.......... 381,481 481,177 612,781 592,074 739,497 809,074
</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> 20
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 does
not give retroactive effect to the Company's acquisition of InPhyNet. 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. 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 Note 1 of the accompanying
consolidated financial statements of the Company. 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> 21
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 44,000 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- --------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Physician Services
Net revenue........... $1,053,519 $1,663,728 $2,555,642 $614,054 $715,100
Operating income...... 27,121 73,586 125,015 26,329 46,790
Margin................ 2.6% 4.4% 4.9% 4.3% 6.5%
Pharmaceutical Services
Net revenue........... $1,097,315 $1,432,250 $1,784,319 $422,691 $500,839
Operating income...... 46,236 56,022 75,788 16,465 19,297
Margin................ 4.2% 3.9% 4.2% 3.9% 3.9%
Specialty Services
Net revenue........... $ 487,820 $ 487,399 $ 473,538 $113,067 $116,332
Operating income...... 75,139 70,762 56,006 13,937 13,235
Margin................ 15.4% 14.5% 11.8% 12.3% 11.4%
Corporate Services
Operating loss........ $ (35,212) $ (24,668) $ (20,881) $ (6,438) $ (4,225)
Percentage of total
net revenue........ (1.3)% (0.7)% (0.4)% (0.6)% (0.3)%
</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> 22
penetration. The following table sets forth the breakdown of net revenue for the
PPM services area for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Prepaid......................... $ 620,701 $ 982,128 $1,401,837 $333,096 $373,370
Fee-for-Service................. 408,832 661,974 1,139,265 276,049 337,939
Other........................... 23,986 19,626 14,540 4,909 3,791
---------- ---------- ---------- -------- --------
Total net revenue from
PPM service area.... $1,053,519 $1,663,728 $2,555,642 $614,054 $715,100
========== ========== ========== ======== ========
</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 MARCH 31,
------------------------------- ---------------------
1994 1995 1996 1996 1997
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Professional enrollees............. 548,821 603,391 1,025,763 915,272 1,027,230
Global enrollees (professional and
institutional)................... 255,188 477,208 603,892 605,042 659,752
------- --------- --------- --------- ---------
Total enrollees.......... 804,009 1,080,599 1,629,655 1,520,314 1,686,982
======= ========= ========= ========= =========
</TABLE>
During 1996, prepaid revenues increased 42.7% while prepaid enrollees
increased 50.8%. 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 63% at
December 31, 1996 compared to 56% at December 31, 1995. Revenue per enrollee for
professional capitation is substantially lower than global capitation as
discussed below.
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 2.6% in 1994 to 6.5% in the first
quarter of 1997.
The Company has developed strong relationships with many of the national
and regional managed care organizations and has demonstrated its ability to
deliver high-quality, cost-effective care. The Company is strategically
positioned to capitalize on the industry's continued evolution toward a prepaid
environment, specifically by increasing the number of prepaid enrollees and
converting existing enrollees from professional to global capitation. These
changes have resulted in significant internal growth. During the first quarter
of 1997, the Company converted approximately 56,000 lives from professional
capitation to global capitation. An additional 180,000 lives are expected to be
converted in the second quarter of 1997, exclusive of lives which will be added
as a result of the Company's alliance with Aetna U.S. Healthcare in May 1997.
The Company has continued to acquire high-quality groups of emergency
physicians and radiologists who believe in the value of providing increasingly
cost-effective care. The reputation and strong local presence of new and
existing hospital-based groups provide a substantial advantage in the
competition for contracts with emergency room and radiology departments. The
excellent reputation and leadership of these groups continue to provide
opportunities for new contracts.
21
<PAGE> 23
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 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. Net revenue for
the quarter ended March 31, 1997 increased 18.5% over the same period in 1996 as
a result of increased pharmacy transaction volume (8.0%), drug cost inflation,
product mix and pricing (9.9%) and growth of clinical and other programs (0.6%).
Key factors contributing to this growth include high customer retention,
additional penetration of retained customers and new customer contracts. These
growth factors were partially offset in 1995 and 1996 by selective non-renewal
of certain accounts not meeting threshold profitability levels. Pharmaceutical
Services' largest single client contract, the National Association of Letter
Carriers, went into effect on 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 17.2% in the first quarter of 1997 compared to
the first quarter of 1996. Operating margins in the first quarter of 1997 were
consistent with the first quarter of 1996. Retail service revenue continues to
grow at a faster rate than mail related revenue, and reductions in operating
expenses 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> 24
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, the United Kingdom and Japan,
where it is expanding into new services in response to transforming healthcare
delivery systems in these countries. Margins for specialty services have
declined slightly as a result of managed care pricing pressures, restructuring
of benefit plans by payors and reduced reimbursement from Medicaid and other
state agency payors. For the hemophilia business, federal government programs
providing special pricing to qualified organizations who may be competitors have
impacted margins negatively. In addition to pricing pressures, particularly in
growth deficiency therapy, operating expenses and cost of service expenses rose
due to programs targeted at launching the Company's new multiple sclerosis
("MS") therapy service, an expanded payor marketing initiative and an initiative
targeted at attaining accreditation by the Joint Committee on Accreditation of
Healthcare Organizations for the nationwide system of pharmacies. To offset
these declines, the Company launched new products and services including the
opening of a PBM in the Netherlands and an MS therapy service in the U.S.
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 Note 13 of the accompanying audited
consolidated financial statements 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 Note 13 of the accompanying audited
consolidated financial statements and an after-tax gain on disposition of the
nephrology services business, net of disposal costs, of $2.5 million.
Results of Operations -- Three Months Ended March 31, 1997 and 1996
For the three months ended March 31, 1997, net revenue was $1,332.3
million, compared to $1,149.8 million for the same period in 1996, an increase
of 15.9%. The increase in net revenue primarily resulted from affiliations with
new physician practices and the increase in pharmaceutical services net revenue,
which accounted for $26.9 million and $78.1 million of the increase in net
revenue, respectively. The increase in pharmaceutical services net revenue is
attributable to pharmaceutical price increases, the addition of new customers,
further penetration of existing customers and the sale of new products.
23
<PAGE> 25
Operating income grew 77.7% and 17.2% in the first quarter of 1997, as
compared to the same period of 1996, for the physician services and
pharmaceutical services areas, respectively. The increase in the physician
services area is the result of higher net revenue and increases in operating
margins resulting from the spreading of fixed overhead expenses over a larger
revenue base and continued integration of operations. The pharmaceutical
services area's increase in operating income was primarily due to reductions in
operating expenses and higher net revenue. Operating income and margins declined
in the corresponding periods for the specialty services area as a result of
lower volumes in the hemophilia business and continued pricing pressures for its
growth hormone products.
Net income for the first quarter of 1997 was $40.5 million, as compared to
a loss of $65.9 million for the same period of 1996. Net loss for the first
quarter of 1996 included merger charges totaling $34.4 million relating to the
business combination with PPSI and the loss from discontinued operations of
$68.7 million discussed previously.
Results of Operations for the Years Ended December 31, 1996 and 1995
For the year ended December 31, 1996, net revenue was $4,813.5 million,
compared to $3,583.4 million for 1995, an increase of 34.3%. 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 69.9% 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 $308.7
million related to the business combinations with Caremark, PPSI and several
other entities, the major components of which are listed in Note 11 of the
accompanying audited consolidated financial statements.
Results of Operations for the Years Ended December 31, 1995 and 1994
Net revenue for the year ended December 31, 1995 was $3,583.4 million, an
increase of $944.7 million, or 35.8%, over the year ended December 31, 1994. The
increase in net revenue resulted primarily from affiliation with new physician
practices, the increase in prepaid enrollees at existing affiliated physician
practices and the increase in PBM net revenue, which accounted for $240.1
million, $295.8 million, and $334.9 million of the increase in net revenue,
respectively. 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 171.3% 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, 2.6% in 1994 to 4.4% in 1995, which resulted from the
leveraging of fixed overhead expenses over a substantially larger revenue base,
integration of operations and 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.
24
<PAGE> 26
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 March 31, 1997 and December 31, 1996, the Company had working capital
of $236.3 and $170.3 million, respectively, including cash and cash equivalents
of $141.6 and $123.8 million, respectively. For the periods ending March 31,
1997 and 1996, and December 31, 1996, 1995 and 1994, cash flow from continuing
operations was $45.3 million, $34.7 million, $159.8 million, $152.8 million and
$43.6 million, respectively.
For the periods ended March 31, 1997 and December 31, 1996, respectively,
the Company invested $43.1 and $157.4 million, respectively, in acquisitions of
the assets of physician practices and $16.8 and $122.1 million, respectively, in
property and equipment. These expenditures were funded by approximately $24.5
and $270.2 million, respectively, derived from equity proceeds and $41.4 and
$133.6 million, respectively, in net incremental borrowings. For the three
months ended March 31, 1996 the Company invested $76.0 million in acquisitions
of the assets of physician practices and $30.8 million in property and
equipment. These expenditures were funded by a portion of the $224.1 million
derived from a secondary stock offering in March 1996. For the year ended
December 31, 1995, the Company invested $205.1 million in acquisitions of the
assets of physician practices and $124.5 million in property and equipment.
These expenditures were funded by approximately $83.4 million derived from
equity proceeds and $71.2 million in net incremental borrowings. For the year
ended December 31, 1994, the Company's investing activities totaled $248.3
million, which was composed primarily of $126.7 million related to practice
acquisitions and $102.7 million related to the purchase of property and
equipment. These expenditures were funded by $128.1 million derived from equity
proceeds and $232.4 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 March 31, 1997, there was $266
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
provides a negative pledge on substantially all assets of the Company. As of
March 31, 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
25
<PAGE> 27
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.
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 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
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.
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 settlement will result in a second
quarter after-tax charge from discontinued operations of approximately $75
million. See "Business -- Legal Proceedings".
26
<PAGE> 28
QUARTERLY RESULTS (UNAUDITED)
The following tables set forth certain unaudited quarterly financial data
for 1995 and 1996. 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.......... $806,396 $ 887,121 $919,750 $ 970,110 $1,149,812 $1,196,226 $1,199,679
Operating expenses... 770,599 846,889 871,279 918,908 1,099,519 1,143,107 1,139,178
Net interest
expense.......... 6,254 2,213 5,350 3,804 6,741 4,021 5,257
Merger expenses.... -- 1,051 3,473 62,040 34,448 -- 263,000
Losses on
investments...... -- -- -- 86,600 -- -- --
Other, net......... (406) 5 (27) 236 (144) (229) (37)
-------- --------- -------- --------- ---------- ---------- ----------
Income (loss) from
continuing
operations before
income taxes....... 29,949 36,963 39,675 (101,478) 9,248 49,327 (207,719)
Income tax expense
(benefit)........ 10,903 13,904 15,156 (55,755) 6,496 16,926 (55,465)
-------- --------- -------- --------- ---------- ---------- ----------
Income (loss) from
continuing
operations......... 19,046 23,059 24,519 (45,723) 2,752 32,401 (152,254)
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)....... $ 27,336 $(124,762) $ 18,728 $ (36,929) $ (65,946) $ 32,401 $ (152,254)
======== ========= ======== ========= ========== ========== ==========
<CAPTION>
QUARTER ENDED
-------------------------
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Net revenue.......... $1,267,782 $1,332,271
Operating expenses... 1,195,767 1,257,174
Net interest
expense.......... 7,911 9,686
Merger expenses.... 11,247 --
Losses on
investments...... -- --
Other, net......... (1,159) --
---------- ----------
Income (loss) from
continuing
operations before
income taxes....... 54,016 65,411
Income tax expense
(benefit)........ 26,746 24,925
---------- ----------
Income (loss) from
continuing
operations......... 27,270 40,486
Discontinued
operations:
Income (loss) from
discontinued
operations....... -- --
Net gains (losses)
on sales of
discontinued
operations....... -- --
---------- ----------
Income (loss) from
discontinued
operations......... -- --
---------- ----------
Net income
(loss)....... $ 27,270 $ 40,486
========== ==========
</TABLE>
The Company's historical unaudited quarterly financial data have been
restated to include the results of all businesses acquired prior to December 31,
1996 that were accounted for as poolings of interests (collectively, the
"Mergers"). The Company's Quarterly Reports on Form 10-Q 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
----------------------- ----------------------- ------------------------
FORM 10-Q AS RESTATED FORM 10-Q AS RESTATED FORM 10-Q AS RESTATED
--------- ----------- --------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue................. $332,549 $1,149,812 $360,398 $1,196,226 $1,182,015 $1,199,679
Income (loss) from
continuing operations
before income taxes....... (21,435) 9,248 16,153 49,327 (207,168) (207,719)
Income tax expense
(benefit)................. (5,935) 6,496 6,129 16,926 (55,634) (55,465)
Loss from discontinued
operations................ -- (68,698) -- -- -- --
Net income (loss)........... (15,500) (65,946) 10,024 32,401 (151,534) (152,254)
</TABLE>
27
<PAGE> 29
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
SELECTED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected pro forma financial information for the Company
gives effect to the acquisition of InPhyNet as a pooling of interests. All of
the following selected pro forma financial information should be read in
conjunction with the pro forma financial information, including the notes
thereto, incorporated herein by reference. The pro forma financial information
set forth below is not necessarily indicative of the results that actually would
have occurred had the acquisition of InPhyNet been consummated on the date
indicated or that may be obtained in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................ $2,909,024 $3,908,717 $5,222,019 $1,237,715 $1,454,778
Operating expenses:
Clinic expenses.......................................... 1,200,291 1,785,564 2,683,107 637,117 747,171
Non-clinic goods and services............................ 1,365,203 1,688,075 2,019,895 477,264 555,818
General and administrative expenses...................... 169,273 172,896 173,428 46,032 44,587
Depreciation and amortization............................ 44,384 62,394 86,579 20,651 26,610
Net interest expense..................................... 16,214 19,114 24,715 7,030 9,781
Merger expenses.......................................... -- 69,064 308,945 34,448 --
Loss on investments...................................... -- 86,600 -- -- --
Other, net............................................... (143) (192) (1,075) (107) (39)
---------- ---------- ---------- ---------- ----------
Net operating expenses............................. 2,795,222 3,883,515 5,295,594 1,222,435 1,383,928
---------- ---------- ---------- ---------- ----------
Income (loss) before pro forma income taxes and
discontinued operations.................................. 113,802 25,202 (73,575) 15,280 70,850
Pro forma income tax expense (benefit)..................... 50,292 (6,987) 3,215 8,878 27,074
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations................... 63,510 32,189 (76,790) 6,402 43,776
Loss (income) from discontinued operations................. (25,902) 136,528 68,698 68,698 --
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)................................ $ 89,412 $ (104,339) $ (145,488) $ (62,296) $ 43,776
========== ========== ========== ========== ==========
Pro forma net income (loss) per share(1)................... $ 0.61 $ (0.66) $ (0.83) $ (0.37) $ 0.24
========== ========== ========== ========== ==========
Number of shares used in pro forma net income (loss) per
share calculations(1)(2)................................. 146,773 158,109 174,269 169,381 184,579
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 148,375
Working capital............................................. 257,173
Total assets................................................ 2,515,376
Long-term debt, less current portion........................ 764,202
Total stockholders' equity.................................. 864,276
</TABLE>
- ---------------
(1) Pro forma net income (loss) per share is computed by dividing net income
(loss) by the number of common equivalent shares outstanding during the
periods in accordance with the applicable rules of the SEC. All stock
options and warrants issued have been considered as outstanding common
share equivalents for all the periods presented, even if anti-dilutive,
under the treasury stock method. Shares of MedPartners Common Stock issued
in February 1995 upon conversion of the then outstanding MedPartners
convertible preferred stock are assumed to be common share equivalents for
all periods presented.
(2) Number of shares used in pro forma net income (loss) per share gives effect
to the acquisition of InPhyNet by using the fixed Exchange Ratio of 1.18
shares of Common Stock for each share of common stock of InPhyNet.
28
<PAGE> 30
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 141,578 $ 6,797 $ -- $ 148,375
Accounts receivable less allowance for bad
debts.................................... 610,675 88,658 -- 699,333
Inventory................................... 131,403 419 -- 131,822
Prepaid expenses and other current assets... 77,556 17,465 -- 95,021
Income tax receivable....................... 1,223 -- -- 1,223
Deferred tax assets......................... 34,030 763 -- 34,793
---------- -------- -------- ----------
Total current assets................ 996,465 114,102 -- 1,110,567
Property and equipment........................ 507,878 12,770 (7,700)(A) 512,948
Intangible assets, net........................ 681,720 28,090 -- 709,810
Deferred tax assets........................... 10,243 (860) -- 9,383
Other assets.................................. 170,299 2,369 -- 172,668
---------- -------- -------- ----------
Total assets........................ $2,366,605 $156,471 $ (7,700) $2,515,376
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 305,974 $ 10,035 $ 42,300(A) $ 358,309
Accrued medical claims payable.............. 95,817 20,975 -- 116,792
Other accrued expenses and liabilities...... 334,119 19,416 -- 353,535
Current portion of long-term debt........... 24,224 534 -- 24,758
---------- -------- -------- ----------
Total current liabilities........... 760,134 50,960 42,300 853,394
Long-term debt, net of current portion........ 763,893 309 -- 764,202
Other long-term liabilities................... 33,504 -- -- 33,504
Stockholders' equity:
Common stock................................ 172 164 (145)(B) 191
Additional paid-in capital.................. 822,472 70,387 145(B) 893,004
Shares held in trust........................ (150,200) -- (150,200)
Notes receivable from shareholders.......... (1,590) -- (1,590)
Accumulated earnings........................ 138,220 34,651 (50,000)(A) 122,871
---------- -------- -------- ----------
Total stockholders' equity.......... 809,074 105,202 (50,000) 864,276
---------- -------- -------- ----------
Total liabilities and stockholders'
equity............................ $2,366,605 $156,471 $ (7,700) $2,515,376
========== ======== ======== ==========
</TABLE>
29
<PAGE> 31
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue..................................... $1,332,271 $122,507 $ -- $1,454,778
Operating expenses:
Clinic expenses............................... 640,623 106,548 -- 747,171
Non-clinic goods and services................. 555,818 -- -- 555,818
General and administrative expenses........... 35,399 9,188 -- 44,587
Depreciation and amortization................. 25,334 1,276 -- 26,610
Net interest expense.......................... 9,686 95 -- 9,781
Other, net.................................... -- (39) -- (39)
---------- -------- ------ ----------
Net operating expenses................ 1,266,860 117,068 -- 1,383,928
---------- -------- ------ ----------
Income before pro form income taxes............. 65,411 5,439 -- 70,850
Pro forma income tax expense.................... 24,925 2,149 -- 27,074
---------- -------- ------ ----------
Pro forma net income............................ $ 40,486 $ 3,290 $ -- $ 43,776
========== ======== ====== ==========
Pro forma net income per share.................. $ 0.25 $ 0.20 $ 0.24
========== ======== ==========
Number of shares used in pro forma net income
per share calculations........................ 164,841 16,727 3,011(C) 184,579
========== ======== ====== ==========
</TABLE>
30
<PAGE> 32
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue....................................... $1,149,812 $87,903 $ -- $1,237,715
Operating expenses:
Clinic expenses................................. 563,224 73,893 -- 637,117
Non-clinic goods and services................... 477,264 -- -- 477,264
General and administrative expenses............. 39,439 6,593 -- 46,032
Depreciation and amortization................... 19,592 1,059 -- 20,651
Net interest expense............................ 6,741 289 -- 7,030
Merger expenses................................. 34,448 -- -- 34,448
Other, net...................................... (144) 37 -- (107)
---------- ------- ------ ----------
Net operating expenses.................. 1,140,564 81,871 -- 1,222,435
---------- ------- ------ ----------
Income before pro forma income taxes and
discontinued operations......................... 9,248 6,032 -- 15,280
Pro forma income tax expense...................... 6,496 2,382 -- 8,878
---------- ------- ------ ----------
Income from continuing operations................. 2,752 3,650 -- 6,402
Loss from discontinued operations................. 68,698 -- -- 68,698
---------- ------- ------ ----------
Pro forma net (loss) income....................... $ (65,946) $ 3,650 $ -- $ (62,296)
========== ======= ====== ==========
Pro forma net (loss) income per share............. $ (0.44) $ 0.23 $ (0.37)
========== ======= ==========
Number of shares used in pro forma net (loss)
income per share calculations................... 150,422 16,067 2,892(C) 169,381
========== ======= ====== ==========
</TABLE>
31
<PAGE> 33
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO PRO
---------------------- FORMA FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue....................................... $4,813,499 $408,520 $ -- $5,222,019
Operating expenses:
Clinic expenses................................. 2,332,958 350,149 -- 2,683,107
Non-clinic goods and services................... 2,019,895 -- -- 2,019,895
General and administrative expenses............. 142,789 30,639 -- 173,428
Depreciation and amortization................... 81,929 4,650 -- 86,579
Net interest expense............................ 23,930 785 -- 24,715
Merger expenses................................. 308,695 250 -- 308,945
Other, net...................................... (1,569) 494 -- (1,075)
---------- -------- ------- ----------
Net operating expenses.................. 4,908,627 386,967 -- 5,295,594
---------- -------- ------- ----------
(Loss) income before pro forma income taxes and
discontinued operations......................... (95,128) 21,553 -- (73,575)
Pro forma income tax (benefit) expense............ (5,297) 8,512 -- 3,215
---------- -------- ------- ----------
(Loss) income from continuing operations.......... (89,831) 13,041 -- (76,790)
Loss from discontinued operations................. (68,698) -- -- (68,698)
---------- -------- ------- ----------
Pro forma net (loss) income....................... $ (158,529) $ 13,041 $ -- $ (145,488)
========== ======== ======= ==========
Pro forma net (loss) income per share............. $ (1.02) $ 0.81 $ (0.83)
========== ======== ==========
Number of shares used in pro forma net (loss)
income per share calculations................... 155,364 16,021 2,884(C) 174,269
========== ======== ======= ==========
</TABLE>
32
<PAGE> 34
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO
---------------------- FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue........................................ $3,583,377 $325,340 $ -- $3,908,717
Operating expenses:
Clinic expenses.................................. 1,512,380 273,184 -- 1,785,564
Non-clinic goods and services.................... 1,688,075 -- -- 1,688,075
General and administrative expenses.............. 148,515 24,381 -- 172,896
Depreciation and amortization.................... 58,705 3,689 -- 62,394
Net interest expense............................. 17,621 1,493 -- 19,114
Merger expenses.................................. 66,564 2,500 -- 69,064
Loss on investments.............................. 86,600 -- -- 86,600
Other, net....................................... (192) -- -- (192)
---------- -------- ------ ----------
Net operating expenses................... 3,578,268 305,247 -- 3,883,515
---------- -------- ------ ----------
Income before pro forma income taxes and
discontinued operations.......................... 5,109 20,093 -- 25,202
Pro forma income tax (benefit) expense............. (15,792) 8,805 -- (6,987)
---------- -------- ------ ----------
Income from continuing operations.................. 20,901 11,288 -- 32,189
Loss from discontinued operations.................. (136,528) -- -- (136,528)
---------- -------- ------ ----------
Pro forma net (loss) income........................ $ (115,627) $ 11,288 $ -- $ (104,339)
========== ======== ====== ==========
Pro forma net (loss) income per share.............. $ (0.82) $ 0.75 $ (0.66)
========== ======== ==========
Number of shares used in pro forma net (loss)
income per share calculations.................... 140,364 15,038 2,707(C) 158,109
========== ======== ====== ==========
</TABLE>
33
<PAGE> 35
MEDPARTNERS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO
---------------------- FORMA PRO FORMA
MEDPARTNERS INPHYNET ADJUSTMENTS COMBINED
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue........................................ $2,638,654 $270,370 $ -- $2,909,024
Operating expenses:
Clinic expenses.................................. 969,345 230,946 -- 1,200,291
Non-clinic goods and services.................... 1,365,203 -- -- 1,365,203
General corporate expenses....................... 148,990 20,283 -- 169,273
Depreciation and amortization.................... 41,832 2,552 -- 44,384
Net interest expense............................. 15,235 979 -- 16,214
Other, net....................................... (143) -- -- (143)
---------- -------- ----- ----------
Net operating expenses................... 2,540,462 254,760 -- 2,795,222
Income before pro forma income taxes and
discontinued operations.......................... 98,192 15,610 -- 113,802
Pro forma income tax expense....................... 44,048 6,244 -- 50,292
---------- -------- ----- ----------
Income from continuing operations.................. 54,144 9,366 -- 63,510
Income from discontinued operations................ 25,902 -- -- 25,902
---------- -------- ----- ----------
Pro forma net income............................... $ 80,046 $ 9,366 $ -- $ 89,412
========== ======== ===== ==========
Pro forma net income per share..................... $ 0.61 $ 0.74 $ 0.61
========== ======== ==========
Number of shares used in pro forma net income per
share calculations............................... 131,783 12,703 2,287(C) 146,773
========== ======== ===== ==========
</TABLE>
34
<PAGE> 36
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION
The acquisition of InPhyNet was consummated on June 26, 1997 and was
accounted for as a pooling of interests. The pro forma combined statements of
operations assumed that the acquisition of InPhyNet was consummated at the
beginning of the earliest period presented. The pro forma condensed combined
balance sheet assumes that the transaction was consummated on March 31, 1997.
The pro forma financial information contains no adjustments to conform the
accounting policies of the companies because any such adjustments have been
determined to be immaterial.
The following adjustments are necessary to reflect the acquisition of
InPhyNet (in thousands):
A. The pro forma combined statements of operations do not reflect
nonrecurring costs and charges resulting directly from the acquisition of
InPhyNet. These costs and charges are estimated as follows:
<TABLE>
<CAPTION>
PROPERTY TOTAL
AND ACCOUNTS ACCUMULATED MERGER
EQUIPMENT PAYABLE EARNINGS CHARGE
--------- -------- ----------- -------
<S> <C> <C> <C> <C>
InPhyNet...................................... $(7,700) $42,300 $(50,000) $50,000
</TABLE>
The following is a detail of the estimated merger expense:
<TABLE>
<S> <C>
Severance and related benefits.............................. $ 7,000
Operational restructuring................................... 17,000
Lease abandonment........................................... 1,500
Non-compatible technology................................... 6,000
Brokerage fees.............................................. 9,000
Professional fees........................................... 3,000
Other transaction related costs............................. 3,200
Transition costs............................................ 3,000
Filing fees................................................. 300
-------
$50,000
=======
</TABLE>
The non-compatible technology primarily relates to computer hardware and
software that will be abandoned after the acquisition of InPhyNet. These assets
were utilized in the operations of InPhyNet but are not compatible with the
planned operations for MedPartners. Severance and related benefits represent
anticipated payments to identified employees, as required by their respective
employment agreements, who will be terminated after the acquisition of InPhyNet
and certain other payments anticipated to be made to certain employees. The
operational restructuring and transitional costs of $17,000 and $3,000,
respectively, represent management's best estimate of the costs to consolidate
operations of the thirty-five existing MedPartners physician practices in
Florida with the operations of certain practices of InPhyNet. This plan was
formulated by MedPartners' and InPhyNet's management in order to more
efficiently provide services in markets where multiple locations will exist as a
result of the acquisition of InPhyNet. The plan of consolidation calls for
affected operations to be merged over a period of twelve to twenty-four months.
These costs also include costs associated with the merging of InPhyNet's and
MedPartners' hospital based operations including the combining of systems,
facilities and management resources as well as costs associated with the
formation of a regional operating and reporting infrastructure.
B. To reflect the exchange of approximately 19,318 shares of Common Stock
for all the issued and outstanding shares of InPhyNet common stock.
C. To adjust pro forma amounts based on historical share amounts,
converting each outstanding share of InPhyNet common stock into Common Stock
based on the fixed exchange ratio of 1.18.
35
<PAGE> 37
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 34 states through its network of approximately 12,460 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 March 31, 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 300 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 March 31, 1997, the Company had contracts with
45 correctional institutions providing healthcare services to approximately
42,300 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 March 31, 1997, the Company's
military medical services were provided under 15 contracts with the Department
of Defense.
36
<PAGE> 38
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 44,000 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 is being accounted
for as a pooling of interests.
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
37
<PAGE> 39
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 12,460 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 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
38
<PAGE> 40
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. 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 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 46 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
39
<PAGE> 41
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 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
40
<PAGE> 42
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 34 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 32% of PPM revenue (19% of consolidated
revenue) during the first quarter of 1997. The balance of the Company's PPM
revenue (68%) 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 9% of PPM revenues (5% of
consolidated revenue) during the first quarter 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;
(ii) Physician practices that contributed 14% of PPM revenue (9% of
consolidated revenue) during the first quarter 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 9% of PPM revenue (5% of
consolidated revenue) during the first quarter of 1997 provided
physician-stockholders with a salary, plus bonus, and a profit-sharing
41
<PAGE> 43
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 employes 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 6,900 primary care and
specialist IPA physicians serving approximately 357,000 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 30% of the Company's
net revenue for the quarter ended March 31, 1997.
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 March 31, 1997, approximately 1.8 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
42
<PAGE> 44
generally greater. Consequently, the cost of their covered care is higher. As of
March 31, 1997, the Company's HMO enrollees comprised approximately 1.5 million
commercial enrollees and approximately 125,000 senior (over age 65) enrollees
and approximately 165,000 Medicaid and other enrollees. As of March 31, 1997,
the Company was receiving institutional capitation payments for approximately
660,000 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. Team Health currently provides
services at over 300 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 March 31, 1997, the Company had contracts with 45 correctional institutions
and managed the healthcare services provided to approximately 42,300 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.
43
<PAGE> 45
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 March 31, 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 44,000 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 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
44
<PAGE> 46
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 13
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 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 13 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-
45
<PAGE> 47
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 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.
46
<PAGE> 48
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
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.
47
<PAGE> 49
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 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.
48
<PAGE> 50
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 March 31, 1997, the Company, including its affiliated professional
entities, employed approximately 24,000 people on a full-time equivalent basis.
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
49
<PAGE> 51
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 34 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
("FEHBA"), 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
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.
50
<PAGE> 52
In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory violations, Caremark
is required to report such violations to the OIG and DOJ. Caremark is,
therefore, subject to increased regulatory scrutiny and, in the event it commits
legal or regulatory violations, Caremark may be subject to an increased risk of
sanctions or penalties, including disqualification as a provider of Medicare or
Medicaid services, which would have a material adverse effect on the operating
results and financial condition of the Company.
In March 1996, Caremark agreed to settle all disputes with a number of
private payors. These disputes relate to businesses that were covered by the OIG
Settlement. The settlements resulted in an after-tax charge of approximately
$43.8 million. In addition, Caremark paid $24.1 million after tax to cover the
private payors' pre-settlement and settlement-related expenses. An after-tax
charge for the above amounts was recorded in first quarter 1996 discontinued
operations.
In connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various non-governmental claims and may in
the future become subject to additional OIG-related claims. Caremark is a party
to, or the subject of, and may be subjected to in the future, various private
suits and claims (including stockholder derivative actions and an alleged class
action suit) being asserted in connection with matters relating to the OIG
Settlement by Caremark's stockholders, patients who received healthcare services
from Caremark and such patients' insurers. The Company cannot determine at this
time what costs or liabilities may be incurred in connection with future
disposition of non-governmental claims or litigation. Such additional costs or
liabilities, if incurred, could have a material adverse effect on the operating
results and financial condition of the Company.
In August and September 1994, stockholders of Caremark, each purporting to
represent a class, filed complaints against Caremark and certain officers and
employees of Caremark in the United States District Court for the Northern
District of Illinois, alleging violations of the Securities Act and the Exchange
Act and fraud and negligence and various state law claims in connection with
public disclosures by Caremark regarding Caremark's business practices and the
status of the OIG investigation. The complaints seek unspecified damages,
declaratory and equitable relief, and attorneys fees and expenses. In June 1996,
the complaint filed by one group of stockholders alleging violations of the
Exchange Act only, was certified as a class. The parties continue to engage in
discovery proceedings. The Company intends to defend these cases vigorously.
Although management believes, based on information currently available, that the
ultimate resolution of this matter is not likely to have a material adverse
effect on the operating results and financial condition of the Company, there
can be no assurance that the ultimate resolution of this matter, if adversely
determined, would not have a material adverse effect on the operating results
and financial condition of the Company.
In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of the health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys fees and expenses. In July 1996, these plaintiffs also
served a separate lawsuit in the Minnesota State Court in the County of Hennepin
against a subsidiary of Caremark purporting to be on behalf of a class and
alleging all of the claims contained in the complaint filed with the Minnesota
federal court other than the federal claims contained therein. The state
complaint seeks unspecified damages, attorneys' fees and expenses and an award
of punitive damages. In November 1996, in response to a motion by the
plaintiffs, the Court dismissed the United States District Court cases without
prejudice. On March 27, 1996, the Minnesota state court lawsuit was dismissed
with prejudice. In July 1995, another patient of this same physician filed a
separate complaint in the District Court of South Dakota against the physician,
Caremark and another corporation alleging violations of the federal laws
prohibiting payment of remuneration to induce referral of Medicare and Medicaid
beneficiaries, and the federal mail fraud and conspiracy statutes. The complaint
also alleges the intentional infliction of emotional distress and seeks trebling
of at least $15.9 million in general damages, attorneys fees and costs, and an
award of punitive damages. In August 1995, the parties to the case
51
<PAGE> 53
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
settlement will result in a second quarter after-tax charge from discontinued
operations of approximately $75 million. See "Business -- Legal Proceedings".
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 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
52
<PAGE> 54
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.
53
<PAGE> 55
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
Richard J. Kramer........................... 54 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
54
<PAGE> 56
President of CIGNA HealthCare of California, an HMO. From November 1989 to
December 1992, he was the President of Managed Care Partners, Inc., a private
consulting management company specializing in managed care services. He has been
involved in 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.
55
<PAGE> 57
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 was an executive of
Pioneer Hospital and their 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. Mr. Lopez had been a director of the general partner of MME since
1989. Dr. Lopez joined MME's principal professional corporation in 1984 and
serves as the Chairman of its Medical Council and Family Practice and Managed
Care committees. He also
56
<PAGE> 58
acted as a director and a Vice President of MME's principal professional
corporation. He is also a director and stockholder of MIPA.
Richard J. Kramer has been a member of the Company's Board of Directors
since November 1995. Mr. Kramer is President/Chief Executive Officer and a
director of Catholic Healthcare West ("CHW"). Before joining CHW in September
1989, Mr. Kramer served as the Executive Vice President of LifeSpan, Inc., a
multi-hospital/healthcare system headquartered in Minneapolis, which he joined
in 1971, serving in a variety of capacities, including Vice President of
Planning and Marketing and administrator for Abbott-Northwestern Hospital. Mr.
Kramer is currently a member of the Board of Directors of the California
Association of Hospitals and Health Systems and the Hospital Council of Northern
and Central California, the Board of Directors of the California Chamber of
Commerce, the Governing Council of the American Hospital Association Section on
Health Systems and the House of Delegates of the American Hospital Association,
the Advisory Council for the Center for Clinical Integration and the Board of
Directors of the Alumni Association of the University of Minnesota Program in
Health Care Administration.
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.
57
<PAGE> 59
DESCRIPTION OF THE NOTES
The Notes will be issued under an indenture to be dated as of ,
1997 (the "Indenture") between the Company and , 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
$350,000,000 aggregate principal amount. The Notes will mature on July 31, 2000.
Interest on the Notes will accrue at the rate of % per annum and will be
payable semi-annually on January 31 and July 31 of each year, commencing January
31, 1998, to the Holders of record of Notes at the close of business on the
January 15 and July 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 that
certain Credit Agreement dated September 5, 1996, as amended, by and among the
Company and NationsBank, National Association (South), as administrative agent
for a group of lenders (the "Credit Facility"), 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 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
58
<PAGE> 60
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
59
<PAGE> 61
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 unsecured
indebtedness by the Company or its subsidiaries or the payment of dividends or
financial covenants. As of March 31, 1997, after giving effect to the offering
being made hereby and the use of proceeds therefrom as described in "Use of
Proceeds", the Company would have had approximately $523 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 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 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
60
<PAGE> 62
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.
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.
61
<PAGE> 63
CERTAIN COVENANTS
Restrictions on Liens
The Indenture will contain a covenant providing that so long as any of the
Notes are outstanding, the Company will not, and will not permit any Subsidiary
to, issue, assume, incur or guarantee any Indebtedness secured by a Lien on or
with respect to any property or assets of the Company or any Subsidiary, or upon
any shares of capital stock, Indebtedness or other obligations of any
Subsidiary, whether now owned or leased or hereafter acquired, without in any
such case effectively providing that the Notes shall be secured equally and
ratably with (or prior to) such Indebtedness for so long as such Indebtedness
shall be so secured, except that the foregoing restrictions shall not apply to:
(a) Liens existing as of the date of the Indenture;
(b) Liens created solely to secure the payment of Purchase Money
Indebtedness incurred by the Company or a Subsidiary provided that any such
Lien shall not secure Indebtedness in excess of the amount expended in the
acquisition of, or construction of improvements on, the property or assets
and shall not extend to or cover any property or assets other than the
property or assets so acquired or the improvements thereon;
(c) Liens upon any property or assets owned or leased by any
Subsidiary when it becomes a Subsidiary and not incurred as a result of, or
in connection with or in anticipation of, such Subsidiary becoming a
Subsidiary (except to the extent otherwise permitted by (b) above);
(d) Liens existing on any property or assets at the time of its
acquisition by the Company or 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 (except to the extent
otherwise permitted by (b) above);
(e) Liens securing Indebtedness of a Subsidiary to the Company or to
another Subsidiary;
(f) Liens imposed by law for taxes, assessments or charges of any
Governmental Authority for claims not yet delinquent or which are being
contested in good faith by appropriate proceedings diligently conducted and
with respect to which adequate reserves or other appropriate provisions are
being maintained in accordance with GAAP and which Liens are not yet
enforceable against other creditors;
(g) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other Liens imposed by law or created in the
ordinary course of business and in existence less than 90 days from the
date of creation thereof for amounts not yet due or which are being
contested in good faith by appropriate proceedings diligently conducted and
with respect to which adequate reserves or other appropriate provisions are
being maintained in accordance with GAAP and which Liens are not yet
enforceable against other creditors;
(h) Liens incurred or deposits made in the ordinary course of business
(including, without limitation, surety bonds and appeal bonds) in
connection with workers' compensation, unemployment insurance and other
types of social security benefits or to secure the performance of tenders,
bids, leases, contracts (other than for the repayment of Indebtedness),
statutory obligations and other similar obligations or arising as a result
of progress payments under government contracts;
(i) easements (including reciprocal easement agreements and utility
agreements), rights-of-way, covenants, consents, reservations,
encroachments, variations and zoning and other restrictions, charges or
encumbrances (whether or not recorded), which do not interfere materially
with the ordinary conduct of the business of the Company or any Subsidiary
and which do not materially detract from the value of the property to which
they attach or materially impair the use thereof to the Company or any
Subsidiary;
(j) Liens arising in connection with Capital Leases otherwise
permitted or not prohibited by the terms of the Indenture provided that no
such Lien shall extend to any property other than the assets subject to
such Capital Leases;
62
<PAGE> 64
(k) Liens securing Off-Balance Sheet Liabilities otherwise permitted
or not prohibited by the terms of the Indenture;
(l) Permitted Receivables Securitizations; and
(m) the extension, renewal or replacement (or successive extensions,
renewals or replacements), in whole or in part, of any Lien referred to in
the foregoing clauses (a) through (l), or of any Indebtedness secured
thereby provided, however, that (i) such extension, renewal, refunding or
replacement Lien shall be limited to all or a part of the same property,
shares of stock or Indebtedness that were encumbered by the Lien extended,
renewed, refunded or replaced (plus improvements on such property) and (ii)
the Indebtedness secured by such Lien at such time is not increased.
Notwithstanding the foregoing, the Company or any Subsidiary may issue, assume,
incur or guarantee Indebtedness secured by Liens which otherwise would be
subject to the foregoing restrictions in an aggregate amount which, together
with (i) all other such Indebtedness of the Company and its Subsidiaries
outstanding which would otherwise be subject to the foregoing restrictions (not
including Indebtedness permitted to be secured under clauses (a) through (m)
above), (ii) all Indebtedness of the Subsidiaries (not including Indebtedness
permitted to be issued, assumed, incurred or guaranteed under clauses (a)
through (j) under "Restrictions on Subsidiary Indebtedness" below) and (iii) all
Attributable Debt in respect of Sale and Leaseback Transactions permitted under
"Restrictions on Sale and Leaseback Transactions" below, does not exceed 15% of
Consolidated Net Worth of the Company.
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 (A) all
Indebtedness outstanding secured by Liens (not including Indebtedness permitted
to be secured under clauses (a) through (m) under "Restrictions on Liens" above)
and (B) 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;
(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;
63
<PAGE> 65
(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
permitted under "Restrictions on Liens" above) 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) and other secured Indebtedness of a Subsidiary not to
exceed an aggregate outstanding principal amount of $25,000,000 provided,
however, that the aggregate outstanding principal amount of Off-Balance
Sheet Liabilities and other secured Indebtedness permissible under this
clause (h) shall be increased or decreased to such amount as is permissible
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.
64
<PAGE> 66
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 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 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.
"Funded Debt" means Indebtedness of the Company and its Subsidiaries,
whether incurred, assumed or guaranteed, which by its terms matures more than
one year from the date of creation thereof, or which is extendable or renewable
at the sole option of the obligor so that it may become payable more than one
year from such date.
"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.
"Governmental Authority" shall mean any Federal, state, municipal, national
or other governmental department, commission, board, bureau, court, agency or
instrumentality or political subdivision thereof or any entity or officer
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to any government or any court, in each case whether
associated with a state of the United States, the United States, or a foreign
governmental entity.
"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
65
<PAGE> 67
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.
"Lien" means any mortgage, pledge, hypothecation, charge, assignment,
deposit arrangement, encumbrance, security interest, lien (statutory or other),
or preference, priority, or other security or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
agreement to give or grant a Lien or any lease, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).
"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, 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.
"Senior Funded Debt" means all Funded Debt, including the Notes, except
Funded Debt the payment of which is subordinated to the payment of the Notes.
"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.
66
<PAGE> 68
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, (c) if as a
result of any such consolidation or merger or such conveyance, transfer or
lease, properties or assets of the Company would become subject to a mortgage,
pledge, lien, security interest or other encumbrance which would not be
permitted as described under "-- Certain Covenants -- Restrictions on Liens",
the Company or such successor Person, as the case may be, shall take such steps
as shall be necessary to effectively secure the Notes equally and ratably with
(or prior to) all indebtedness secured thereby, and (d) 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
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
67
<PAGE> 69
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.
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
68
<PAGE> 70
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.
69
<PAGE> 71
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............................................ $
Credit Suisse First Boston..................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
J.P. Morgan Securities Inc..................................
NationsBanc Capital Markets, Inc............................
------------
Total............................................. $350,000,000
============
</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 % of the public
offering price of the Notes. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of % 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 granted to the Underwriters an option, exercisable for
thirty days from the date of this Prospectus, to purchase up to an additional
$52,500,000 aggregate principal amount of Notes at the price to the public set
forth on the cover page of this Prospectus minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the offering of the Notes
offered hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional principal amount of Notes as the principal amount
of Notes set forth opposite each Underwriter's name in the preceding table bears
to the total principal amount of Notes listed in such table.
The Company has agreed to indemnify the Underwriters, and the Underwriters
have agreed to indemnify the Company, against certain liabilities, including
liabilities under the Securities Act.
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".
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.
70
<PAGE> 72
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 for the year ended December 31,
1996, and the consolidated financial statements of InPhyNet Medical Management
Inc. and Subsidiaries appearing in InPhyNet Medical Management Inc. and
Subsidiaries' Annual Report on Form 10-K/A for the year ended December 31, 1996,
each have been audited by Ernst & Young LLP, as set forth in their reports
included therein and incorporated herein by reference. Such consolidated
financial statements referred to above are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
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 Current Report on Form 8-K filed on January 27, 1997
(reporting the Plan of Merger with InPhyNet and setting forth certain pro
forma financial information for the combined companies).
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
4. The Company's Registration Statement on Form S-4 (Registration No.
333-24639).
71
<PAGE> 73
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).
72
<PAGE> 74
======================================================
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
Pro Forma Condensed Combined Financial
Information......................... 28
Business.............................. 36
Management............................ 54
Description of the Notes.............. 58
Underwriting.......................... 70
Legal Matters......................... 71
Experts............................... 71
Available Information................. 71
Incorporation of Certain Information
by Reference........................ 71
</TABLE>
======================================================
======================================================
$350,000,000
% SENIOR SUBORDINATED
NOTES DUE 2000
[MEDPARTNERS, INC. LOGO]
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
NATIONSBANC CAPITAL
MARKETS, INC.
======================================================
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the Notes offered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $
National Association of Securities Dealers, Inc. Filing
Fee....................................................... $ 30,500
Trustee's Fees.............................................. $
Blue Sky Fees and Expenses.................................. $
Legal Fees and Expenses..................................... $
Accounting Fees............................................. $
Printing Costs.............................................. $
Miscellaneous Expenses...................................... $
-----------
Total........................................ $
===========
</TABLE>
- ---------------
* Actual amount.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
("DGCL") grants corporations the right to limit or eliminate the personal
liability of their directors in certain circumstances in accordance with
provisions therein set forth. The Company's Third Restated Certificate of
Incorporation contains a provision eliminating or limiting director liability to
the Company and its stockholders for monetary damages arising from acts of
omissions in the director's capacity as a director. The provision does not,
however, eliminate or limit the personal liability of a director (i) for any
breach of such director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Delaware statutory
provision making directors personally liable, under a negligence standard, for
unlawful dividends or unlawful stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision offers persons who serve on the Board of Directors of the Company
protection against awards of monetary damages resulting from breaches of their
duty of care (except as indicated above). As a result of this provision, the
ability of the Company or a stockholder thereof to successfully prosecute an
action against a director for a breach of his duty of care is limited. However,
the provision does not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care. The
Commission has taken the position that the provision will have no effect on
claims arising under the federal securities laws.
Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. The Company's Second Amended and Restated By-laws provide for
mandatory indemnification rights, subject to limited exceptions, to any
director, officer, employee, or agent of the Company who, by reason of the fact
that he or she is a director, officer, employee, or agent of the Company, is
involved in a legal proceeding of any nature. Such indemnification rights
include reimbursement for expenses incurred by such director, officer, employee,
or agent in advance of the final disposition of such proceeding in accordance
with the applicable provisions of the DGCL.
The Company has agreed to indemnify all of its directors and executive
officers against liability incurred by them by reason of their services as a
director to the fullest extent allowable under applicable law. In addition, the
Company has purchased insurance containing customary terms and conditions as
permitted by Delaware law on behalf of its directors and officers, which may
cover liabilities under the Securities Act.
II-1
<PAGE> 76
ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
(1) -- Form of Underwriting Agreement.*
(2)-1 -- Agreement and Plan of Merger, dated as of January 20, 1997
as amended by Amendment No. 1 dated as of May 21, 1997,
among MedPartners, Inc., SeaBird Merger Corporation and
InPhyNet Medical Management Inc., filed as Exhibit (2)-1 to
the Company's Registration Statement on Form S-4
(Registration No. 333-24639), is hereby incorporated herein
by reference.
(3)-1 -- MedPartners, Inc. Third Restated Certificate of
Incorporation, filed as Exhibit (3)-1 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, is hereby incorporated herein by
reference.
(3)-2 -- MedPartners, Inc. Second Amended and Restated Bylaws, filed
as Exhibit (3)-2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-12465), is hereby
incorporated herein by reference.
(4)-1 -- MedPartners, Inc. Rights Agreement, filed as Exhibit (4)-1
to the Company's Registration Statement on Form S-4
(Registration No. 33-00774), is hereby incorporated herein
by reference.
(4)-2 -- Amendment No. 1 to the Rights Plan of MedPartners, Inc.,
filed as Exhibit (4)-2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, is hereby
incorporated herein by reference.
(4)-3 -- Amendment No. 2 to the Rights Agreement of MedPartners,
Inc., filed as Exhibit (4)-2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-17339), is
hereby incorporated herein by reference.
(5) -- Opinion of Haskell Slaughter & Young L.L.C., as to the
legality of the Notes.*
(12) -- Statement re: computation of ratios.
(23)-1 -- Consent of Ernst & Young LLP. See pages immediately
following signature pages to the Registration Statement.
(23)-2 -- Consent of Haskell Slaughter & Young L.L.C. (included in the
opinion filed as Exhibit (5)).
(24) -- Powers of Attorney. See the signature pages to this
Registration Statement.
(25) -- Statement of Eligibility of Trustee.*
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statements Schedule:
None are applicable.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 14 hereof, or otherwise,the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or
II-2
<PAGE> 77
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Birmingham, State of Alabama on July 9, 1997.
MEDPARTNERS, INC.
By: /s/ LARRY R. HOUSE
------------------------------------
Larry R. House
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Larry R. House and Harold O. Knight, Jr., and
each of them, his attorney-in-fact with power of substitution for him in any and
all capacities, to sign any amendments, supplements, subsequent registration
statements relating to the offering to which this Registration Statement
relates, or other instructions he deems necessary or appropriate, and to file
the same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitute may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ LARRY R. HOUSE Chairman of the Board and July 9, 1997
- ----------------------------------------------------- Chief Executive Officer and
Larry R. House Director
/s/ HAROLD O. KNIGHT, JR. Executive Vice President and July 9, 1997
- ----------------------------------------------------- Chief Financial Officer
Harold O. Knight, Jr. (Principal Financial and
Accounting Officer)
/s/ RICHARD M. SCRUSHY Director July 9, 1997
- -----------------------------------------------------
Richard M. Scrushy
/s/ LARRY D. STRIPLIN, JR. Director July 9, 1997
- -----------------------------------------------------
Larry D. Striplin, Jr.
/s/ CHARLES W. NEWHALL III Director July 9, 1997
- -----------------------------------------------------
Charles W. Newhall III
/s/ TED H. MCCOURTNEY Director July 9, 1997
- -----------------------------------------------------
Ted H. McCourtney
/s/ WALTER T. MULLIKIN, M.D. Director July 9, 1997
- -----------------------------------------------------
Walter T. Mullikin, M.D.
</TABLE>
II-4
<PAGE> 79
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ JOHN S. MCDONALD, J.D. Director July 9, 1997
- -----------------------------------------------------
John S. McDonald, J.D.
/s/ RICHARD J. KRAMER Director July 9, 1997
- -----------------------------------------------------
Richard J. Kramer
/s/ ROSALIO J. LOPEZ, M.D. Director July 9, 1997
- -----------------------------------------------------
Rosalio J. Lopez, M.D.
/s/ C.A. LANCE PICOLO Director July 9, 1997
- -----------------------------------------------------
C.A. Lance Picolo
/s/ ROGER L. HEADRICK Director July 9, 1997
- -----------------------------------------------------
Roger L. Headrick
/s/ HARRY M. JANSEN KRAEMER, JR. Director July 9, 1997
- -----------------------------------------------------
Harry M. Jansen Kraemer, Jr.
</TABLE>
II-5
<PAGE> 80
EXHIBIT (23)-1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-3, No. 333- ) and the related Prospectus
of MedPartners, Inc. for the registration of its Senior Subordinated Notes due
2000 referenced therein and to the incorporation by reference therein of our
report dated February 3, 1997, with respect to the consolidated financial
statements of MedPartners, Inc. for the year ended December 31, 1996, included
in its Annual Report on Form 10-K/A for the year ended December 31, 1996, and
our report dated February 14, 1997, (except for the second paragraph of Note 4,
as to which the date is May 20, 1997) with respect to the consolidated
financial statements of InPhyNet Medical Management Inc. and Subsidiaries,
included in its Annual Report (Form 10-K/A) for the year ended December 31,
1996, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Birmingham, Alabama
July 8, 1997
<PAGE> 1
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL
Income (loss) from continuing
operations before income
taxes ............................ $60,225 $91,305 $ 98,192 $ 5,109 $(95,128) $ 9,248 $ 65,411
Non recurring charges(1)............ -- -- -- 153,164 308,695 34,448 --
------- ------- -------- -------- -------- ------- --------
Income (loss) from continuing
operations before income taxes
and non recurring charges......... 60,225 91,305 98,192 158,273 213,567 43,696 65,411
Fixed Charges:
Interest expense.................. 2,396 9,588 21,800 30,496 34,571 9,522 12,026
Interest factor of rental
expense......................... 8,025 10,311 15,138 22,842 26,685 7,698 9,234
------- ------- -------- -------- -------- ------- --------
Total fixed charges........ 10,421 19,899 36,938 53,338 61,256 17,220 21,260
------- ------- -------- -------- -------- ------- --------
Income (loss) from continuing
operations before income taxes and
non recurring charges and fixed
charges........................... $70,646 $111,204 $135,130 $211,611 $274,823 $60,916 $ 86,671
======== ======== ========= ========= ========= ======== =========
Ratio of earnings to fixed
charges........................... 6.78 5.59 3.66 3.97 4.49 3.54 4.08
======== ======== ========= ========= ========= ======== =========
PRO FORMA
Income (loss) from continuing
operations before income taxes and
cumulative effect of change in
method of accounting.............. $113,802 $ 25,202 $(73,575) $15,280 $ 70,850
Non recurring charges(1)............ -- 155,664 308,945 34,448 --
-------- -------- -------- ------- --------
Income (loss) from continuing
operations before income taxes and
cumulative effect of change in
method of accounting and non
recurring charges................. 113,802 180,866 235,370 49,728 70,850
Fixed Charges:
Interest expense.................. 23,105 32,406 35,705 9,884 12,209
Interest factor of rental
expense......................... 16,050 23,993 27,949 8,003 9,602
-------- -------- -------- ------- --------
Total fixed charges........ 39,155 56,399 63,654 17,887 21,811
-------- -------- -------- ------- --------
Income (loss) from continuing
operations before income taxes and
cumulative effect of change in
method of accounting, non
recurring charges and fixed
charges........................... $152,957 $237,265 $299,024 $67,615 $ 92,661
========= ========= ========= ======== =========
Ratio of earnings to fixed
charges........................... 3.91 4.21 4.70 3.78 4.25
========= ========= ========= ======== =========
</TABLE>
- ---------------
(1) In connection with various acquisitions, the Company has incurred one-time
pretax charges against earnings which are reflected in the historical and
proforma financial statements and losses on investments.
