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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO_____________
COMMISSION FILE NUMBER: 0-27276
CAREMARK RX, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-1151076
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
(Address of principal executive offices)
(205)733-8996
(Registrant's telephone number, including area code)
(Formerly MedPartners, Inc.)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
<S> <C>
CLASS OUTSTANDING AT APRIL 16, 2000
----- -----------------------------
Common Stock, Par Value $.001 Per Share 199,695,110*
</TABLE>
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* Includes 8,304,877 shares held in trust to be utilized in employee
benefit plans.
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FORWARD LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Section 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. Caremark Rx, Inc. ("Caremark Rx" or the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe
harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual events or results to differ materially from those projected. Due to
those uncertainties and risks, the investment community is urged not to place
undue reliance on written or oral forward-looking statements of Caremark Rx.
Caremark Rx undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
The "forward-looking statements" contained in this document are made
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Moreover, the Company, through its senior
management, may from time to time make "forward-looking statements" about
matters described herein or other matters concerning the Company.
There are several factors which could adversely affect the Company's
operations and financial results including, but not limited to, the following:
Risks relating to the Company's divestiture of its
discontinued operations; risks relating to the proposed settlement and
transition plan for the MPN operations in the State of California;
risks relating to the Company's compliance with or changes in
government regulations, including pharmacy licensing requirements and
healthcare reform legislation; risks relating to adverse resolution of
lawsuits pending against the Company and its affiliates; risks
relating to declining reimbursement levels for products distributed;
risks relating to identification of growth opportunities; risks
relating to implementation of the Company's strategic plan; risks
relating to liabilities in excess of the Company's insurance; and
risks relating to the Company's liquidity and capital requirements.
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CAREMARK RX, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
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PAGE
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- March 31, 2000 (Unaudited) and
December 31, 1999................................................................................... 4
Condensed Consolidated Statements of Operations (Unaudited) -- Three Months Ended
March 31, 2000 and 1999............................................................................. 5
Condensed Consolidated Statements of Cash Flows (Unaudited) -- Three Months Ended
March 31, 2000 and 1999............................................................................. 6
Notes to Condensed Consolidated Financial Statements (Unaudited).................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 16
Item 2. Changes in Securities and use of proceeds........................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................................................... 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAREMARK RX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 11,785 $ 6,797
Accounts receivable, less allowances for bad debts of
$15,074 and $14,146............................................................. 206,410 229,332
Inventories........................................................................ 134,196 159,031
Prepaid expenses and other current assets.......................................... 16,898 14,880
Current assets of discontinued operations.......................................... 60,100 124,616
----------- -----------
Total current assets....................................................... 429,389 534,656
Property and equipment, net.......................................................... 101,521 108,168
Intangible assets, net............................................................... 38,794 41,080
Other assets......................................................................... 53,515 54,089
Non current assets of discontinued operations........................................ 15,720 32,853
----------- -----------
Total assets.................................................................. $ 638,939 $ 770,846
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................................... $ 299,473 $ 275,119
Other accrued expenses and liabilities............................................. 139,025 162,768
Income tax payable................................................................. 6,717 6,978
Current portion of long-term debt.................................................. 19,780 19,371
Current liabilities of discontinued operations..................................... 135,674 99,170
----------- -----------
Total current liabilities.................................................. 600,669 563,406
Long-term debt, net of current portion............................................... 1,204,178 1,230,025
Other long-term liabilities.......................................................... 82,169 46,453
Long-term liabilities of discontinued operations..................................... 11,291 12,437
----------- -----------
Total liabilities.......................................................... 1,898,307 1,852,321
Contingencies (Note 7)............................................................... -- --
Convertible preferred securities..................................................... 200,000 200,000
Stockholders' deficit:
Common stock, $.001 par value; 400,000 shares authorized;
issued -- 199,597 in 2000 and 199,523 in 1999................................... 200 200
Additional paid-in capital......................................................... 953,951 952,432
Shares held in trust, 8,343 in 2000 and 8,383 in 1999.............................. (134,506) (135,141)
Accumulated deficit................................................................ (2,279,013) (2,098,966)
----------- -----------
Total stockholders' deficit................................................... (1,459,368) (1,281,475)
----------- -----------
Total liabilities and stockholders' deficit................................... $ 638,939 $ 770,846
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
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CAREMARK RX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
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(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenue............................................................ $1,052,548 $ 785,058
Operating expenses:
Cost of revenues..................................................... 968,675 715,866
Selling, general and administrative.................................. 27,097 24,773
Depreciation and amortization........................................ 6,281 5,558
Net interest expense................................................. 28,869 27,058
---------- ---------
Income from continuing operations before income taxes.................. 21,626 11,803
Income tax expense..................................................... 1,621 968
---------- ---------
Income from continuing operations before preferred security
dividends............................................................ 20,005 10,835
Preferred security dividends........................................... 3,220 --
---------- ---------
Income from continuing operations available to common
stockholders......................................................... 16,785 10,835
Loss from discontinued operations...................................... (198,000) --
---------- ---------
Net (loss) income available to common stockholders..................... $ (181,215) $ 10,835
========== =========
Earnings (loss) per common share outstanding:
Income from continuing operations available
to common stockholders............................................. $ 0.09 $ 0.06
Loss from discontinued operations.................................... (1.04) --
--------- ----------
Net (loss) income available to common stockholders................... $ (0.95) $ 0.06
========= =========
Weighted average common shares outstanding............................. 191,250 190,195
Diluted earnings (loss) per common share outstanding:
Income from continuing operations available
to common stockholders............................................. $ 0.09 $ 0.06
Loss from discontinued operations.................................... (1.02) --
--------- ---------
Net (loss) income available to common stockholders................... $ (0.93) $ 0.06
========= =========
Weighted average common and dilutive shares
outstanding ......................................................... 193,687 192,556
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
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CAREMARK RX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
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THREE MONTHS ENDED
MARCH 31,
2000 1999
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(IN THOUSANDS)
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Operating activities:
Net (loss) income available to common stockholders................ $(181,215) $ 10,835
Adjustments for non-cash items:
Loss from discontinued operations.............................. 198,000 --
Non-cash interest expense...................................... 1,801 1,489
Preferred security dividends................................... 3,220 --
Depreciation and amortization.................................. 6,281 5,558
Changes in operating assets and liabilities......................... 50,494 (758)
--------- ---------
Net cash and cash equivalents provided by
continuing operations................................... 78,581 17,124
Investing activities:
Net purchase of property and equipment............................ (4,201) (3,152)
--------- ---------
Net cash and cash equivalents used in investing
Activities.............................................. (4,201) (3,152)
Financing activities:
Capital contributions............................................. 3,328 167
Net repayments under credit facility.............................. (25,438) (251,585)
Dividend payments on preferred securities......................... (3,568) --
Other............................................................. (104) (129)
----------- ---------
Net cash and cash equivalents used
in financing activities................................. (25,782) (251,547)
Cash paid for special charges....................................... (211) (1,677)
Cash (used in) provided by discontinued operations.................. (43,399) 225,977
--------- ---------
Net increase (decrease) in cash and cash equivalents................ 4,988 (13,275)
Cash and cash equivalents at beginning of period.................... 6,797 23,100
--------- ---------
Cash and cash equivalents at end of period.......................... $ 11,785 $ 9,825
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
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CAREMARK RX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The Company's operations are conducted through Caremark Inc.
("Caremark"), which provides pharmacy benefit management services and
therapeutic pharmaceutical services. These services are sold separately and
together to assist corporations, insurance companies, unions, government
employee groups and managed care organizations throughout the United States in
delivering prescription drugs to their members in a cost effective manner.
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries and have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and in accordance with Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring items) necessary for a fair presentation of results for the interim
periods presented. The results of operations for any interim period are not
necessarily indicative of results for the full year. The condensed consolidated
balance sheet of the Company at December 31, 1999, has been derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. These financial statements and
footnote disclosures should be read in conjunction with the December 31, 1999,
audited consolidated financial statements and the notes thereto.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the accompanying unaudited
condensed consolidated financial statements and notes thereto. Actual results,
including the Company's estimated costs to exit its Physician Practice
Management ("PPM") operations, as discussed in Notes 4 and 5, could differ from
those estimates.
NOTE 2. INCOME TAXES
Significant variations exist in the customary relationship between
income tax expense and pretax income because the Company has utilized net
operating loss carryforwards to offset its taxable federal income and certain
taxable state income. Consequently, the Company has recognized a tax rate of
7.5%, its effective state income tax rate and alternative minimum taxes for
federal income tax purposes.
NOTE 3. CREDIT FACILITY
The Company has a credit facility with Bank of America, N.A. (formerly
NationsBank N.A.), as administrative agent. The Company has pledged the capital
stock of Caremark International Inc. ("CII"), which owns Caremark, as security
for amounts outstanding. The credit facility is guaranteed by the Company's
material subsidiaries and matures in June 2001. The credit facility consists of
the following:
- An amortizing tranche A term loan with $48.8 million outstanding at
March 31, 2000. Quarterly principal payments on this term loan began
in November 1999. Accordingly, the portion of this debt due within
the next twelve months has been classified as short-term.
- A non-amortizing tranche B term loan with $58.1 million outstanding
at March 31, 2000.
- A revolving credit facility in an aggregate principal amount of up to
$400 million. At March 31, 2000, the Company had $247.0 million in
borrowings and $62.6 million in letters of credit under the revolving
credit facility. Net of these amounts, the Company had $90.4 million
available for borrowing under the credit facility as of March 31,
2000.
The credit facility indebtedness currently bears interest at variable rates
based on LIBOR, plus varying margins. At the Company's option, or upon certain
defaults or other events, credit facility indebtedness may instead bear interest
based on the prime rate plus
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varying margins. The Company is also required to repay the term
loans ratably under the credit facility with 100% of the net cash proceeds
received from certain issuances of equity or debt or extraordinary receipts,
and with 50% of the excess cash flow (as defined) for each fiscal year.
The credit facility contains covenants that, among other things,
restrict or limit the Company's ability to incur additional indebtedness or
guarantee obligations, engage in mergers or consolidations, dispose of assets,
make investments, loans or advances, engage in certain transactions with
affiliates, conduct certain corporate activities, create liens, make capital
expenditures, prepay or modify the terms of other indebtedness, pay dividends
and other distributions, and change its business. In addition, the Company is
required to comply with specified financial covenants, including a maximum
leverage ratio, a minimum fixed charge coverage ratio and a minimum interest
expense coverage ratio. The credit facility includes various customary and other
events of default, including cross default provisions, defaults for any material
judgment or change in control, and defaults relating to liabilities arising from
the Company making additional investments in its California physician practice
management ("PPM") business.
NOTE 4. DISCONTINUED OPERATIONS
During the first quarter of 2000 the Company recorded a charge of
$198.0 million as a result of its progress in completing the exit from its PPM
operations. This charge includes a $153.3 million adjustment in the net assets
of the Company's remaining PPM operations and $44.7 million in adjustments to
reserves for potential future obligations such as rents and litigation. These
amounts are estimates. The actual results could differ from those outlined
above. During the three months ended March 31, 2000, the Company completed the
sales of two of its PPM practices. Net proceeds from these sales totaled $21.6
million. As of March 31, 2000, the Company has two remaining PPM practices,
both of which are in litigation.
NOTE 5. CALIFORNIA PPM DISCONTINUED OPERATIONS
The Company's California PPM operations included MedPartners Provider
Network, Inc. ("MPN"), a wholly-owned subsidiary of the Company and a
healthcare service plan licensed under the Knox-Keene Health Care Service Plan
Act of 1975. In March 1999, the California Department of Corporations (the
"DOC") appointed a conservator and assumed control of the business operations
of MPN. The conservator, purportedly on behalf of MPN, filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code. The Company
judicially challenged the authority of both the DOC and the conservator to take
these actions in both the California Superior Court and in the United States
Bankruptcy Court for the Central District of California (the "Bankruptcy
Court").
The Company, MPN, and representatives of the State of California (the
"State") subsequently executed an agreement to settle the disputes relating to
MPN (the "Settlement Agreement"), which was approved by the Bankruptcy Court.
The Company, various of its subsidiaries, MPN, certain managed physician
practices and various health plans executed a supplemental agreement (the
"Supplemental Plan Agreement"), pursuant to which (1) the parties to the
Supplemental Plan Agreement agreed to subordinate, waive and/or release various
claims against one another on the terms and conditions set forth therein, and
(2) the health plans agreed to support the Chapter 11 plan of reorganization
(the "Plan of Reorganization") to be filed by MPN. The Supplemental Plan
Agreement was approved by the Bankruptcy Court following a hearing on February
7, 2000. MPN filed an initial draft of the Plan of Reorganization on November 5,
1999. An amended Plan of Reorganization, accompanied by a revised disclosure
statement, was filed with the Bankruptcy Court on February 3, 2000. MPN has
reached an agreement on the amounts of allowed claims with the majority of
the providers owed funds by MPN. The Plan of Reorganization continues to be the
subject of ongoing negotiations involving MPN, the Company, and parties in
interest in MPN's bankruptcy case. Neither the disclosure statement nor the Plan
of Reorganization have yet been approved by the Bankruptcy Court.
NOTE 6. CONVERTIBLE PREFERRED SECURITIES
In September, 1999, the Company privately placed $200 million
guaranteed preferred beneficial interest in Caremark Rx junior subordinated debt
securities ("Convertible Preferred Securities"). The issuer of the Convertible
Preferred Securities is a trust, which is a wholly owned finance subsidiary of
the Company, with no independent assets or operations. The sole assets of the
trust are the 7% Convertible Subordinated Debentures of the Company, maturing
October 1, 2029, with principal amount equal to approximately $206.2 million.
(This is equal to the amount of the Convertible Preferred Securities plus the
amount of the common equity issued by the Trust to the Company.) Considered
together, (1) the Company's guaranty of distribution and liquidation payments,
to the extent that the trust has funds available, on the Convertible Preferred
Securities and (2) the Company's obligations under (a) its Convertible
Subordinated Debentures and the related Indenture and (b) the trust's trust
agreement, provide a full and unconditional guarantee of amounts due on the
Convertible Preferred Securities issued by the trust.
NOTE 7. CONTINGENCIES
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The Company is party to certain legal actions arising in the ordinary
course of business. The Company is named as a defendant in various legal actions
arising primarily out of services rendered by physicians and others employed by
its managed medical groups, as well as personal injury and employment disputes.
In addition, certain of its managed 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 and/or 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 that would have a material
adverse effect on the operating results and financial condition of the Company.
In June 1995, Caremark and CII agreed to settle an investigation with
certain agencies of the United States government (the "Government Settlement").
The Government Settlement allows Caremark and CII to continue participating in
Medicare, Medicaid, and other government healthcare programs. In the Government
Settlement, Caremark and CII agreed to continue to maintain certain
compliance-related oversight procedures until June 15, 2000. Should these
oversight procedures reveal credible evidence of legal or regulatory
violations, Caremark and CII are required to report such violations to the OIG
and DOJ. Caremark and CII are therefore subject to increased regulatory
scrutiny and, in the event that either Caremark or CII 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 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
Government Settlement, Caremark and CII are the subject of various
non-governmental claims and may in the future become subject to additional
OIG-related claims. Caremark and CII are the subject of, and may in the future
be subjected to, various private suits and claims being asserted in connection
with matters relating to the OIG settlement by CII's former 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.
In 1993, independent and retail chain pharmacies filed a group of
antitrust lawsuits, and a class action lawsuit, against brand name
pharmaceutical manufacturers, wholesalers and PBM companies. Caremark was named
as a defendant in these lawsuits in 1994, but was not named in the class
action. 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 attorney's fees and expenses.
All of these actions have been transferred by the Judicial Panel for
Multi-District 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 the pharmaceutical
manufacturers. The amended settlement provides for a cash payment by the
defendants in the class action (which does not include Caremark) of
approximately $351 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 this
settlement, although numerous additional settlements have been reached between
a number of parties to the class and individual manufacturers. The class action
conspiracy claims against the remaining defendants were tried in the fall of
1998, and resulted in a judgment by the court at the close of the plaintiffs'
case in favor of the remaining defendants. That judgment was affirmed in part
and reversed and remanded in part and is currently undergoing further
proceedings in the district court and the court of appeals, which may result in
a second trial of the class action or its dismissal on the merits. It is
expected that trials of the non-class action conspiracy claims brought by
opt-out individual plaintiffs under the Sherman Act, to the extent they have
not been settled or dismissed, will move forward in 2000 to a decision on
summary judgment or to trial and likely will also precede the trial of any
Robinson-Patman Act claims.
In March 1998, a consortium of insurance companies and third-party
private payors sued Caremark and CII in the United States District Court for
the Northern District of Illinois. The complaint alleges that Caremark's home
infusion division, which was sold by Caremark in 1995 and is reported in the
unaudited condensed consolidated financial statements as discontinued
operations, implemented a scheme to submit fraudulent claims for payment to
payors which the payors unwittingly paid, and seeks unspecified
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damages, treble damages and attorney's fees and expenses. A tentative
settlement has been reached among the parties to this case.
Pursuant to the Provider Self-Disclosure Protocol of the OIG, the
Company has conducted a voluntary investigation of the practices of an
affiliate known as Home Health Agency of Greater Miami, doing business as
AmCare ("AmCare"). The investigation uncovered several potentially
inappropriate practices by certain managers at AmCare, some of which may have
resulted in overpayments from federal programs for AmCare's home health
services. The Company has since terminated these managers, ceased AmCare's
operations, and reported the matter to the OIG. While the OIG has not yet
responded to the Company's internal investigation report, and therefore the
resolution of this matter is as yet unknown, it is likely that the government
will determine that overpayments were made which require repayment by the
Company. The Company's estimates of the repayments due have been accrued in the
financial statements.
In 1999, two lawsuits were filed in the Supreme Court of the State of
New York, City of New York, Claiming that a "Termination Event" had occurred
with respect to the Threshold Appreciation Price Securities ("TAPS") issued by
the Company in September 1997. One of these lawsuits, which involved plaintiffs
holding approximately 35 percent of the outstanding TAPS, was settled by the
Company in April 2000 (the "New York Settlement"). As a result, the lawsuit was
dismissed with prejudice, and the Company has issued common stock and paid
accrued interest on the related TAPS through April 14, 2000. Subsequent to March
31, 2000, the Company received approximately $168 million in cash from the
cancellation of the related TAPS, which was used to reduce indebtedness under
the credit facility. Approximately $148 million was applied to the revolving
credit facility, and will only be used to retire the Senior Subordinated Notes.
The remaining $20 million was applied to the term loans under the Company's
credit facility. The remaining lawsuit in New York has also been dismissed.
In March 2000, a purported class action was filed in the Circuit Court
of Franklin County, Alabama, also claiming that a Termination Event had
occurred. This lawsuit has since been certified by the court as a "non-opt out"
class action, and therefore includes all TAPS holders other than those included
in the New York Settlement. The Company has reached a settlement in this lawsuit
(the "Alabama Settlement"), which has received preliminary court approval and
remains subject to final court approval following customary class notices and
hearings. In connection with the Alabama Settlement, all remaining TAPS holders
have agreed to surrender their TAPS on August 31, 2000, the date required by the
TAPS documents, even if the settlement transaction has not been finalized. The
Company anticipates using proceeds of the U.S. Treasury Notes securing the
outstanding TAPS and amounts available under the credit agreement, as discussed
above, to repay its Senior Subordinated Notes coming due in September 2000. If
the proceeds of the U.S. Treasury Notes are not available to the Company as
contemplated by the Alabama Settlement, then the Company may not have funds
available to pay the Senior Subordinated Notes when due.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against it, there can be no
assurance that the lawsuits will not have a disruptive effect upon the
operations of the business, that the defense of the lawsuits will not consume
the time and attention of senior management of Caremark Rx and its
subsidiaries, or that the resolution of the lawsuits will not have a material
adverse effect on the operating results and financial condition of the Company.
The Company intends to vigorously defend each of these lawsuits. The Company
believes that these lawsuits will not have a material adverse effect on the
operating results and financial condition of the Company.
The Company has assigned lease obligations related to its discontinued
operations of approximately $145.1 million to various parties. The Company
and/or one or more of its subsidiaries remain as guarantor or obligator on
these lease obligations. The leases have been assigned to numerous unrelated
entities and the Company believes there is no significant concentration of
credit risk related to these contingent obligations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is one of the largest pharmaceutical services companies in
the United States. The Company's operations are comprised of pharmacy benefit
management services and therapeutic pharmaceutical services. These services are
sold both separately and together to assist corporations, insurance companies,
unions, government employee groups and managed care organizations throughout the
United States in delivering prescription drugs to their members in a
cost-effective manner.
The Company's net revenues generally include payments by its customers
based on the price of pharmaceuticals dispensed to their members and
administrative fees. Pharmaceuticals are dispensed from retail pharmacies
included in one of the Company's networks and from its wholly-owned and
operated mail service pharmacies. Costs of net revenues are comprised primarily
of pharmaceutical acquisition costs and the cost of services associated with
dispensing drugs and operating systems.
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The Company has added two large managed care contracts since the first
quarter of 1999. While this resulted in higher revenues and higher average
revenue per account, the Company's gross margins -- that is, gross profit as a
percentage of net revenues -- have decreased. Managed care plans typically
involve a higher concentration of retail pharmacy services, which have a lower
margin than the Company's mail service pharmacy and specialty therapeutic
services. The Company anticipates its gross margin for the remaining quarters
of 2000 will be lower than the corresponding prior year quarters as a result of
the new managed care contracts noted above.
The Company has tax net operating loss ("NOL") carryforwards of
approximately $2.3 billion as of December 31, 1999. Because of the uncertainty
of the ultimate realization of the net deferred tax asset, the Company has
established a valuation allowance for the amount of the net deferred tax asset
that is not otherwise expected to be used to offset deferred tax liabilities.
Additionally, its sales of discontinued operations have and will continue to
generate additional tax NOL carryforwards in 2000. If not utilized to offset
future taxable income, the net operating loss carryforwards will expire on
various dates through 2020. The Company's taxes payable in 2000 and, until such
time as its NOLs are utilized, will consist of state taxes in those states
where it does not have state NOL carryforwards and alternative minimum taxes
for federal income tax purposes. The Company expects its effective tax rate to
be approximately 7.5% after 1999 until such time as the NOLs are utilized.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
For the three months ended March 31, 2000 and 1999, net revenue was
$1,052.5 million and $785.1 million, representing an increase of $267.4 million
(34%) from 1999 to 2000. Key factors contributing to this growth include new
customer contracts, including two large managed care contracts, higher customer
retention, additional services provided to existing customers and drug cost
inflation. The preponderance of the Company's 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 and margins were $50.5 million and 4.8% for the three
months ended March 31, 2000. Operating income and margins were $38.9 million
and 5.0% for the three months ended March 31, 1999. (Operating income
represents earnings before interest and income taxes and excludes losses from
discontinued operations.) The 30% increase in operating income is primarily due
to the growth in revenue. The decrease in operating margin was due to the
addition of two large managed care plans since the first quarter of 1999.
Managed care plan accounts produce lower margins due to their higher retail
product mix.
Net interest expense was $28.9 million and $27.1 million for the three
months ended March 31, 2000 and 1999, respectively. The period over period
increase in interest expense primarily resulted from increased interest rates
on floating rate debt and the amount of interest allocated to discontinued
operations. Based on the expected net proceeds from the sale and exit of the
discontinued operations, no interest expense has been allocated to these
discontinued operations for the three months ended March 31, 2000.
The Company recorded dividends on its Convertible Preferred Securities
of $3.2 million net of income tax expense during the three months ended March
31, 2000. Dividends on the Convertible Preferred Securities are payable at an
annual rate of 7% of the liquidation amount of $50 per Convertible Preferred
Security, and are payable quarterly in arrears on January 1, April 1, July 1 and
October 1 each year. The Convertible Preferred Securities were not outstanding
in the first quarter of 1999.
The Company's effective tax rate was 7.5% for the first quarter of
2000. This effective rate is the result of tax planning strategies in certain
states that allow consolidated return filings that will allow the Company to
utilize its consolidated NOL in these states. This effective tax rate is
expected to be achieved for the foreseeable future.
During the first quarter of 2000 the Company recorded a charge of
$198.0 million as a result of its progress in completing the exit from its PPM
operations. This charge includes a $153.3 million adjustment in the net assets
of the Company's remaining PPM operations and $44.7 million in adjustments to
reserves for potential future obligations such as rents and litigation. These
amounts are estimates. The actual results could differ from those outlined
above. During the three months ended March 31, 2000, the Company completed the
sales of two of its PPM practices. Net proceeds from these sales totaled $21.6
million.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company broadly defines liquidity as its ability to
generate sufficient cash flow from operating activities to meet its obligations
and commitments. In addition, liquidity includes the ability to obtain
appropriate financing and to convert into cash those
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assets that are no longer required to meet existing strategic and financial
objectives. Therefore, liquidity cannot be considered separately from capital
resources that consist of current or potentially available funds for use in
achieving business objectives and meeting debt service commitments.
Currently, the Company's liquidity needs arise primarily from debt
service on its indebtedness and the funding of its discontinued operations
(including the funding of any retained liabilities), as well as its working
capital requirements and capital expenditures. The Company believes that cash
flow from operations and amounts available under the revolving credit facility
are sufficient to meet its liquidity needs.
Cash Flows. The Company's cash flow from continuing operations for the
three months ended March 31, 2000 was $78.6 million. This positive cash flow was
offset by cash used in discontinued operations and repayments of amounts under
the company's credit facility. Among other things, the Company's cash flow from
operations was positively affected by improved inventory management and a
reduction of days outstanding in the theurapeutic pharmaceutical services
accounts receivable. Cash used by discontinued operations for this period was
$43.4 million. See Note 4 of the accompanying unaudited Condensed Consolidated
Financial Statements.
Credit Facility. The Company has a credit facility with Bank of
America, N.A. (formerly NationsBank N.A.), as administrative agent. The Company
has pledged the capital stock of CII, which owns Caremark, as security for
amounts outstanding. The credit facility is guaranteed by the Company's material
subsidiaries and matures in June 2001, with all amounts then outstanding due at
that time. The credit facility consists of the following:
- An amortizing tranche A term loan with $48.8 million outstanding at
March 31, 2000. Quarterly principal payments on this term loan began
in November 1999. Accordingly, the portion of this debt due within
the next twelve months has been classified as short-term.
- A non-amortizing tranche B term loan with $58.1 million outstanding
at March 31, 2000.
- A revolving credit facility in an aggregate principal amount of up to
$400 million. At March 31, 2000, the Company had $247.0 million in
borrowings and $62.6 million in letters of credit under the revolving
credit facility. Net of these amounts, the Company had $90.4 million
available for borrowing under the credit facility as of March 31,
2000.
The credit facility indebtedness currently bears interest at variable
rates based on LIBOR (as defined), plus varying margins. At the Company's
option, or upon certain defaults or other events, credit facility indebtedness
may instead bear interest based on prime rate. The Company is also required to
repay the term loans ratably under the credit facility with 100% of the net
cash proceeds received from certain issuances of equity or debt or
extraordinary receipts, and with 50% of the excess cash flow (as defined) for
each fiscal year.
The credit facility contains covenants that, among other things,
restrict the Company's ability to incur additional indebtedness or guarantee
obligations, engage in mergers or consolidation, dispose of assets, make
investments, loans or advances, engage in certain transactions with affiliates,
conduct certain corporate activities, create liens, make capital expenditures,
prepay or modify the terms of other indebtedness, pay dividends and other
distributions, and change its business. In addition, the Company is required to
comply with specified financial covenants, including a maximum leverage ratio, a
minimum fixed charge coverage ratio and a minimum interest expense coverage
ratio. The credit facility includes various customary and other events of
default, including cross default provisions, defaults for any material judgment
or change in control, and defaults relating to liabilities arising from the
Company making additional investment in its California PPM business. The Company
currently anticipates it will amend and extend the term of its current credit
facility, execute a new credit facility and/or issue additional equity/debt
prior to June 2001 when the current credit facility matures. The Company's
current portion of long-term debt includes $19.8 million of term loan
indebtedness under the credit facility.
Convertible Preferred Securities. In September 1999, the Company
privately placed $200 million of Convertible Preferred Securities. The
Convertible Preferred Securities mature in the year 2029, but are redeemable
prior to maturity at the option of the Company beginning October 15, 2002, at
prices ranging from $52.00 to $50.00 plus accumulated and unpaid interest per
Convertible Preferred Security. Each Convertible Preferred Security is
convertible at the option of the holder into shares of Common Stock at a
conversion rate of 6.7125 shares of Common Stock for each Convertible Preferred
Security (equivalent to a conversion price of $7.4488 per share of Common
Stock). Dividends on the Convertible Preferred Securities are payable at an
annual rate of 7% of the liquidation amount of $50 per Convertible Preferred
Security, and are payable quarterly in arrears on January 1, April 1, July 1
and October 1 each year, beginning January 1, 2000. Dividends on the
Convertible Preferred Securities may be deferred by the Company for up to 20
consecutive quarters. The Company has no intention at the present time to defer
the payment of the dividends.
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Receivables Securitization. The credit facility as amended permits up
to $125 million in accounts receivable securitization. The Company has
securitized certain of its accounts receivable pursuant to an accounts
receivable securitization facility with The Chase Manhattan Bank as funding
agent. As of March 31, 2000, the Company had securitized approximately $100.0
million in accounts receivable.
Discontinued Operations. Cash used to fund exit costs, which are
classified in current liabilities as other accrued expenses and liabilities,
will be funded by the revolving credit facility, cash flow from continuing
operations and proceeds from the sales of the discontinued operations. The
Company believes that approximately $100 million in net cash funding will be
required for the remaining quarters of fiscal 2000. The Company believes that
amounts available from the sales of discontinued operations, amounts available
under the revolving credit facility (including $40 million in letters of credit
which will be used to fund discontinued operations in California), and cash flow
from continuing operations will be sufficient to fund the cash requirements of
the discontinued operations. However, there can be no assurance that the cash
generated from such sources will be sufficient to meet these funding needs or
that the Company's estimate of discontinued operations funding requirements will
not increase. If the cash generated from these sources is not sufficient to
meet these funding needs, the Company would seek to enhance its liquidity
position through further modifications to the credit facility, incurrence of
additional indebtedness, asset sales, restructuring of debt, and/or the sale of
securities. Although the Company currently believes that one or more of such
alternatives would be available to enhance liquidity, each such alternative is
dependent upon future events, conditions and other matters outside its control.
Other Indebtedness. The Company has outstanding two other series of
debt securities. Neither is guaranteed by any subsidiary. The Senior Notes are
in an aggregate principal amount of $450 million and bear interest at 7 3/8%
annually, with all principal amounts due in October 2006. The Senior
Subordinated Notes are in an aggregate principal amount of $420 million and
bear interest at 6 7/8% annually, with all principal amounts due in September
2000. The indenture for each series of notes contains, among other things,
restrictions on subsidiary indebtedness, sale and leaseback transactions, and
consolidation, merger and sale of assets.
The Senior Notes indenture also contains restrictions on indebtedness
secured by liens. To comply with this covenant, the Company has secured the
Senior Notes with an equal and ratable pledge of all of the capital stock of
the subsidiary that owns its primary operating subsidiary. The two series of
these notes are otherwise unsecured.
TAPS. In September 1997, the Company issued approximately 21.7 million
6.50% TAPS with a stated amount of $22.1875 per security. Each TAPS consists of
(i) a stock purchase contract which obligates the holder to purchase Common
Stock on the final settlement date (August 31, 2000) and (ii) 6.25% U.S.
Treasury Notes due August 31, 2000. The Treasury Notes forming a part of the
TAPS have been pledged to secure the obligations of the TAPS holders under the
purchase contracts. Pursuant to the TAPS, TAPS holders receive payments equal to
6.50% of the stated amount per annum consisting of interest on the Treasury
Notes at the rate of 6.25% per annum and yield enhancement payments payable
semi-annually by the Company at the rate of 0.25% of the stated amount per
annum. At March 31, 2000, these securities are not included on the Company's
balance sheet.
The Company is and has been party to litigation related to the TAPS.
Several lawsuits alleged that events have occurred that entitle the TAPS holders
to terminate their obligations to purchase the Company's common stock in August
2000 and that entitle the TAPS holders to receive the U.S. Treasury Notes held
under the TAPS arrangements to secure those obligations. The Company has settled
one of these lawsuits brought in New York, and all other claims have been
included in a "non-opt out" class action pending in the Circuit Court of
Franklin County, Alabama. During April 2000, the Company issued common stock to
holders of approximately 35 percent of the outstanding TAPS pursuant to the
settlement of the New York lawsuit and received approximately $168 million in
cash and recorded an increase in stockholders' equity as a result of the New
York settlement transaction. The Company has reached a settlement of the Alabama
class action, which has received preliminary court approval and remains subject
to final court approval following customary class notices and hearings. Pursuant
to the settlement of the Alabama class action lawsuit, the Company would receive
remaining cash proceeds from the Treasury Notes of $323.4 million and would
record an increase in stockholders' equity from the issuance of its common stock
upon surrender of the remaining TAPS. Any adverse developments in this
litigation that would prevent the Company from timely receiving the proceeds of
the Treasury Notes securing the remaining TAPS would materially adversely affect
the Company's liquidity position, including its ability to repay the Senior
Subordinated Notes due in September 2000. For more information see "Legal
Proceedings."
OTHER MATTERS
Impact of Year 2000. The Year 2000 issue concerns the ability of
computer hardware and software to distinguish between the year 1900 and the
year 2000. An inability to make this distinction could result in computer
application failure.
During 1999, the Company completed a detailed assessment of all its
information technology and non-information technology hardware and software
with regard to the Year 2000 issue, with special emphasis on mission critical
systems. Information and non-information technology hardware and software were
inventoried and those not Year 2000 ready were identified, remediated (i.e.,
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corrected or replaced) and tested to ensure that they would, in fact, operate
as desired according to Year 2000 requirements. The Company expensed
approximately $2.4 million during 1999 in connection with remediating its
systems.
As a result of its Year 2000 readiness efforts, the Company's mission
critical information technology and non-information technology systems
successfully distinguished between the year 1900 and the year 2000 on January
1, 2000, without any mission critical application failure. However, the Company
will continue to monitor its mission critical computer applications throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
It is possible that the Company may experience Year 2000 related
problems in the future, particularly with its non-mission critical systems,
which may result in failures or miscalculations resulting in inaccuracies in
computer output or disruptions of operations. However, the Company believes
that the Year 2000 issue will not pose significant operations problems for its
mission critical computer systems and equipment.
The financial impact of future remediation activities that may become
necessary, if any, cannot be known precisely at this time, but it is not
expected to be material.
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
divestiture strategy; competition for expansion opportunities; efforts to
control healthcare costs; exposure to professional liability; pharmacy licensing
requirements; healthcare reform legislation; implementation of the Company's
settlement agreement with the State of California; adverse resolution of
lawsuits pending against the Company; implementation of the Company's strategic
plan; and the Company's liquidity and capital requirements. 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.
There are various legal matters which, if materially adversely
determined, could have a material adverse effect on the Company's operating
results and financial condition. See Item 3 of the Company's Annual Report
filed on Form 10-K for the fiscal year ended December 31, 1999 and Notes 5 and
7 of the unaudited condensed consolidated financial statements included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
related to its long-term debt. The impact on earnings and value of its current
and long-term debt is subject to change as a result of movements in market
rates and prices. As of March 31, 2000, the Company had $334.2 million in
long-term debt subject to variable interest rates. The remaining $870.0 million
in long-term debt is subject to fixed rates of interest. The Company had $19.8
million in current debt subject to variable interest rates. A hypothetical
increase in interest rates of 1% would result in potential reductions in future
pre-tax earnings of approximately $3.5 million per year. The impact of such a
change on the carrying value of the current and long-term debt would not be
significant. These amounts are determined based on the impact of the
hypothetical interest rates on the Company's current and long-term debt
balances and do not consider the effects, if any, of the potential changes in
the overall level of economic activity that could exist in such an environment.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain legal actions arising in the ordinary
course of business. The Company is named as a defendant in various legal actions
arising primarily out of services rendered by physicians and others employed by
its managed medical groups, as well as personal injury and employment disputes.
In addition, certain of its managed 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 and/or 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 that would have a material
adverse effect on the operating results and financial condition of the Company.
In June 1995, Caremark and CII agreed to settle an investigation with
certain agencies of the United States government (the "Government Settlement").
The Government Settlement allows Caremark and CII to continue participating in
Medicare, Medicaid, and other government healthcare programs. In the Government
Settlement, Caremark and CII agreed to continue to maintain certain
compliance-related oversight procedures until June 15, 2000. Should these
oversight procedures reveal credible evidence of legal or regulatory
violations, Caremark and CII are required to report such violations to the OIG
and DOJ. Caremark and CII are therefore subject to increased regulatory
scrutiny and, in the event that either Caremark or CII 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 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
Government Settlement, Caremark and CII are the subject of various
non-governmental claims and may in the future become subject to additional OIG-
related claims. Caremark and CII are the subject of, and may in the future be
subjected to, various private suits and claims being asserted in connection
with matters relating to the OIG settlement by CII's former 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.
In 1993, independent and retail chain pharmacies filed a group of
antitrust lawsuits, and a class action lawsuit, against brand name
pharmaceutical manufacturers, wholesalers and PBM companies. Caremark was named
as a defendant in these lawsuits in 1994, but was not named in the class action.
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 attorney's fees and expenses.
All of these actions have been transferred by the Judicial Panel for
Multi-District 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 the pharmaceutical
manufacturers. The amended settlement provides for a cash payment by the
defendants in the class action (which does not include Caremark) of
approximately $351 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 this
settlement, although numerous additional settlements have been reached between
a number of parties to the class and individual manufacturers. The class action
conspiracy claims against the remaining defendants were tried in the fall of
1998, and resulted in a judgment by the court at the close of the plaintiffs'
case in favor of the remaining defendants. That judgment was affirmed in part
and reversed and remanded in part and is currently undergoing further
proceedings in the district court and the court of appeals, which may result in
a second trial of the class
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action or its dismissal on the merits. It is expected that trials of the
non-class action conspiracy claims brought by opt-out individual plaintiffs
under the Sherman Act, to the extent they have not been settled or dismissed,
will move forward in 2000 to a decision on summary judgment or to trial and
likely will also precede the trial of any Robinson-Patman Act claims.
In March 1998, a consortium of insurance companies and third-party
private payors sued Caremark and CII in the United States District Court for the
Northern District of Illinois. The complaint alleges that Caremark's home
infusion division, which was sold by Caremark in 1995 and is reported in the
unaudited condensed consolidated financial statements as discontinued
operations, implemented a scheme to submit fraudulent claims for payment to
payors which the payors unwittingly paid, and seeks unspecified damages, treble
damages and attorney's fees and expenses. A tentative settlement has been
reached among the parties to this case.
The Company's California PPM operations included MedPartners Provider
Network, Inc. ("MPN"), a wholly-owned subsidiary of the Company and a
healthcare service plan licensed under the Knox-Keen Health Care Service Plan
Act of 1975. In March 1999, the California Department of Corporations (the
"DOC") appointed a conservator and assumed control of the business operations
of MPN. The conservator, purportedly on behalf of MPN, filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code. The Company
judicially challenged the authority of both the DOC and the conservator to take
these actions in both the California Superior Court and in the United States
Bankruptcy Court for the Central District of California (the "Bankruptcy
Court").
The Company, MPN, and representatives of the State of California (the
"State") subsequently executed an agreement to settle the disputes relating to
MPN (the "Settlement Agreement"), which was approved by the Bankruptcy Court.
The Company, various of its subsidiaries, MPN, certain managed physician
practices and various health plans executed a supplemental agreement (the
"Supplemental Plan Agreement"), pursuant to which (1) the parties to the
Supplemental Plan Agreement agreed to subordinate, waive and/or release various
claims against one another on the terms and conditions set forth therein, and
(2) the health plans agreed to support the Chapter 11 plan of reorganization
(the "Plan of Reorganization") to be filed by MPN. The Supplemental Plan
Agreement was approved by the Bankruptcy Court following a hearing on February
7, 2000. MPN filed an initial draft of the Plan of Reorganization on November 5,
1999. An amended Plan of Reorganization, accompanied by a revised disclosure
statement, was filed with the Bankruptcy Court on February 3, 2000. MPN has
reached an agreement on the amounts of allowed claims with the majority of
the providers owed funds by MPN. The Plan of Reorganization continues to be the
subject of ongoing negotiations involving MPN, the Company, and parties in
interest in MPN's bankruptcy case. Neither the disclosure statement nor the Plan
of Reorganization have yet been approved by the Bankruptcy Court.
Pursuant to the Provider Self-Disclosure Protocol of the OIG, the
Company has conducted a voluntary investigation of the practices of an
affiliate known as Home Health Agency of Greater Miami, doing business as
AmCare ("AmCare"). The investigation uncovered several potentially
inappropriate practices by certain managers at AmCare, some of which may have
resulted in overpayments from federal programs for AmCare's home health
services. The Company has since terminated these managers, ceased AmCare's
operations, and reported the matter to the OIG. While the OIG has not yet
responded to the Company's internal investigation report, and therefore the
resolution of this matter is as yet unknown, it is likely that the government
will determine that overpayments were made which require repayment by the
Company. The Company's estimates of the repayments due have been accrued in the
financial statements.
In 1999, two lawsuits were filed in the Supreme Court of the State of
New York, City of New York, claiming that a "Termination Event" had occurred
with respect to the Threshold Appreciation Price Securities ("TAPS") issued by
the Company in September 1997. One of these lawsuits, which involved plaintiffs
holding approximately 35 percent of the outstanding TAPS, was settled by the
Company in April 2000 (the "New York Settlement"). As a result, the lawsuit was
dismissed with prejudice, and the Company has issued common stock and paid
accrued interest on the related TAPS through April 14, 2000. The Company
received approximately $168 million in cash from the cancellation of the related
TAPS, which was used to reduce indebtedness under the credit facility.
Approximately $148 million was applied to the revolving credit facility, and
will only be used to retire the Senior Subordinated Notes. The remaining $20
million was applied to the term loans under the Company's credit facility. The
remaining lawsuit in New York has also been dismissed.
In March 2000, a purported class action was filed in the Circuit Court
of Franklin County, Alabama, also claiming that a Termination Event had
occurred. This lawsuit has since been certified by the court as a "non-opt out"
class action, and therefore includes all TAPS holders other than those included
in the New York Settlement. The Company has reached a settlement in this
lawsuit, which has received preliminary court approval and remains subject to
final court approval following customary class notices and hearings. In
connection with the Alabama Settlement, all remaining TAPS holders have agreed
to surrender their TAPS on August 31, 2000, the date required by the TAPS
documents, even if the settlement transaction has not been finalized. The
Company anticipates using proceeds of the U.S. Treasury Notes securing the
outstanding TAPS and amounts available under the Credit Agreement, as discussed
above, to repay its Senior Subordinated Notes coming
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due in September 2000. If the proceeds of the U.S. Treasury Notes are not
available to the Company as contemplated by the Alabama Settlement, then the
Company may not have funds available to repay its Senior Subordinated Notes when
due.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against it, there can be no
assurance that the lawsuits will not have a disruptive effect upon the
operations of the business, that the defense of the lawsuits will not consume
the time and attention of senior management of Caremark Rx and its
subsidiaries, or that the resolution of the lawsuits will not have a material
adverse effect on the operating results and financial condition of the Company.
The Company intends to vigorously defend each of these lawsuits. The Company
believes that these lawsuits will not have a material adverse effect on the
operating results and financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On March 1, 1995, the Company's Board of Directors declared a dividend
of one preferred purchase right (an "Original Right") for each outstanding share
of the Company's common stock. The Original Rights granted the holder the right
to purchase from the Company one one-hundredth of a share of Series C Junior
Participating Preferred Stock of the Company, par value $.001 per share (the
"Preferred Shares"), at a price of $52.00 (the "Rights Purchase Price") per one
one-hundredth of a Preferred Share, subject to adjustment. The Original Rights
granted the holder the right to purchase the Preferred Shares commencing on the
tenth day following the earlier of the acquisition by any person of the
beneficial ownership of 10% or more of the Company's outstanding common stock or
the announcement of a tender offer or exchange wherein any person would acquire
beneficial ownership of 10% or more of the Company's outstanding common stock.
On February 1, 2000, the Company amended and restated the rights
agreement. The amendment did not change the number of Preferred Shares to be
purchased upon exercise of any right nor did it change the Rights Purchase
Price. The amendment did, however, change the terms under which holders may
exercise the rights. As amended, holders of rights may exercise the rights
commencing on the tenth day following the earlier of the acquisition by any
person of the beneficial ownership of 20% or more of the Company's outstanding
common stock or the announcement of a tender offer or exchange wherein any
person would acquire beneficial ownership of 20% or more of the Company's
outstanding common stock.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits required by Regulation S-K are set forth in the following
list:
<TABLE>
<S> <C>
2.1 Amendment No. 8 to the Amended and Restated Operations and Settlement
Agreement, dated as of January 31, 2000, among the Commissioner of the
Department of Corporations of the State of California acting for
himself and for the Department of Corporations of the State of
California, J. Mark Abernathy as Special Monitor, the Company and it
successors and assigns, and MedPartners Provider Network, Inc., a
California corporation, filed as Exhibit 2.9 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, is
hereby incorporated herein by reference.
2.2 Amendment No. 9 to the Amended and Restated Operations and Settlement
Agreement, dated as of February 7, 2000, among the Commissioner of the
Department of Corporations of the State of California acting for
himself and for the Department of Corporations of the State of
California, J. Mark Abernathy as Special Monitor, the Company and its
successors and assigns, and MedPartners Provider Network, Inc., a
California corporation, filed as Exhibit 2.10 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, is
hereby incorporated herein by reference.
2.3 Amendment No. 10 to the Amended and Restated Operations and Settlement
Agreement, dated as of February 15, 2000, among the Commissioner of
the Department of Corporations of the State of California acting for
himself and for the Department of Corporations of the State of
California, J. Mark Abernathy as Special Monitor , the Company and its
successors and assigns, and MedPartners Provider Network, Inc., a
California corporation, filed as Exhibit 2.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, is
hereby incorporated herein by reference.
2.4 Amendment No. 11 to the Amended and Restated Operations and Settlement
Agreement, dated as of February 25, 2000, among the Commissioner of
the Department of Corporations of the State of California acting for
himself and for the Department of Corporations of the State of
California, J. Mark Abernathy as Special Monitor , the Company and its
successors and assigns, and MedPartners Provider Network, Inc., a
California corporation, filed as Exhibit 2.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, is
hereby incorporated herein by reference.
2.5 Amendment No. 12 to the Amended and Restated Operations and Settlement
Agreement, dated as of February 28, 2000, among the Commissioner of
the Department of Corporations of the State of California acting for
himself and for the Department of Corporations of the State of
California, J. Mark Abernathy as Special Monitor , the Company and its
successors and assigns, and MedPartners Provider Network, Inc., a
California corporation, filed as Exhibit 2.13 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, is
hereby incorporated herein by reference.
2.6 Amendment No. 13 to the Amended and Restated Operations and Settlement
Agreement, dated as of March 15, 2000, among the Commissioner of the
Department of Corporations of the State of California acting for
himself and for the Department of Corporations of the State of
California, J. Mark Abernathy as Special Monitor, the Company and its
successors and assigns, and MedPartners Provider Network, Inc., a
California corporation.
2.7 Amendment No. 14 to the Amended and Restated Operations and Settlement
Agreement, dated as of March 31, 2000, among the Commissioner of the
Department of Corporations of the State of California acting for
himself and for the Department of Corporations of the State of
California, J. Mark Abernathy as Special Monitor, the Company and its
successors and assigns, and MedPartners Provider Network, Inc., a
California corporation.
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 Certificate of Ownership and Merger, merging Caremark Rx, Inc. into
MedPartners, Inc. filed as Exhibit 99.2 to the Company's Current
Report on Form 8-K filed on September 14, 1999, is hereby incorporated
herein by reference.
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
3.3 MedPartners, Inc. Fourth Amended and Restated Bylaws, filed as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, is hereby incorporated herein by reference.
4.1 Amended and Restated Rights Agreement, dated as of February 1, 2000,
between Caremark Rx, Inc. and First Chicago Trust Company, filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K filed on
February 4, 2000, is hereby incorporated herein by reference.
4.2 Purchase Contract Agreement, dated September 15, 1997, between
MedPartners, Inc. and The First National Bank of Chicago, filed as
Exhibit 4.4 to the Company's Registration Statement of Form S-3
(Registration No. 333-35665), is hereby incorporated herein by
reference.
4.3 Pledge Agreement, dated September 15, 1997, by and between
MedPartners, Inc., PNC Bank, Kentucky, Inc. and The First National
Bank of Chicago, filed as Exhibit 4.5 to the Company's Registration
Statement of Form S-3 (Registration No. 333-35665), is hereby
incorporated herein by reference.
4.4 Form of Common Stock Certificate of the Company filed as Exhibit 4.6
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, is hereby incorporated herein by reference.
4.5 Certificate of Trust of Caremark Rx Capital Trust I, filed as Exhibit
4.1 to Amendment No. 1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1999, is hereby
incorporated herein by reference.
4.6 Trust Agreement of Caremark Rx Capital Trust I dated as of September
10, 1999, by and between the Company, the Wilmington Trust Company,
and the Administrative Trustees named therein, filed as Exhibit 4.2 to
Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1999, is hereby incorporated herein
by reference.
4.7 Amended and Restated Trust Agreement dated as of September 29, 1999,
by and between the Company, the Wilmington Trust Company, and the
Holders named therein, filed as Exhibit 4.3 to Amendment No. 1 to the
Company's Quarterly Report on Form 10-Q for the first fiscal quarter
ended September 30, 1999, is hereby incorporated herein by reference.
4.8 Indenture for the Convertible Subordinated Debentures due 2029 dated
as of September 29, 1999 between the Company, and the Wilmington Trust
Company, filed as Exhibit 4.4 to Amendment No. 1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 1999, is hereby incorporated herein by reference.
4.9 Form of Common Securities, filed as Exhibit 4.5 to Amendment No. 1 of
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1999, is hereby incorporated herein by reference.
4.10 Form of SPURS, filed as Exhibit 4.6 to Amendment No. 1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1999, is hereby incorporated herein by reference.
4.11 Form of Convertible Subordinated Debentures due 2029, filed as Exhibit
4.7 to Amendment No. 1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1999, is hereby
incorporated herein by reference.
4.12 Guarantee Agreement dated as of September 29, 1999 by and between the
Company and the Wilmington Trust Company, filed as Exhibit 4.8 to
Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1999, is hereby incorporated herein
by reference.
10.1 Amendment and Waiver No. 15 to the Third Amended and Restated Credit
Agreement, dated January 20, 2000 by and between the Company,
NationsBank, N.A., Credit Lyonnais New York Branch, The First National
Bank of Chicago, Morgan Guaranty Trust Company of New York, and
NationsBanc Montgomery Securities LLC, filed as Exhibit 10.40 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, is hereby incorporated herein by reference.
10.2 Amendment and Waiver No. 16 to the Third Amended and Restated Credit
Agreement dated February 3, 2000, by and between the Company,
NationsBank, N.A., Credit Lyonnais New York Branch, The First National
Bank of Chicago, Morgan
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
Guaranty Trust Company of New York, and NationsBanc Montgomery
Securities LLC, filed as Exhibit 10.41 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, is hereby
incorporated herein by reference.
(27) Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K
The Company's Current Report on Form 8-K filed on February 4, 2000
(reporting, under Item 5, the adoption of the Company's Amended and Restated
Rights Agreement).
No other Items of Part II are applicable to the Company for the period
covered by this Quarterly Report on Form 10-Q.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Caremark Rx, Inc.
By: /s/ HOWARD A. MCLURE
--------------------------------------
Howard A. McLure
Executive Vice President and
Chief Financial Officer
Date: May 15, 2000
20
<PAGE> 1
EXHIBIT 2.6
AMENDMENT NO. 13 TO THE AMENDED AND
RESTATED OPERATIONS AND SETTLEMENT AGREEMENT
This Amendment No. 13 ("Amendment") to the Amended and Restated Operations
and Settlement Agreement, as amended, (the "Agreement") is entered into as of
March 15, 2000, among the Commissioner of the Department of Corporations of the
State of California (the "Commissioner" acting for himself and the Department of
Corporations of the State of California (collectively, the "State")), J. Mark
Abernathy, as Special Monitor-Examiner, Caremark Rx, Inc., a Delaware
corporation, f/k/a MedPartners, Inc., and its successors and assigns
("MedPartners") and MedPartners Provider Network, Inc., a California corporation
("MPN"), as a debtor and debtor in possession in the Bankruptcy Case.
Capitalized terms not otherwise defined herein shall have the meanings ascribed
to them in the Agreement.
RECITALS
WHEREAS, the parties entered into the Agreement as of June 16, 1999; and
WHEREAS, the parties have previously entered into Amendments Nos. 1 through
12 to the Agreement.
NOW THEREFORE, in consideration of the mutual covenant and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
AGREEMENT
1. The second sentence of Subsection 3.8(b) of the Agreement is hereby
amended by deleting "March 15, 2000" and inserting in its place "March 31,
2000."
2. The Agreement shall remain unchanged in all other respects.
3. This Amendment may be executed in one or more counterparts each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same agreement.
Delivery of an executed counterpart of this Amendment by facsimile shall be
equally effective as delivery of an original executed counterpart of this
Amendment.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
CAREMARK RX, INC.,
A DELAWARE CORPORATION
By:
-----------------------------------
Edward L. Hardin, Jr.
Title: EVP
--------------------------------
MEDPARTNERS PROVIDER NETWORK, INC.,
A CALIFORNIA CORPORATION
By:
-----------------------------------
Don Garner
Title: Corporate Secretary
--------------------------------
COMMISSIONER OF THE DEPARTMENT OF
CORPORATIONS
By:
-----------------------------------
William Kenefick
Title: Acting Commissioner of the
Department of Corporations
J. MARK ABERNATHY,
AS SPECIAL MONITOR-EXAMINER AND NOT
INDIVIDUALLY
By:
-----------------------------------
Title: J. Mark Abernathy,
as Special Monitor-Examiner
<PAGE> 1
EXHIBIT 2.7
AMENDMENT NO. 14 TO THE AMENDED AND
RESTATED OPERATIONS AND SETTLEMENT AGREEMENT
This Amendment No. 14 ("Amendment") to the Amended and Restated Operations
and Settlement Agreement, as amended, (the "Agreement") is entered into as of
March 31, 2000, among the Commissioner of the Department of Corporations of the
State of California (the "Commissioner" acting for himself and the Department of
Corporations of the State of California (collectively, the "State")), J. Mark
Abernathy, as Special Monitor-Examiner, Caremark Rx, Inc., a Delaware
corporation, f/k/a/ MedPartners, Inc., and its successors and assigns
("MedPartners") and MedPartners Provider Network, Inc., a California corporation
("MPN"), as a debtor and debtor in possession in the Bankruptcy Case.
Capitalized terms not otherwise defined herein shall have the meanings ascribed
to them in the Agreement.
RECITALS
WHEREAS, the parties entered into the Agreement as of June 16, 1999; and
WHEREAS, the parties have previously entered into Amendments Nos. 1 through
13 to the Agreement.
NOW THEREFORE, in consideration of the mutual covenant and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
AGREEMENT
1. The second sentence of Subsection 3.8(b) of the Agreement is hereby
amended by deleting "March 31, 2000" and inserting in its place "May 1, 2000;
provided, however, that the Creditors Committee shall have the right to file
objections to pre-petition Claims through the effective date of MPN's Plan of
Reorganization, or such other date as is provided for in the Plan of
Reorganization once confirmed."
2. Section 13.2 of the Agreement is hereby amended by deleting "March 31,
2000" and inserting in its place "May 1, 2000."
3. The Agreement shall remain unchanged in all other respects.
4. This Amendment may be executed in one or more counterparts each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same agreement.
Delivery of an executed counterpart of this Amendment by facsimile shall be
equally effective as delivery of an original executed counterpart of this
Amendment.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
CAREMARK RX, INC.,
A DELAWARE CORPORATION
By:
-----------------------------------
Edward L. Hardin, Jr.
Title: EVP
--------------------------------
MEDPARTNERS PROVIDER NETWORK, INC.,
A CALIFORNIA CORPORATION
By:
-----------------------------------
Don Garner
Title: Corporate Secretary
--------------------------------
COMMISSIONER OF THE DEPARTMENT OF
CORPORATIONS
By:
-----------------------------------
William Kenefick
Title: Acting Commissioner of the
Department of Corporations
J. MARK ABERNATHY,
AS SPECIAL MONITOR-EXAMINER AND NOT
INDIVIDUALLY
By:
-----------------------------------
Title: J. Mark Abernathy,
as Special Monitor-Examiner
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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200,000
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