<PAGE> 1
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UNITED STATES
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 SEPTEMBER 30, 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)
<TABLE>
<S> <C>
DELAWARE 63-1151076
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 733-8996
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] 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>
CLASS OUTSTANDING AT OCTOBER 23, 2000
<S> <C>
Common Stock, Par Value $.001 Per Share 229,456,119*
</TABLE>
* Includes 7,954,510 shares held in trust to be utilized in employee benefit
plans.
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<PAGE> 2
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.
"Forward-looking statements" are contained in this document primarily 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.
Factors which could adversely affect the Company's operations and financial
results include, but are not limited to, the following:
Risks relating to the Company's closure or divestiture of its Physician
Practice Management ("PPM") business, including those related to the MPN
(as defined herein) 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.
2
<PAGE> 3
CAREMARK RX, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 2000
(Unaudited) and December 31, 1999......................... 4
Condensed Consolidated Statements of Operations
(Unaudited) -- Three Months Ended September 30, 2000
and 1999.................................................. 5
Condensed Consolidated Statements of Operations
(Unaudited) -- Nine Months Ended September 30, 2000
and 1999.................................................. 6
Condensed Consolidated Statements of Cash Flows
(Unaudited) -- Nine Months Ended September 30, 2000
and 1999.................................................. 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 20
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities and Use of Proceeds................... 23
Item 6. Exhibits and Reports on Form 8-K............................ 24
</TABLE>
3
<PAGE> 4
CAREMARK RX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,760 $ 6,797
Accounts receivable, less allowances for doubtful accounts
of $14,370 in 2000 and $14,146 in 1999................. 192,299 229,332
Inventories............................................... 146,444 159,031
Prepaid expenses and other current assets................. 14,799 14,880
Current assets of discontinued operations................. 42,629 124,616
----------- -----------
Total current assets.............................. 412,931 534,656
Property and equipment, net of accumulated depreciation of
$95,223 in 2000 and $80,458 in 1999....................... 101,212 108,168
Intangible assets, net of accumulated amortization of
$19,354 in 2000 and $15,500 in 1999....................... 37,486 41,080
Other assets................................................ 49,082 54,089
Non-current assets of discontinued operations............... 26,039 32,853
----------- -----------
Total assets...................................... $ 626,750 $ 770,846
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 326,887 $ 275,119
Other accrued expenses and liabilities.................... 157,309 162,768
Income taxes payable...................................... 2,264 6,978
Current portion of long-term debt......................... 259,691 19,371
Current liabilities of discontinued operations............ 104,467 99,170
----------- -----------
Total current liabilities......................... 850,618 563,406
Long-term debt, net of current portion...................... 450,000 1,230,025
Other long-term liabilities................................. 57,548 46,453
Long-term liabilities of discontinued operations............ 4,606 12,437
----------- -----------
Total liabilities................................. 1,362,772 1,852,321
Contingencies (Note 9)
Convertible preferred securities............................ 200,000 200,000
Stockholders' deficit:
Common stock, $.001 par value; 400,000 shares authorized;
issued -- 229,403 in 2000 and 199,523 in 1999.......... 229 200
Additional paid-in capital................................ 1,435,044 952,432
Shares held in trust, 8,269 in 2000 and 8,383 in 1999..... (133,300) (135,141)
Accumulated deficit and other comprehensive loss.......... (2,237,995) (2,098,966)
----------- -----------
Total stockholders' deficit....................... (936,022) (1,281,475)
----------- -----------
Total liabilities and stockholders' deficit....... $ 626,750 $ 770,846
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
CAREMARK RX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- --------
<S> <C> <C>
Net revenue................................................. $1,089,362 $812,996
Operating expenses:
Cost of revenues.......................................... 1,004,464 738,054
Selling, general and administrative....................... 27,256 24,907
Depreciation and amortization............................. 6,248 5,594
Net interest expense...................................... 22,291 29,335
---------- --------
Income from continuing operations before income taxes....... 29,103 15,106
Income tax expense.......................................... 2,182 1,179
---------- --------
Income from continuing operations........................... 26,921 13,927
Preferred security dividends, net of tax benefit of $265 in
2000 and $3 in 1999....................................... 3,273 35
---------- --------
Net income available to common stockholders................. $ 23,648 $ 13,892
========== ========
Earnings per common share -- basic:
Net income available to common stockholders............... $ 0.11 $ 0.07
========== ========
Average number of common shares outstanding -- basic........ 209,502 190,780
========== ========
Earnings per common share -- diluted:
Net income available to common stockholders............... $ 0.11 $ 0.07
========== ========
Average number of common shares outstanding -- diluted...... 218,852 197,238
========== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
CAREMARK RX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net revenue................................................. $3,226,366 $2,394,261
Operating expenses:
Cost of revenues.......................................... 2,973,637 2,179,006
Selling, general and administrative....................... 82,603 72,560
Depreciation and amortization............................. 18,731 16,256
Net interest expense...................................... 76,592 86,895
---------- ----------
Income from continuing operations before income taxes....... 74,803 39,544
Income tax expense.......................................... 5,610 3,087
---------- ----------
Income from continuing operations........................... 69,193 36,457
Preferred security dividends, net of tax benefit of $790 in
2000 and $3 in 1999....................................... 9,748 35
---------- ----------
Income from continuing operations available to common
stockholders.............................................. 59,445 36,422
Loss from discontinued operations........................... (198,000) (199,310)
---------- ----------
Net loss to common stockholders............................. $ (138,555) $ (162,888)
========== ==========
Earnings (loss) per common share -- basic:
Income from continuing operations available to common
stockholders........................................... $ 0.30 $ 0.19
Loss from discontinued operations......................... (0.99) (1.04)
---------- ----------
Net loss to common stockholders........................... $ (0.69) $ (0.85)
========== ==========
Average number of common shares outstanding -- basic........ 200,684 190,622
========== ==========
Earnings (loss) per common share -- diluted:
Income from continuing operations available to common
stockholders........................................... $ 0.29 $ 0.19
Loss from discontinued operations......................... (0.96) (1.02)
---------- ----------
Net loss to common stockholders........................... $ (0.67) $ (0.83)
========== ==========
Average number of common shares outstanding -- diluted...... 206,981 195,107
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
CAREMARK RX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Income from continuing operations......................... $ 69,193 $ 36,457
Adjustments for non-cash items:
Non-cash interest expense............................ 4,985 4,152
Depreciation and amortization........................ 18,731 16,256
Changes in operating assets and liabilities, net of
effects of acquisitions of businesses.................. 94,875 80,525
--------- ---------
Net cash and cash equivalents provided by continuing
operations................................................ 187,784 137,390
Investing activities:
Acquisitions of businesses................................ -- (12,548)
Net purchase of property and equipment.................... (13,921) (12,757)
--------- ---------
Net cash and cash equivalents used in investing
activities................................................ (13,921) (25,305)
Financing activities:
Net repayments under credit facility...................... (119,705) (554,662)
Accounts receivable securitization........................ -- 14,690
Proceeds from issuance of common stock.................... 484,276 2,049
Payments on subordinated debt............................. (420,000) --
Net proceeds from issuance of preferred securities........ -- 193,000
Dividend payments on preferred securities................. (10,568) --
Debt and preferred securities issuance costs.............. (374) (3,162)
Other..................................................... -- (404)
--------- ---------
Net cash and cash equivalents used in financing
activities................................................ (66,371) (348,489)
Cash paid for special charges............................... (4,603) (3,596)
Cash provided by (used in) discontinued operations.......... (92,926) 237,064
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 9,963 (2,936)
Cash and cash equivalents at beginning of period............ 6,797 23,100
--------- ---------
Cash and cash equivalents at end of period.................. $ 16,760 $ 20,164
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
7
<PAGE> 8
CAREMARK RX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1. BUSINESS AND 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 employers, insurance companies, unions, government employee groups and
managed care organizations throughout the United States in delivering
prescription drugs 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 to be expected for a 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 Company's December
31, 1999, audited consolidated financial statements and notes thereto which
appear in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 10, 2000.
The preparation of 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 PPM operations, as discussed
in Note 8, could differ from those estimates.
Certain prior period amounts have been reclassified to conform to the
current period's presentation. Such reclassifications had no material effect on
the previously reported consolidated financial position, results of operations
or cash flows of the Company.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB No. 25" ("FIN No. 44"). FIN No. 44
clarifies the application of Accounting Principles Board Opinion No. 25 ("APB
25") for certain issues including: (1) the definition of "employee" for purposes
of applying APB 25, (2) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (3) the accounting consequences of various modifications
to the terms of a previously fixed stock option award, and (4) the accounting
for an exchange of stock compensation awards in a business combination. The
Company adopted FIN No. 44 on July 1, 2000, and this adoption did not have a
material impact on the Company's financial position or results of operations.
NOTE 3. INCOME TAXES
Significant variations exist in the customary relationship between income
tax expense and pretax income because the Company has generated net operating
losses or utilized net operating loss carryforwards to offset its taxable
federal income and certain taxable state income. Consequently, the Company has
provided for an income tax rate of 7.5% on income from continuing operations,
which represents its aggregate effective state income tax and federal
alternative minimum tax rate.
8
<PAGE> 9
CAREMARK RX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. LONG-TERM DEBT
Information with respect to the Company's long-term debt at September 30,
2000, and December 31, 1999, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Credit facility due 2001:
Term loans (10.39% to 10.64% at September 30, 2000)...... $ 36,691 $ 111,396
Revolving facility (9.89% to 11.75% at September 30,
2000)................................................. 223,000 268,000
--------- ----------
259,691 379,396
7.375% senior notes due 2006............................... 450,000 450,000
6.875% senior subordinated notes due 2000.................. -- 420,000
--------- ----------
709,691 1,249,396
Less: amounts due within one year.......................... (259,691) (19,371)
--------- ----------
$ 450,000 $1,230,025
========= ==========
</TABLE>
The Company has a credit facility with Bank of America, N.A., as
administrative agent. The Company has pledged the capital stock of Caremark
International Inc., which owns Caremark, as security for amounts outstanding.
The credit facility, which matures in June 2001, is guaranteed by the Company's
material subsidiaries and consists of the following:
- An amortizing tranche A term loan with $12.7 million outstanding at
September 30, 2000. Quarterly principal payments on this term loan began
in November 1999.
- A non-amortizing tranche B term loan with $24.0 million outstanding at
September 30, 2000.
- A revolving credit facility in an aggregate principal amount of up to
$400.0 million. At September 30, 2000, the Company had $223.0 million in
borrowings and $63.9 million in letters of credit under the revolving
credit facility. The Company had $113.1 million available for borrowing
under the revolving credit facility as of September 30, 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 varying margins. The Company is also required to
repay the term loans ratably with 100% of the net cash proceeds received from
certain issuances of equity or debt or from extraordinary receipts, and with 50%
of the excess cash flow (as defined in the credit facility) 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, or
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's
making certain additional investments in its California PPM business.
9
<PAGE> 10
CAREMARK RX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents all non-owner changes in the
Company's stockholders' deficit. Information with respect to the Company's
comprehensive income (loss) is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Beginning of period balances:
Accumulated deficit.............................. $(2,093,860) $(1,950,441)
Accumulated other comprehensive loss............. (5,106) (5,874)
----------- -----------
Accumulated deficit and other comprehensive
loss........................................ (2,098,966) (1,956,315)
Changes during period:
Comprehensive loss:
Income from continuing operations............. 69,193 59,146
Loss from discontinued operations............. (198,000) (199,310)
----------- -----------
Net loss........................................... (128,807) (140,164)
Preferred security dividends....................... (9,748) (3,255)
----------- -----------
Net loss to common stockholders.................... (138,555) (143,419)
Other comprehensive income
(loss) -- unrealized gain (loss) on
marketable securities....................... (474) 768
----------- -----------
Comprehensive loss to common stockholders... (139,029) (142,651)
End of period balances:
Accumulated deficit.............................. (2,232,415) (2,093,860)
Accumulated other comprehensive loss............. (5,580) (5,106)
----------- -----------
Accumulated deficit and other comprehensive
loss........................................ $(2,237,995) $(2,098,966)
=========== ===========
</TABLE>
NOTE 6. CONVERTIBLE PREFERRED SECURITIES
In September 1999, the Company, through its wholly-owned subsidiary
Caremark Rx Capital Trust I (the "Trust"), privately placed 4.0 million shares
($200.0 million aggregate face value) of 7% shared preference redeemable
securities ("Convertible Preferred Securities"). The sole assets of the Trust,
which has no business operations apart from administration of the Convertible
Preferred Securities, are the 7% convertible subordinated debentures of the
Company, maturing October 1, 2029, with principal amount of $206.2 million (the
"Trust Debentures"). The Trust is the sole holder of the Trust Debentures.
Each Convertible Preferred Security may be converted, at the option of the
holder, into shares of the Company's common stock at the 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). The conversion of all
Convertible Preferred Securities would result in the Company's issuance of
approximately 26.9 million shares of common stock.
All Convertible Preferred Securities outstanding on October 1, 2029, must
be redeemed by the Company; however, any or all of the Convertible Preferred
Securities may be redeemed at the option of the Company beginning October 15,
2002, at prices ranging from $52.00 to $50.00 plus accumulated and unpaid
dividends per Convertible Preferred Security.
Dividends on the Convertible Preferred Securities are payable at an annual
rate of 7% of the liquidation amount of $50.00 per Convertible Preferred
Security. These dividends are cumulative and are payable in arrears on the first
day of each calendar quarter.
10
<PAGE> 11
CAREMARK RX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Considered together, (1) the Company's guaranty, to the extent that the
Trust has funds available, of distribution and liquidation payments on the
Convertible Preferred Securities and (2) the Company's obligations under (a) the
Trust Debentures and the related indenture and (b) the Trust's trust agreement,
provide a full and unconditional guarantee by the Company of amounts payable in
respect to the Convertible Preferred Securities issued by the Trust.
NOTE 7. EARNINGS (LOSS) PER COMMON SHARE
The following table reconciles shares used in the Company's computations of
earnings (loss) per common share (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Average number of common shares
outstanding -- basic...................... 209,502 190,780 200,684 190,622
Common stock equivalents -- stock options... 9,350 6,458 6,297 4,485
Common stock equivalents -- Convertible
Preferred Securities(1)................... -- -- -- --
------- ------- ------- -------
Average number of common shares
outstanding -- diluted.................... 218,852 197,238 206,981 195,107
======= ======= ======= =======
</TABLE>
---------------
(1) Conversion of the Convertible Preferred Securities is not reflected due to
the anti-dilutive effect of such presumed conversion for all periods
presented. See Note 6 -- "Convertible Preferred Securities."
Options to purchase approximately 8.3 million shares of the Company's
common stock at $8.938 to $26.188 per share were outstanding during the three
months ended September 30, 2000, but were excluded from the calculation of
average number of common shares outstanding -- diluted, because the options'
exercise prices were greater than the average market price of the common shares
underlying such options during the period.
Options to purchase approximately 9.2 million shares of the Company's
common stock at $6.375 to $26.188 per share were outstanding during the nine
months ended September 30, 2000, but were excluded from the calculation of
average number of common shares outstanding -- diluted, because the options'
exercise prices were greater than the average market price of the common shares
underlying such options during the period. Approximately 8.8 million of these
options were outstanding at September 30, 2000.
NOTE 8. 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 nine months ended September 30, 2000, the Company completed
the divestiture of three of its PPM practices. As of September 30, 2000, the
Company is operating one remaining PPM practice.
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 by the State of California
11
<PAGE> 12
CAREMARK RX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(the "State") 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 subsequently
executed an agreement to settle the disputes relating to MPN (as amended, the
"Settlement Agreement").
The Company, various of its subsidiaries, MPN, certain managed physician
practices and various health plans executed a supplemental agreement (as
amended, 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 to be filed by MPN. On September 14, 2000, the Bankruptcy Court
entered an order which: (1) confirmed the Second Amended Chapter 11 Plan of MPN
dated July 7, 2000 (the "Plan"); (2) approved the Settlement Agreement; and (3)
approved the Supplemental Plan Agreement. Following the occurrence of the
"Effective Date" of the Plan on October 16, 2000, distributions commenced to the
creditors of MPN from assets of MPN and from letters of credit in the aggregate
amount of $40.0 million provided by the Company pursuant to its funding
commitment described in the Plan. All required distributions are expected to be
completed approximately one year following the Effective Date of the Plan.
NOTE 9. CONTINGENCIES
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 from its continuing operations and its discontinued PPM operations,
including employment disputes, contract disputes, personal injury claims, and
professional liability claims. 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 or financial condition of the Company.
In September 1997 the Company issued 6.50% Threshold Appreciation Price
Securities ("TAPS"). The TAPS were initially secured by $481.4 million in U.S.
Treasury Notes. Under the terms of the purchase contract agreement pursuant to
which the TAPS were issued (the "Purchase Contract"), the Company was to receive
the maturity proceeds from these U.S. Treasury Notes, and the TAPS holders were
to exchange their TAPS for shares of the Company's common stock on August 31,
2000. In 1999, two lawsuits were filed in the Supreme Court of the State of New
York, County of New York, claiming that a "Termination Event", as defined in the
Purchase Contract, which would have resulted in the TAPS holders receiving the
U.S. Treasury Notes, had occurred with respect to the TAPS. Both of these
lawsuits have been dismissed with prejudice. The Company settled one of these
lawsuits, which involved plaintiffs holding approximately 35 percent of the
outstanding TAPS (the "Settling TAPS Holders"), in April 2000 (the "New York
Settlement").
The New York Settlement provided, among other things, that the Settling
TAPS Holders would receive 1.55 shares of the Company's common stock for each
TAPS owned or controlled by them. Accordingly, on April 14, 2000, the Company
delivered 1.55 shares of the Company's common stock for each TAPS tendered by
the Settling TAPS Holders and paid to the Settling TAPS Holders accrued and
unpaid interest due on the U.S. Treasury Notes corresponding to the tendered
TAPS. The Company received approximately $168 million in cash from the
cancellation of the related TAPS.
The New York Settlement provides that, in the event the Company settles
litigation with other holders of TAPS for a greater value per each TAPS, as
measured in accordance with the terms of the settlement agreement, than the
settlement value of the New York Settlement, the Company will pay each Settling
TAPS Holder the difference in value per each TAPS between the settlement value
of the New York Settlement and the settlement value of any settlement with other
holders of TAPS.
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CAREMARK RX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 was subsequently certified by the court as a "non-opt out" class
action, and therefore includes all TAPS holders other than those who were
parties to the New York Settlement. The Company reached a settlement in this
lawsuit (the "Alabama Settlement"), which received final court approval pursuant
to a Final Approval Order and Judgment issued on June 9, 2000 (the "Final
Order") by the Circuit Court of Franklin County, Alabama. On June 19, 2000,
certain TAPS holders filed a notice of appeal to the Supreme Court of Alabama,
questioning the Circuit Court's order denying their motion to intervene and the
adequacy of the settlement. On July 21, 2000, two other TAPS holders filed
notices of appeal to the Supreme Court of Alabama, purporting to appeal on the
same grounds as the June 19, 2000 appeal. The Company believes that the appeals
are without merit and has filed a motion to dismiss these appeals.
As required by the Purchase Contract, on August 31, 2000, the Company
issued approximately 14.2 million shares of its common stock to the class
members in exchange for the same number of outstanding TAPS. The Company
received the remaining $313 million of proceeds related to the TAPS which,
combined with the proceeds received in April 2000 in connection with the New
York Settlement, were used to retire the Company's $420 million senior
subordinated notes which matured on September 1, 2000. The remaining TAPS
proceeds were used to reduce the Company's indebtedness under its credit
facility, with $60 million being applied to term loans and the remainder to the
revolving facility.
Pursuant to an order from the Circuit Court of Franklin County, Alabama
requiring distribution of the class benefits under the Alabama Settlement, on
September 13, 2000, the Company issued to each class member 0.22 shares of the
Company's common stock for each TAPS held by that class member, less each class
member's share of pro rata attorney's fees. The Final Order provided for 25% of
the stock issuable to the class under the Alabama Settlement to be paid as fees
to the attorneys for the class.
On April 11, 2000, certain TAPS holders filed a lawsuit entitled Aragon
Investments, Ltd. et al. v. Caremark Rx, Inc. in the Supreme Court of the State
of New York, County of New York, claiming that a "Termination Event" had
occurred with respect to the TAPS. The Supreme Court of the State of New York
previously postponed further action in the Aragon litigation pending action by
the Circuit Court of Franklin County, Alabama relating to the Alabama
Settlement. The Company does not know what future action, if any, the Supreme
Court of the State of New York will take with respect to this 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. 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
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CAREMARK RX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ultimately move forward to a decision on summary
judgment or to trial and likely will also precede the trial of any
Robinson-Patman Act claims.
Pursuant to the Provider Self-Disclosure Protocol of the Office of
Inspector General ("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.
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 $195.9 million to various parties. The Company
and/or one or more of its subsidiaries remain as guarantor or obligator on these
lease obligations. Approximately 37% of these lease obligations, with end dates
ranging from 2001 to 2017, were assigned to KPC Medical Management, Inc.; KPC
Global Care, Inc. or one of their affiliates (collectively, "KPC"), companies
which acquired a substantial portion of the Company's California PPM operations.
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CAREMARK RX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
OVERVIEW
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 employers, insurance companies,
unions, government employee groups and managed care organizations throughout the
United States in delivering prescription drugs in a cost-effective manner.
The Company's net revenue generally includes 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. 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. Costs of revenues are comprised
primarily of pharmaceutical acquisition costs and the cost of services
associated with dispensing drugs and operating systems.
The Company has added two large managed care contracts since mid-September
1999, the largest of which began on January 1, 2000 (the "Managed Care
Contracts"). While this resulted in higher revenues and higher average revenue
per account, the Company's gross margins (gross profit as a percentage of net
revenue) have decreased. Managed care plans typically involve a higher
concentration of retail pharmacy services, which have lower gross margins than
the Company's mail service pharmacy and specialty therapeutic services. The
Company anticipates its gross margin for the fourth quarter of 2000 to be lower
than that of the corresponding prior year quarter as a result of its adding the
Managed Care Contracts.
The Company had 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 generated, and will
continue to generate, additional tax NOL carryforwards in 2000. If not utilized
to offset future taxable income, these NOL carryforwards will expire on various
dates through 2020. Amounts reflected in income taxes payable on the Company's
condensed consolidated balance sheets set forth elsewhere herein represent: (1)
state taxes in those states where the Company does not have state NOL
carryforwards and (2) alternative minimum taxes for federal income tax purposes.
A discussion of the factors influencing the Company's results of operations
for the three months and the nine months ended September 30, 2000, compared to
the same periods in 1999 follows. All numbers presented in this discussion are
approximations at the level of precision indicated.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
For the three months ended September 30, 2000 and 1999, net revenue was
$1,089.4 million and $813.0 million, respectively, representing an increase of
$276.4 million, or 34.0%, from 1999 to 2000. Key factors contributing to this
growth include new customer contracts, including the Managed Care Contracts,
higher customer retention, additional services provided to existing customers
and drug cost inflation. The Company processed 16.7 million pharmacy claims
during the three months ended September 30, 2000, an increase of 4.4 million
claims, or 35.8%, over the 12.3 million claims processed during the same period
in 1999.
Cost of revenues increased to 92.2% of net revenue during the third quarter
of 2000 from 90.8% for the same period of 1999. This increase is due primarily
to the increased mix of retail revenue to total revenue due
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to the addition of the Managed Care Contracts. Retail claims represented 13.1
million of the 16.7 million pharmacy claims processed during the three months
ended September 30, 2000, compared to 9.3 million of the 12.3 million claims
processed during the same period in 1999.
Selling, general and administrative expense decreased to 2.5% of net
revenue during the third quarter of 2000 from 3.1% in the same period of 1999.
This decrease results primarily from increased sales volumes which do not
require proportional increases in administrative expenses.
Operating income (income from continuing operations before interest and
income taxes) and margins were $51.4 million and 4.7% for the three months ended
September 30, 2000. Operating income and margins were $44.4 million and 5.5% for
the three months ended September 30, 1999. The 15.8% increase in operating
income is primarily due to the growth in revenue. The decrease in operating
margin was due primarily to the addition of the Managed Care Contracts.
Net interest expense was $22.3 million and $29.3 million for the three
months ended September 30, 2000 and 1999, respectively. The period over period
decrease in interest expense resulted primarily from reduced debt levels from
the Company's servicing its $420 million senior subordinated notes, as well as
reductions in amounts due under its credit facility, from operating cash flows
and the TAPS proceeds. The reduction in interest expense due to reduced debt
levels was offset by increases in interest rates on the Company's credit
facility which is subject to variable rates. See "Liquidity and Capital
Resources."
The Company's effective tax rate on income from continuing operations was
7.5% and 7.8% for the third quarters of 2000 and 1999, respectively. This
effective rate is the result of the tax NOL carryforwards discussed above and
tax planning strategies in certain states that allow consolidated return filings
which will allow the Company to utilize its consolidated NOL in these states.
The Company recorded dividends on its Convertible Preferred Securities of
$3.3 million during the three months ended September 30, 2000. See "Liquidity
and Capital Resources -- Convertible Preferred Securities" and Note 6,
"Convertible Preferred Securities" to the Company's unaudited condensed
consolidated financial statements set forth elsewhere herein.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
For the nine months ended September 30, 2000 and 1999, net revenue was
$3,226.4 million and $2,394.3 million, representing an increase of $832.1
million, or 34.8%, from 1999 to 2000. Key factors contributing to this growth
include new customer contracts, including the Managed Care Contracts, higher
customer retention, additional services provided to existing customers and drug
cost inflation. The Company processed 49.9 million pharmacy claims during the
nine months ended September 30, 2000, an increase of 12.6 million claims, or
33.8%, over the 37.3 million claims processed during the same period in 1999.
Cost of revenues increased to 92.2% of net revenue during the first nine
months of 2000 from 91.0% for the same period of 1999. This increase is due
primarily to the increased mix of retail revenue to total revenue due to the
addition of the Managed Care Contracts. Retail claims represented 39.5 million
of the 49.9 million pharmacy claims processed during the nine months ended
September 30, 2000, compared to 28.3 million of the 37.3 million claims
processed during the same period in 1999.
Selling, general and administrative expense decreased to 2.6% of revenue
during the first nine months of 2000 from 3.0% in the same period of 1999. This
decrease results primarily from increased sales volumes which do not require
proportional increases in administrative expenses.
Operating income and margins were $151.4 million and 4.7% for the nine
months ended September 30, 2000. Operating income and margins were $126.4
million and 5.3% for the nine months ended September 30, 1999. The 19.8%
increase in operating income is primarily due to the growth in revenue. The
decrease in operating margin was due primarily to the addition of the Managed
Care Contracts since the second quarter of 1999.
Net interest expense was $76.6 million and $86.9 million for the nine
months ended September 30, 2000 and 1999, respectively. The period over period
decrease in interest expense resulted primarily from decreased
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debt levels from the Company's servicing its $420 million senior subordinated
notes, as well as reductions in amounts due under its credit facility, from
operating cash flows and the TAPS proceeds. The reduction in interest expense
due to reduced debt levels was offset by increases in interest rates on the
Company's credit facility, which is subject to variable rates. See "Liquidity
and Capital Resources."
The Company's effective tax rate on income from continuing operations was
7.5% and 7.8% for the nine months ended September 30, 2000, and 1999,
respectively. This effective rate is the result of the tax NOL carryforwards
discussed above and tax planning strategies in certain states that allow
consolidated return filings which will allow the Company to utilize its
consolidated NOL in these states.
The Company recorded dividends on its Convertible Preferred Securities of
$9.7 million during the nine months ended September 30, 2000. See "Liquidity and
Capital Resources -- Convertible Preferred Securities" and Note 6, "Convertible
Preferred Securities" to the Company's unaudited condensed consolidated
financial statements set forth elsewhere herein.
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 nine months ended September 30, 2000, the Company completed
the divestiture of three of its PPM practices. Net proceeds from these
divestitures totaled $21.6 million.
During the second quarter of 1999, the Company recorded a charge of $199.3
million related to the net loss on the disposal of its discontinued operations.
This charge consisted of $119.9 million for the impairment and write-offs of
intangibles and other PPM assets, adjustments to the estimated costs to exit the
PPM operations of $73.6 million and an adjustment of $5.8 million related to the
gain on the sale of the contract services business.
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 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
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. The Company's credit facility matures in June 2001.
See -- "Credit Facility."
Cash Flows. The Company's cash flow from continuing operations for the
nine months ended September 30, 2000 was $187.8 million. This positive cash flow
was offset by cash used in discontinued operations ($92.9 million), capital
expenditures ($13.9 million) and repayments of amounts under the Company's
credit facility ($119.7 million). Among other things, the Company's cash flow
from operations was positively affected by increased focus on managing working
capital, including improvements in inventory management and a reduction of days
outstanding in accounts receivable.
The Company received approximately $481 million in proceeds from the
cancellation of the TAPS during the nine months ended September 30, 2000. The
majority of these proceeds were used to retire the Company's $420 million senior
subordinated notes which became due on September 1, 2000. The remaining TAPS
proceeds were used to reduce the Company's indebtedness under its credit
facility, with $60 million being applied to term loans and the remainder to the
revolving facility.
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Credit Facility. The Company has a credit facility with Bank of America,
N.A., as administrative agent. The Company has pledged the capital stock of
Caremark International Inc., 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 $12.7 million outstanding at
September 30, 2000. Quarterly principal payments on this term loan began
in November 1999.
- A non-amortizing tranche B term loan with $24.0 million outstanding at
September 30, 2000.
- A revolving credit facility in an aggregate principal amount of up to
$400.0 million. At September 30, 2000, the Company had $223.0 million in
borrowing and $63.9 million in letters of credit under the revolving
credit facility. The Company had $113.1 million available for borrowing
under the revolving credit facility as of September 30, 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 prime rate plus 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 in the credit
facility) 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, or
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
certain additional investments in its California PPM business.
The credit facility matures in June 2001. The Company currently anticipates
that it will amend and extend the term of its current credit facility, execute a
new credit facility and/or raise additional capital through the issuance of debt
or equity securities prior to the credit facility's maturity. The Company's
ability to successfully extend the current credit facility or to access
alternative debt or equity financing sources sufficient to meet its capital
needs cannot be assured and is dependent on many factors which are outside of
the Company's control. These factors, which include, but are not limited to,
trends and uncertainties in the healthcare industry, the Company's performance
and prospects in relation to its industry peers and general economic and capital
market conditions, will influence the terms of any financing arrangement secured
by the Company upon expiration of the current credit agreement. There can be no
assurance that these terms will be comparable to those contained in the current
credit agreement or that such terms will not have a material adverse impact on
the Company's future financial condition, results of operations and cash flows.
Convertible Preferred Securities. In September 1999, the Company privately
placed $200.0 million of Convertible Preferred Securities. All Convertible
Preferred Securities outstanding on October 1, 2029, must be redeemed by the
Company; however, any or all of the Convertible Preferred Securities are
redeemable at the option of the Company beginning October 15, 2002, at prices
ranging from $52.00 to $50.00 plus accumulated and unpaid dividends per
Convertible Preferred Security. Each Convertible Preferred Security may be
converted, at the option of the holder, into shares of the Company's 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 in arrears on the first day of each calendar quarter.
Dividends on the Convertible Preferred Securities are
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cumulative and may be deferred by the Company for up to twenty consecutive
quarters; however the Company has not deferred, and does not intend to defer,
the payment of the dividends.
Receivables Securitization. The Company's 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 September 30, 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 to $125 million in net cash
funding, including approximately $50 million to $60 million in the last quarter
of 2000, will be required for the next twelve months. 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 the Company's control.
Senior Notes. The Company's senior notes are in an aggregate principal
amount of $450.0 million and bear interest at 7 3/8% annually, with all
principal amounts due in October 2006. The indenture for the senior notes
contains, among other things, restrictions on subsidiary indebtedness, sale and
leaseback transactions, and consolidation, merger and sale of assets.
The indenture for the senior notes also contains restrictions on
indebtedness secured by liens. The senior notes are not guaranteed by any
subsidiary; however, the Company has secured the senior notes with an equal and
ratable pledge of all of the capital stock of the subsidiary that owns the
Company's primary operating subsidiary to comply with this covenant. The senior
notes are otherwise unsecured.
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.,
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
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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 for its discontinued PPM business, including, but not
limited to, the outcome of working capital settlements, the Company's ability to
successfully terminate leases and other contractual agreements, and the outcome
of various litigation surrounding the closure or sale of PPM assets; 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
including litigation related to the TAPS; 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, Notes 8 and 9 of the Company's
unaudited condensed consolidated financial statements set forth elsewhere
herein, and Part II, Item 1. "Legal Proceedings" set forth elsewhere herein.
The Company's current credit facility matures in June 2001. The Company
anticipates that it will amend and extend the term of its current credit
facility, execute a new credit facility and/or raise additional capital through
the issuance of equity or debt securities prior to the current credit facility's
maturity. The Company's ability to successfully extend the current credit
facility or to access alternative debt or equity financing sources sufficient to
meet its capital needs cannot be assured and is dependent on many factors which
are outside of the Company's control. These factors, which include, but are not
limited to, trends and uncertainties in the healthcare industry, the Company's
performance and prospects in relation to its industry peers and general economic
and capital market conditions, will influence the terms of any financing
arrangement secured by the Company upon expiration of the current credit
agreement. There can be no assurance that these terms will be comparable to
those contained in the current credit agreement or that such terms will not have
a material adverse impact on the Company's future financial condition, results
of operations and cash flows.
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 September 30, 2000, the Company had $259.7 million in current
debt subject to variable interest rates. The remaining $450.0 million in
long-term debt is subject to fixed rates of interest. A hypothetical increase in
interest rates of 1% would result in potential reductions in future pre-tax
earnings of approximately $2.6 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 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 -- OTHER INFORMATION
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 from its continuing operations and its discontinued PPM operations,
including employment disputes, contract disputes, personal injury claims, and
professional liability claims. 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 September 1997 the Company issued 6.50% Threshold Appreciation Price
Securities ("TAPS"). The TAPS were initially secured by $481.4 million in U.S.
Treasury Notes. Under the terms of the purchase contract agreement pursuant to
which the TAPS were issued (the "Purchase Contract"), the Company was to receive
the proceeds of these U.S. Treasury Notes on August 31, 2000, the date the TAPS
were scheduled to be surrendered by the TAPS holders in exchange for shares of
the Company's common stock.
In 1999, two lawsuits were filed in the Supreme Court of the State of New
York, County of New York, claiming that a "Termination Event" had occurred with
respect to the TAPS. Both of these lawsuits have been dismissed with prejudice.
The Company settled one of these lawsuits, which involved plaintiffs holding
approximately 35 percent of the outstanding TAPS (the "Settling TAPS Holders")
in April 2000 (the "New York Settlement").
The New York Settlement provided, among other things, that the Settling
TAPS Holders would receive 1.55 shares of the Company's common stock for each
TAPS owned or controlled by them. Accordingly, on April 14, 2000, the Company
delivered 1.55 shares of the Company's common stock for each TAPS tendered by
the Settling TAPS Holders and paid to the Settling TAPS Holders accrued and
unpaid interest due on the U.S. Treasury Notes corresponding to the tendered
TAPS. The Company received approximately $168 million in cash from the
cancellation of the related TAPS.
The New York Settlement provides that, in the event the Company settles
litigation with other holders of TAPS for a greater value per each TAPS, as
measured in accordance with the terms of the settlement agreement, than the
settlement value of the New York Settlement, the Company will pay each Settling
TAPS Holder the difference in value per each TAPS between the settlement value
of the New York Settlement and the settlement value of any settlement with other
holders of TAPS.
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 was subsequently certified by the court as a "non-opt out" class
action, and therefore includes all TAPS holders other than those who were
parties to the New York Settlement. The Company reached a settlement in this
lawsuit (the "Alabama Settlement"), which received final court approval pursuant
to a Final Approval Order and Judgment issued on June 9, 2000 (the "Final
Order") by the Circuit Court of Franklin County, Alabama. On June 19, 2000,
certain TAPS holders filed a notice of appeal to the Supreme Court of Alabama,
questioning the Circuit Court's order denying their motion to intervene and the
adequacy of the settlement. On July 21, 2000, two other TAPS holders filed
notices of appeal to the Supreme Court of Alabama, purporting to appeal on the
same grounds as the June 19, 2000 appeal. The Company believes that the appeals
are without merit and has filed a motion to dismiss these appeals.
As required by the Purchase Contract, on August 31, 2000, the Company
issued approximately 14.2 million shares of its common stock to the class
members in exchange for the same number of outstanding TAPS. The Company
received the remaining $313 million of proceeds related to the TAPS which,
combined with the proceeds received in April 2000 in connection with the New
York Settlement, were used to retire the Company's $420 million senior
subordinated notes which matured on September 1, 2000. The remaining TAPS
proceeds were used to reduce the Company's indebtedness under its credit
facility, with $60 million being applied to term loans and the remainder to the
revolving facility.
Pursuant to an order from the Circuit Court of Franklin County, Alabama
requiring distribution of the class benefits under the Alabama Settlement, on
September 13, 2000, the Company issued to each class
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member 0.22 shares of the Company's common stock for each TAPS held by that
class member, less each class member's share of pro rata attorney's fees. The
Final Order provided for 25% of the stock issuable to the class under the
Alabama Settlement to be paid as fees to the attorneys for the class.
On April 11, 2000, certain TAPS holders filed a lawsuit entitled Aragon
Investments, Ltd. et al. v. Caremark Rx, Inc. in the Supreme Court of the State
of New York, County of New York, claiming that a "Termination Event" had
occurred with respect to the TAPS. The Supreme Court of the State of New York
previously postponed further action in the Aragon litigation pending action by
the Circuit Court of Franklin County, Alabama relating to the Alabama
settlement. The Company does not know what future action, if any, the Supreme
Court of the State of New York will take with respect to this 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. 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 ultimately move forward to a decision on summary
judgment or to trial and likely will also precede the trial of any
Robinson-Patman Act claims.
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 by the State of California (the "State") 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 subsequently executed an
agreement to settle the disputes relating to MPN (as amended, the "Settlement
Agreement"). The Company, various of its subsidiaries, MPN, certain managed
physician practices and various health plans executed a supplemental
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agreement (as amended, 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 filed by MPN. On September 14, 2000, the Bankruptcy Court
entered an order which: (1) confirmed the Second Amended Chapter 11 Plan of MPN
dated July 7, 2000 (the "Plan"); (2) approved the Settlement Agreement; and (3)
approved the Supplemental Plan Agreement. Following the occurrence of the
"Effective Date" of the Plan on October 16, 2000, distributions commenced to the
creditors of MPN from assets of MPN and from letters of credit in the aggregate
amount of $40.0 million provided by the Company pursuant to its funding
commitment described in the Plan. All required distributions are expected to be
completed approximately one year following the Effective Date of the Plan.
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.
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 of 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 its 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.
On August 31, 2000, the Company issued approximately 14.2 million shares of
its common stock in settlement of a class action lawsuit brought against the
Company in the Circuit Court of Franklin County, Alabama in March 2000 with
respect to its TAPS. The shares were issued in exchange for an equal number of
outstanding TAPS. On September 13, 2000, the Company issued an aggregate of
3,105,875 additional shares of common stock (including 776,821 shares issued to
attorneys for the class) related to settlement of this
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lawsuit. Such shares were issued in reliance upon an exemption from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 3(a)(10) thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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2.1 Second Amended and Restated Operations and Settlement
Agreement, dated September 14, 2000, among the Director of
the Department of Managed Care of the State of California;
the Department of Managed Care of the State of California;
J. Mark Abernathy, as Special Monitor-Examiner; the Company;
and MedPartners Provider Network, Inc., a California
corporation. The Exhibits and Schedules that are referenced
in the Operations and Settlement Agreement are hereby
incorporated by reference. Such Exhibits and Schedules have
been omitted for purposes of this filing, but will be
furnished supplementally to the commission upon request.
2.2 Second Amended Chapter 11 Plan of MedPartners Provider
Network, Inc., dated July 7, 2000. The Exhibits and
Schedules that are referenced in the Chapter 11 Plan of
MedPartners Provider Network, Inc. are hereby incorporated
by reference. Such Exhibits and Schedules have been omitted
for purposes of this filing, but will be furnished
supplementally to the commission upon request.
2.3 Amended and Restated Supplemental Plan Agreement, dated
September 14, 2000, among MedPartners Provider Network,
Inc., the Company, certain direct and indirect subsidiaries
of the Company, certain Managed Physician Practices, and
certain Plans. The Exhibits and Schedules that are
referenced in the Supplemental Plan Agreement are hereby
incorporated by reference. Such Exhibits and Schedules have
been omitted for purposes of this filing, but will be
furnished supplementally to the commission upon request.
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.
3.3 Caremark Rx, Inc. Fifth Amended and Restated Bylaws, filed
as Exhibit 3.3 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000, 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 Form of Common Stock Certificate of the Company, filed as
Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000, is hereby
incorporated herein by reference.
4.3 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 quarterly period ended September
30, 1999, is hereby incorporated herein by reference.
4.4 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
quarterly period ended September 30, 1999, is hereby
incorporated herein by reference.
4.5 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 quarterly period ended September 30, 1999, is
hereby incorporated herein by reference.
</TABLE>
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<TABLE>
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4.6 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 quarterly period ended September 30, 1999, is
hereby incorporated herein by reference.
4.7 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
quarterly period ended September 30, 1999 is hereby
incorporated herein by reference.
4.8 Form of SPURS, filed as Exhibit 4.6 to Amendment No. 1 to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999, is hereby
incorporated herein by reference.
4.9 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 quarterly period ended September
30, 1999, is hereby incorporated herein by reference.
4.10 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 quarterly period ended September
30, 1999, is hereby incorporated herein by reference.
10.1 Amendment and Waiver No. 19 to the Third Amended and
Restated Credit Agreement, dated August 8, 2000, among the
Company, Bank of America, N.A., Credit Lyonnais New York
Branch, The First National Bank of Chicago, Morgan Guaranty
Trust Company of New York, Banc of America Securities LLC,
and Bank of America, N.A.
10.2 Amendment and Waiver No. 20 to the Third Amended and
Restated Credit Agreement, dated August 31, 2000, among the
Company, Bank of America, N.A., Credit Lyonnais New York
Branch, The First National Bank of Chicago, Morgan Guaranty
Trust Company of New York, Banc of America Securities LLC,
and Bank of America, N.A.
10.3 Text of Final Order approving the class action settlement in
the class action lawsuit entitled James Taff et al. v.
Caremark Rx, Inc. et al., Case No. 0072, filed as Exhibit
99.2 to the Company's Current Report on Form 8-K filed on
June 13, 2000, is hereby incorporated herein by reference.
10.4 The Company's Amended and Restated Incentive Compensation
Plan.
10.5 The Company's Amended and Restated 1993 Stock Option Plan.
10.6 The Company's Amended and Restated 1994 Stock Option Plan.
10.7 The Company's Amended and Restated 1995 Stock Option Plan.
10.8 The Company's Amended and Restated 1997 Long Term Incentive
Compensation Plan.
10.9 The Company's Amended and Restated 1998 Employee Stock
Option Plan.
10.10 The Company's Amended and Restated 1998 New Employee Stock
Option Plan.
10.11 Employment Agreement between the Company and John Arlotta,
dated as of January 1, 2000.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. The Company filed no current reports on Form 8-K
during the three months ended September 30, 2000.
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SIGNATURES
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: November 7, 2000
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