<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X
------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
------- 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 1- 11328
CAREMARK INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3838069
- ------------------------------- ----------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2215 Sanders Road
Northbrook, Illinois 60062
- ---------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(847) 559-4700
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether 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 registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
------- -------
The number of shares of the registrant's Common Stock, $1 par value per share,
outstanding as of August 1, 1996, the latest practicable date, net of treasury
stock, was 82,311,443 shares.
<PAGE>
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CAREMARK INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------
THREE MONTHS ENDED JUNE 30
(IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995
------------------
<S> <C> <C>
NET REVENUES $805.6 $ 586.0
Cost of goods and services sold 695.6 498.4
Marketing and administrative expenses 63.7 52.6
Provision for doubtful accounts 7.6 5.4
- ------------------------------------------------------------
OPERATING INCOME FROM CONTINUING
OPERATIONS 38.7 29.6
Non-operating expense (income):
Interest expense, net 5.1 0.6
Other, net (0.2) -
- ------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 33.8 29.0
Income tax expense 10.8 11.6
- ------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 23.0 17.4
Discontinued operations:
Operating loss from discontinued
operations, net of income taxes
of ($55.8) in 1995 - (144.0)
Loss on sale of discontinued
operations, net of income taxes of
($2.5) in 1995 - (3.8)
- ------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS - (147.8)
- ------------------------------------------------------------
NET INCOME (LOSS) $ 23.0 ($130.4)
============================================================
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
Primary
Income from continuing operations $ 0.30 $ 0.23
Operating loss from discontinued
operations - ($1.93)
Loss on sale of discontinued
operations - ($0.05)
Net income (loss) $ 0.30 ($1.75)
Fully diluted
Income from continuing operations $ 0.30 $ 0.23
Operating loss from discontinued
operations - ($1.93)
Loss on sale of discontinued
operations - ($0.05)
Net income (loss) $ 0.30 ($1.75)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARE
Primary 77.7 74.6
Fully diluted 77.7 75.0
============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
3
CAREMARK INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------
SIX MONTHS ENDED JUNE 30
(IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995
--------------------
<S> <C> <C>
NET REVENUES $1,569.6 $1,120.1
Cost of goods and services sold 1,349.6 961.8
Marketing and administrative expenses 132.1 93.0
Provision for doubtful accounts 14.6 10.0
- --------------------------------------------------------------
OPERATING INCOME FROM CONTINUING
OPERATIONS 73.3 55.3
Non-operating expense (income):
Interest expense, net 9.3 4.9
Other, net (0.4) (0.4)
- --------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 64.4 50.8
Income tax expense 22.9 20.3
- --------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 41.5 30.5
Discontinued operations:
Operating loss from discontinued
operations, net of
income taxes of ($39.5) in 1996
and ($57.5) in 1995 (68.9) (146.6)
Gain on sale of discontinued
operations, net of
income taxes of $1.4 in 1996 and
$4.7 in 1995 2.1 7.1
- --------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS (66.8) (139.5)
- --------------------------------------------------------------
NET INCOME (LOSS) ($25.3) ($109.0)
==============================================================
EARNINGS PER COMMON AND COMMON
EQUIVALENT
SHARE:
Primary
Income from continuing operations $ 0.54 $ 0.41
Operating loss from discontinued ($0.89) ($1.98)
operations
Gain on sale of discontinued $ 0.03 $ 0.10
operations
Net income (loss) ($0.33) ($1.47)
Fully diluted
Income from continuing operations $ 0.54 $ 0.41
Operating loss from discontinued ($0.89) ($1.98)
operations
Gain on sale of discontinued $ 0.03 $ 0.09
operations
Net income (loss) ($0.33) ($1.47)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARE
Primary 77.4 74.2
Fully diluted 77.4 74.8
==============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
4
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(In millions, except shares) June 30, December 31,
1996 1995
-------------------------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and equivalents $ 49.0 $ 28.4
Restricted cash 14.0 -
Accounts receivable, net 376.3 365.4
Inventories 99.6 112.5
Short-term deferred income taxes 64.2 41.1
Prepaid expenses and other current 23.8 18.6
assets
- -------------------------------------------------------------------
TOTAL CURRENT ASSETS 626.9 566.0
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 454.7 375.9
Accumulated depreciation and (88.0) (76.7)
amortization
- -------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 366.7 299.2
GOODWILL AND OTHER INTANGIBLES 320.5 259.3
OTHER NONCURRENT ASSETS 89.5 69.7
LONG-TERM DEFERRED INCOME TAX ASSET - 33.7
NET ASSETS OF DISCONTINUED OPERATIONS - 36.3
- -------------------------------------------------------------------
TOTAL ASSETS $1,403.6 $1,264.2
===================================================================
CURRENT LIABILITIES:
Short-term debt $ 289.6 $ 85.8
Accounts payable 377.2 253.9
Accrued liabilities 146.7 135.0
- -------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 813.5 474.7
LONG-TERM DEBT AND LEASE OBLIGATIONS 130.2 325.4
LONG-TERM DEFERRED INCOME TAXES 42.2 37.7
OTHER NONCURRENT LIABILITIES 29.7 33.0
CONTINGENT LIABILITIES (NOTE 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized
20,000,000 shares, none issued - -
Common stock, $1 par value, authorized
200,000,000 shares, issued
82,269,462 shares
in 1996 and 81,497, 489 in 1995 82.2 81.5
Additional contributed capital 199.6 188.2
Shares held in trust (150.2) (150.2)
Retained earnings 256.4 281.7
Common stock in treasury, at cost,
none in 1996 and 406,136 shares
in 1995 - (7.8)
- -------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 388.0 393.4
- -------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,403.6 $1,264.2
===================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
5
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, (IN MILLIONS)
(Brackets denote cash outflows) 1996 1995
------------------
CASH FLOWS FROM CONTINUING OPERATIONS:
<S> <C> <C>
Income from continuing operations $ 41.5 $ 30.5
Adjustments for non-cash items:
Provision for doubtful accounts 14.6 10.0
Depreciation and amortization 25.0 14.4
Deferred income tax expense 38.0 6.5
Changes in balance sheet items:
Accounts receivable (26.1) (54.5)
Inventories 14.8 0.5
Accounts payable and accruals (16.1) 56.5
Prepaids and other (6.5) 1.9
- -------------------------------------------------------------------------------
CASH FLOWS FROM CONTINUING OPERATIONS 85.2 65.8
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (48.4) (33.0)
Acquisitions, net of cash received (71.6) (141.0)
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES (120.0) (174.0)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net issuances (redemptions) of debt and lease obligations 27.5 (52.2)
Stock issued under employee benefit plans 19.8 11.7
Purchases of treasury stock - (19.9)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES 47.3 (60.4)
- -------------------------------------------------------------------------------
CASH FLOWS FROM DISCONTINUED OPERATIONS,
NET OF DIVESTITURE PROCEEDS 22.1 158.0
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 34.6 (10.6)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 28.4 32.1
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 63.0 $ 21.5
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
6
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: FINANCIAL INFORMATION
The unaudited interim consolidated financial statements of Caremark
International Inc. and its subsidiaries (the "company" or "Caremark") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the company's 1995
Annual Report to Stockholders.
In the opinion of management, the unaudited interim consolidated financial
statements reflect all normal and recurring adjustments necessary for a fair
presentation of the interim periods. The results of operations for the interim
periods are not necessarily indicative of the results of operations for the full
year.
NOTE 2: INVENTORIES
Inventories of $99.6 and $112.5 million at June 30, 1996 and December 31, 1995,
respectively, consist primarily of finished goods.
NOTE 3: DISCONTINUED OPERATIONS
During 1995 Caremark divested its Clozaril Patient Management System, Home
Infusion business, Oncology Management Services business and Caremark Orthopedic
Services, Inc. subsidiary. Effective February 29, 1996, the company sold its
Nephrology Services business to Total Renal Care, Inc. for $49.0 million in
cash, subject to certain post-closing adjustments. The after-tax gain on
disposition of this business, net of disposal costs, was $2.1 million.
In accordance with APB 30, which addresses the reporting for disposition of
business segments, the company's consolidated financial statements present the
operating income and net assets of these discontinued operations separately from
continuing operations. Prior periods have been restated to conform with this
presentation.
First quarter 1996 discontinued operations also reflects a $65.6 million after-
tax charge related to the settlements with private payors discussed in Note 5
and a $3.3 million charge for a reduction in the amount expected to be realized
for deferred state income tax net operating loss benefits related to
discontinued operations.
NOTE 4: ACQUISITIONS
In January 1996, Caremark completed its agreement with CIGNA Healthcare of
California, a managed health care subsidiary of CIGNA Corporation, to acquire
substantially all of the assets of CIGNA Medical Group, CIGNA Healthcare's Los
Angeles-area staff model delivery system ("CIGNA"). The transaction has been
accounted for by the purchase method of accounting. The accounting related to
this transaction remains subject to purchase accounting adjustments pending
completion of valuations and analysis to determine the respective fair values of
assets received and liabilities assumed. These valuations are expected to be
completed no later than the fourth quarter of 1996.
<PAGE>
7
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 5: CONTINGENT LIABILITIES
In May 1996, two stockholders, each purporting to represent a class, filed (but
have not yet served) complaints against Caremark and each of its directors in
the Court of Chancery of the State of Delaware alleging breached of the
directors' fiduciary duty in connection with Caremark's proposed merger with
Medpartners/Mullikin, Inc. The complaints seek unspecified damages, injunctive
relief, and attorneys' fees and expenses. The Company intends, if served, to
defend these cases vigorously. Management is unable at this time to estimate the
impact, if any, of the ultimate resolution of these matters.
On September 11, 1995, Coram Healthcare Company ("Coram") filed a complaint in
the San Francisco Superior Court against Caremark International Inc. and its
subsidiary, Caremark Inc., and 50 unnamed individual defendants. The complaint,
which arises from Caremark's sale to Coram of Caremark's Home Infusion business
in April 1995 for approximately $209.0 million in cash and $100.0 million in
securities, alleges breach of the Asset Sale and Note Purchase Agreement dated
January 29, 1995 as amended on April 1, 1995 between Coram and the company,
breach of related contracts, fraud, negligent misrepresentation and a right to
contractual indemnity. Requested relief in Coram's amended complaint includes
specific performance, declaratory relief, injunctive relief, and damages of $5.2
billion. The company filed motions in October 1995 in the Superior Court of
California seeking (i) to strike certain causes of action due to the speculative
nature of the claims and damages asserted and (ii) dismissal of Coram's lawsuit
on grounds of lack of jurisdiction over Illinois-based Caremark. The Superior
Court of California subsequently dismissed the case against the company (but not
against Caremark Inc.) on the basis of lack of jurisdiction. Caremark also filed
a lawsuit in the U.S. District Court in Chicago claiming that Coram committed
securities fraud in its sale to the company of its securities in connection with
the sale of the company's Home Infusion business to Coram. This case, which has
been dismissed, is on appeal and the company has filed counterclaims to the
lawsuit pending in San Francisco. Coram's lawsuit is currently in the discovery
phase.
Although the company cannot predict with certainty the outcome of these
proceedings, based on information currently available, management believes that
the ultimate resolution of this matter is not likely to have a material adverse
effect on Caremark's results of operations, cash flows or financial position.
The company intends to defend these cases vigorously.
In May 1996, three pharmacies, purporting to represent a class consisting of all
of Caremark's competitors in the alternate site infusion therapy industry, filed
a complaint against Caremark, a subsidiary of Caremark, and two other
corporations in the United States District Court for the District of Hawaii
alleging violations of the federal conspiracy statute, the antitrust laws and of
California's unfair business practice statute. The complaint seeks unspecified
treble damages, and attorneys' fees and expenses. Caremark intends to defend
this case vigorously. Management is unable at this time to estimate the impact,
if any, of the ultimate resolution of this matter.
In August and September 1994, stockholders, each purporting to represent a
class, filed complaints against Caremark and certain officers and employees of
Caremark in the United States District Court for the Northern District of
Illinois, alleging violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934, and fraud and negligence in connection with public
disclosures by Caremark regarding Caremark's business practices and the status
of the OIG investigation discussed below. The complaints seek unspecified
damages, declaratory and equitable relief, and attorneys' fees and expenses. In
June 1996, the complaint filed by one group of stockholders alleging violations
of the Securities Exchange Act of 1934 only, was
<PAGE>
8
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 5: CONTINGENT LIABILITIES (CONTINUED)
certified as a class. The parties to all of the complaints continue to engage in
discovery proceedings. The company intends to defend these cases vigorously.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of these matters.
In August 1994 and July 1995, stockholders filed derivative actions on behalf of
Caremark in the Court of Chancery of the State of Delaware, the United States
District Court for the Northern District of Illinois and the Circuit Court of
Cook County in Chicago, Illinois alleging breaches of fiduciary duty, negligence
in connection with Caremark's conduct of the business and lack of corporate
controls, and seeking unspecified damages, attorneys' fees and expenses. In June
1996, the parties entered into a Stipulation and Agreement of Compromise and
Settlement which established proposed terms for the settlement of the case. The
Delaware court will conduct a hearing on August 16, 1996 to consider the
proposed settlement. Although the proposed settlement does not contemplate the
payment of any damages by any defendant, plaintiffs are expected to seek an
award of attorneys' fees and expenses not in excess of $1.025 million in
conjunction with any approval of the settlement. The Illinois and Cook County
Courts have entered stays of all proceedings in those actions pending resolution
of the Delaware derivative action. In the event the proposed settlement of the
Delaware derivative action is approved by the Delaware court, Caremark
anticipates that the Illinois and Cook County derivative actions will be
dismissed. If the proposed settlement is not approved, Caremark intends to
defend these cases vigorously. Management is unable at this time to estimate the
impact, if any, of the ultimate resolution of these matters.
In late August 1994, certain patients of a physician who prescribed human growth
hormone distributed by Caremark and the sponsor of a health insurance plan of
one of those patients filed complaints against Caremark, employees of Caremark
and others in the United States District Court for the District of Minnesota.
Each complaint purported to be on behalf of a class and alleged violations of
the federal mail and wire fraud statutes, the federal conspiracy statute and the
state consumer fraud statute, as well as conspiracy to breach a fiduciary duty,
negligence and fraud. Each complaint sought unspecified treble damages, and
attorneys' fees and expenses. In July 1996, these plaintiffs also served (but
have not yet filed) a separate lawsuit in the Minnesota State Court in the
County of Hennepin against a subsidiary of Caremark purporting to be on behalf
of a class and alleging all of the claims contained in the complaint filed with
the Minnesota federal court other than the federal claims contained therein. The
complaint seeks unspecified damages, attorneys' fees and expenses and an award
of punitive damages. In July 1995, another patient of the same physician filed a
separate complaint in the District of South Dakota against the physician,
Caremark and another corporation alleging violations of the federal laws
prohibiting payment of remuneration to induce referral of Medicare and Medicaid
beneficiaries, and the federal mail fraud and conspiracy statutes. The complaint
also alleges the intentional infliction of emotional distress and seeks trebling
of at least $15.9 million in general damages, attorneys' fees and costs, and an
award of punitive damages. In August 1995, the parties to the case filed in
South Dakota agreed to a stay of all proceedings until final judgment has been
entered in a criminal case that is presently pending against this physician.
Caremark intends to defend these cases vigorously. Management is unable at this
time to estimate the impact, if any, of the ultimate resolution of these
matters.
Beginning in September 1994, Caremark was named as a defendant in a series of
new lawsuits added to a pending group of actions brought in 1993 under the
antitrust laws by local and chain retail pharmacies against brand name
pharmaceutical manufacturers, wholesalers and prescription benefit managers
other than Caremark. The new 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
<PAGE>
9
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 5: CONTINGENT LIABILITIES (CONTINUED)
service discounts to certain favored buyers and conspired among themselves to
deny similar discounts to the complaining retail pharmacies (approximately 3,900
in number). The complaints charge that certain defendant prescription benefit
managers, including Caremark, were favored buyers who knowingly induced or
received discriminatory prices from the manufacturers, in violation of the
Robinson-Patman Act. Each complaint seeks unspecified treble damages,
declaratory and equitable relief, and attorneys' fees and expenses. On April 21,
1995, the Court entered a stay of pre-trial 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. The company intends to defend these cases vigorously.
Management is unable to estimate at this time the impact, if any, of the
ultimate resolution of this matter.
In December 1994, Caremark was notified by the Federal Trade Commission (the
"FTC") that it was conducting a civil investigation of the industry concerning
whether acquisitions, alliances, agreements or activities between pharmacy
benefit managers and pharmaceutical manufacturers, including Caremark's alliance
agreements with certain drug manufacturers, violate Sections 3 or 7 of the
Clayton Act or Section 5 of the Federal Trade Commission Act. The specific
nature, scope, timing and outcome of this investigation are not currently
determinable. Under the statutes, if violations are found, the FTC could seek
remedies in the form of injunctive relief to set aside or modify Caremark's
alliance agreements and an order to cease and desist from certain marketing
practices and from entering into or continuing with certain types of agreements.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of this matter.
In March 1996, the company agreed to settle all disputes with a number of
private payors. The settlements resulted in an after-tax charge of $42.3
million. These disputes relate to businesses that were covered by Caremark's
settlement with federal and state agencies in June 1995 discussed below. In
addition, Caremark will pay $23.3 million after-tax to cover the private payors'
pre-settlement and settlement-related expenses. An after-tax charge for the
above amounts has been recorded in first quarter 1996 discontinued operations.
Caremark may pay the settlement amounts in 1996 and 1997 or, under certain
circumstances, in semi-annual installments, including interest, through 1999. No
agreement, contract or other business relationship in existence at the time of
the settlements will be terminated or negatively affected by the settlement
agreements. The parties have also agreed to negotiate in good faith to maintain
or enhance ongoing business relationships. The company's lenders have waived the
impact of these settlements on the financial covenants under its existing credit
facility through September 15, 1996. The company currently expects to enter into
revised credit facilities prior to this date.
In June 1995, Caremark agreed to settle an investigation of the company with the
U.S. Department of Justice, the Office of the Inspector General of the U.S.
Department of Health and Human Services, the Veterans Administration, the
Federal Employees Health Benefits Program, the Civilian Health and Medical
Program of the Uniformed Services and related state investigative agencies in
all 50 states and the District of Columbia (the "OIG investigation"). The
company took an after-tax charge to discontinued operations of $154.8 million in
1995 for these settlement payments, costs to defend ongoing derivative, security
and related lawsuits, and other associated costs.
<PAGE>
10
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 5: CONTINGENT LIABILITIES (CONTINUED)
The company does not believe that the above-referenced settlements will
materially affect its ability to pursue its long-term business strategy. There
can be no assurances, however, that additional costs, claims and damages will
not occur or that the ultimate costs related to the settlements will not exceed
these estimates.
Caremark is party to various other commitments, claims and routine litigation
arising in the ordinary course of business. Management does not believe that the
result of such commitments, claims and litigation, individually or in the
aggregate, will have a material effect on the company's business or its income,
cash flows or financial condition.
NOTE 6: MERGER
On May 13, 1996, Caremark and MedPartners/Mullikin, Inc. ("MedPartners") signed
a definitive agreement to merge. Under the terms of the agreement, which has
been approved by the Boards of Directors of both companies, each Caremark share
will be converted into MedPartners common stock at a fixed ratio of 1.21 shares
of MedPartners per Caremark share. The merger is expected to close in the third
quarter of 1996 and is subject to stockholder and regulatory approval.
<PAGE>
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The company's 1995 Annual Report to Stockholders ("Annual Report") contains
management's discussion and analysis of the company's financial condition and
results of operations at and for the year ended December 31, 1995. Management's
Discussion and Analysis which follows focuses on material changes since that
time and should be read in conjunction with the Annual Report. Relevant trends
that are reasonably likely to be of a material nature are discussed to the
extent known.
SUMMARY OF RESULTS OF CONTINUING OPERATIONS
- -------------------------------------------
The following table sets forth key income statement amounts pertaining to
continuing operations, percentage changes between periods, and the relationship
of such amounts to net revenues for the respective periods.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(UNAUDITED, THREE MONTHS ENDED SIX MONTHS ENDED
DOLLARS IN MILLIONS) JUNE 30, JUNE 30,
1996 1995 % CHANGE 1996 1995 % CHANGE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES $805.6 $586.0 37.5% $1,569.6 $1,120.1 40.1%
- --------------------------------------------------------------------------------------------------
COST OF GOODS AND SERVICES SOLD 695.6 498.4 39.6% 1,349.6 961.8 40.3%
% of net revenues 86.3% 85.0% 86.0% 85.9%
GROSS MARGIN 110.0 87.6 25.6% 220.0 158.3 39.0%
% of net revenues 13.7% 15.0% 14.0% 14.1%
MARKETING AND ADMINISTRATIVE
EXPENSES 63.7 52.6 21.1% 132.1 93.0 42.0%
% of net revenues 7.9% 9.0% 8.4% 8.3%
PROVISION FOR DOUBTFUL ACCOUNTS 7.6 5.4 40.7% 14.6 10.0 46.0%
% of net revenues 0.9% 0.9% 0.9% 0.9%
OPERATING INCOME FROM CONTINUING
OPERATIONS 38.7 29.6 30.7% 73.3 55.3 32.6%
% of net revenues 4.8% 5.1% 4.7% 4.9%
INTEREST EXPENSE, NET 5.1 0.6 750.0% 9.3 4.9 89.8%
% of net revenues 0.6% 0.1% 0.6% 4.4%
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 33.8 29.0 16.6% 64.4 50.8 26.8%
% of net revenues 4.2% 4.9% 4.1% 4.5%
INCOME TAX EXPENSE 10.8 11.6 (6.9%) 22.9 20.3 12.8%
% of net revenues 1.3% 2.0% 1.5% 1.8%
% of income before taxes 32.0% 40.0% 35.6% 40.0%
INCOME FROM CONTINUING OPERATIONS 23.0 17.4 32.2% 41.5 30.5 36.1%
% of net revenues 2.9% 3.0% 2.6% 2.7%
PRIMARY EARNINGS PER SHARE $ 0.30 $ 0.23 30.4% $ 0.54 $ 0.41 31.7%
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
Certain statements included in this document are forward-looking, such as
statements relating to estimates of operating and capital expenditure
requirements, future revenue and operating income, and cash flows and credit
availability. Such forward-looking statements are based on the company's current
expectations and are subject to a number of risks and uncertainties that could
cause actual results in the future to differ significantly from results
expressed or implied in any forward-looking statements made by, or on behalf of,
the company. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic and business conditions, litigation outcomes,
governmental and regulatory policies, medical costs and the competitive
environment in which the company operates. These and other risks are detailed
below as well as in other documents filed by the company with the Securities and
Exchange Commission.
OVERVIEW
Many of the comparisons reflected in the company's Unaudited Consolidated
Statements of Operations are impacted by growth through new affiliations in the
Physician Practice Management segment. Since May 1995, this segment has
affiliated with four new physician practices, which contributed in excess of
$200 million of incremental revenue to the company in the first half of 1996. As
a result of this incremental growth and growth from existing clinics, 29.9% of
the company's revenues were generated from the Physician Practice Management
segment in the first half of 1996 versus 16.1% in the first half of 1995.
These incremental revenues, along with revenue growth in the Pharmaceutical
Services and International segments, has resulted in growth in cost of goods and
services sold and marketing and administrative expenses versus the first half
and second quarter of 1995.
Excluding the impact of new affiliations, the gross margin rate has declined to
12.1% and 11.9% of revenues in the second quarter and first half of 1996,
respectively, due to lower revenues in the higher-margin Disease Management
segment. At the same time, marketing and administrative expenses excluding the
incremental impact of these new affiliations have declined to 6.7% and 6.6% of
revenues in the second quarter and first half of 1996, respectively, as a result
of cost controls in place throughout the company, and reduced general corporate
spending subsequent to the divestitures in 1995.
Operating income from continuing operations increased 30.7% over the second
quarter and 32.6% over the first half of the prior year as a result of growth in
all segments except Disease Management. Overall operating margin rates declined
in the second quarter and first half of 1996 as compared to the prior year due
primarily to the lower percentage of sales generated from the higher-margin
Disease Management segment.
Net interest expense in the second quarter and first half of 1996 increased over
the same periods of 1995 due to higher average borrowings and lower interest
income from securities received upon divestitures. Income tax expense as a
percent of revenues has declined between periods due primarily to lower state
income taxes and adjustments to tax reserves related to completed audits. Income
from continuing operations and net income for the second quarter of 1996
generated primary earnings per share of $0.30, up 30.4% from $0.23 in the prior-
year period. Net income in the first half of 1996 reflected a loss of $0.33 per
share as a result of the private payor settlements discussed further below.
<PAGE>
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
CONTINUING OPERATIONS - CONTINUED
- ---------------------------------
The following tables summarize the results of continuing operations by industry
segment:
<TABLE>
<CAPTION>
NET REVENUES
- -----------------------------------------------------------------------------------------------------------
(UNAUDITED, THREE MONTHS ENDED SIX MONTHS ENDED
DOLLARS IN MILLIONS) JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------------------
1996 1995 % CHANGE 1996 1995 % CHANGE
<S> <C> <C> <C> <C> <C> <C>
PHYSICIAN PRACTICE MANAGEMENT $241.3 $111.6 116.2% $ 469.5 $ 180.1 160.7%
% of net revenues 30.0% 19.0% 29.9% 16.1%
PHARMACEUTICAL SERVICES 442.5 349.3 26.7% 865.2 693.0 24.9%
% of net revenues 54.9% 59.6% 55.1% 61.9%
DISEASE MANAGEMENT 96.4 106.0 (9.1%) 188.7 208.9 (9.7%)
% of net revenues 12.0% 18.1% 12.0% 18.6%
INTERNATIONAL 25.4 19.1 33.0% 46.2 38.1 21.3%
% of net revenues 3.1% 3.3% 3.0% 3.4%
- -----------------------------------------------------------------------------------------------------------
NET REVENUES $805.6 $586.0 37.5% $1,569.6 $1,120.1 40.1%
- -----------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING
OPERATIONS
- -----------------------------------------------------------------------------------------------------------
(UNAUDITED, THREE MONTHS ENDED SIX MONTHS ENDED
DOLLARS IN MILLIONS) JUNE 30, JUNE 30,
1996 1995 % CHANGE 1996 1995 % CHANGE
- -----------------------------------------------------------------------------------------------------------
PHYSICIAN PRACTICE MANAGEMENT $ 9.7 $ 5.1 90.2% $ 17.7 $ 7.0 152.9%
% of segment revenues 4.0% 4.6% 3.8% 3.9%
PHARMACEUTICAL SERVICES 17.1 11.9 43.7% 33.5 22.3 50.2%
% of segment revenues 3.9% 3.4% 3.9% 3.2%
DISEASE MANAGEMENT 16.0 17.9 (10.6%) 31.1 36.2 (14.1%)
% of segment revenues 16.6% 16.9% 16.5% 17.3%
INTERNATIONAL (0.4) (0.5) 20.0% (1.6) (0.7) (128.6%)
% of segment revenues (1.6%) (2.6%) (3.5%) (1.8%)
GENERAL CORPORATE (3.7) (4.8) 22.9% (7.4) (9.5) 22.1%
- -----------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM
CONTINUING OPERATIONS $ 38.7 $ 29.6 30.7% $ 73.3 $ 55.3 32.6%
% of net revenues 4.8% 5.1% 4.7% 4.9%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
CONTINUING OPERATIONS-CONTINUED
- -------------------------------
Caremark operates in four industry segments: Physician Practice Management,
Pharmaceutical Services, Disease Management and International.
PHYSICIAN PRACTICE MANAGEMENT
This segment's revenues increased 116.2% and 160.7% over the second quarter and
first half of 1995, respectively, as a result of same clinic revenue growth and
new affiliations in 1995 and early 1996 with Friendly Hills Healthcare Network,
Diagnostic Clinic, Glen Ellyn Clinic and CIGNA. Revenues for the remainder of
1996 in this segment are expected to grow as compared to 1995, but at a slower
rate given the timing of new affiliations in 1995.
Second quarter and first half operating income in this segment grew 90.2% and
152.9%, respectively, over the same periods of the prior year due to profits
from new affiliations, lower headquarters staff spending and efficiencies
implemented at existing clinics. These benefits were offset partially by
expenses related to cost reduction efforts undertaken in the second quarter of
1996 at Atlanta Medical. Operating margin rates for this segment were 4.0% in
the second quarter as compared to 4.6% in the second quarter of 1995 as a result
of higher margins being generated from new affiliations, operating efficiencies
being implemented at the clinics, and spreading fixed overhead expenses over a
larger revenue base, offset by the expenses from cost reduction efforts noted
above. First half 1996 operating margin rates were consistent with the same
period of the prior year.
PHARMACEUTICAL SERVICES
This segment's revenues grew 26.7% and 24.9% over the second quarter and first
half, respectively, of the prior year. This growth is attributable to
pharmaceutical price increases, the addition of customers, further penetration
of existing customers and the sale of new products.
Operating income grew 43.7% in the second quarter of 1996 and 50.2% for the
first half of 1996 as compared to the same periods of 1995. This growth is the
result of the higher revenues noted above, a reduction in outsourcing costs and
better materials management. As a percentage of revenues, operating income grew
to 3.9% for the second quarter and first half of 1996 due to these factors,
greater mail service revenues which carry a higher margin and the spreading of
fixed overhead expenses over a larger revenue base.
DISEASE MANAGEMENT
Disease Management revenues declined in the second quarter and first half of
1996 as compared to the same periods of 1995 as a result of lower volumes in the
hemophilia business resulting from new competition and continued government and
managed care pricing pressures for its growth hormone products. Hemophilia
revenues declined 7.0% versus the first half of 1995 and growth hormone sales
declined 12.1%. In April 1996, Caremark extended its contract with Genentech
through 1999 to remain the preferred provider of its growth hormone products in
the United States.
Operating income in this segment declined 10.6% in the second quarter and 14.1%
for the first half as compared to the same periods of 1995, as a result of the
lower pricing and volume noted above. These factors have also caused a decline
in the operating margins of this business versus the same periods of 1995.
Continuation of these trends could continue to have a negative impact on this
segments revenues and operating profits.
<PAGE>
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
CONTINUING OPERATIONS-CONTINUED
- -------------------------------
INTERNATIONAL
International revenues increased 33.0% in the second quarter and 21.3% for the
first half of 1996 as compared to the same periods of 1995 due to increased
market penetration and patient gains in most of the countries in which the
company operates. Expansion efforts continue in several countries where reform
initiatives are transforming health care delivery systems. Caremark has signed
a contract to provide prescription benefit management services in the
Netherlands. First half operating results for this segment declined $1.1
million over the first half of 1995 due to investment and start-up spending
necessary to establish and grow these businesses. Foreign exchange rates did
not have a substantial impact on revenues or operating profits.
GENERAL CORPORATE
General corporate spending declined $1.1 million in the second quarter of 1996
and $2.1 million for the first half as compared to the same periods of 1995.
These decreases are the result of the divestiture of businesses during 1995 and
early 1996 which has allowed the company to reduce its overhead spending.
DISCONTINUED OPERATIONS
- -----------------------
During 1995 Caremark divested its Clozaril Patient Management System, Home
Infusion business, Oncology Management Services business and Caremark Orthopedic
Services, Inc. subsidiary. Effective February 29, 1996, the company sold its
Nephrology Services business to Total Renal Care, Inc. for $49.0 million in
cash, subject to certain post-closing adjustments. In accordance with APB 30,
which addresses the reporting for disposition of business segments, the
company's consolidated financial statements present the operating income and net
assets of these discontinued operations separately from continuing operations.
Prior periods have been restated to conform with this presentation.
The after-tax gain reflected in the first half of 1996 on disposition of the
Nephrology Services business, net of disposal costs, was $2.1 million. First
half 1996 discontinued operations also reflects a $65.6 million after-tax charge
related to the settlements with private payors discussed in Note 5 and a $3.3
million charge for a reduction in the amount expected to be realized for
deferred state net operating loss benefits related to discontinued operations.
Discontinued operations for the first half of 1995 reflects the net after-tax
gain on the disposal of the Clozaril Patient Management System (which was
disposed of effective March 31, 1995) and the Home Infusion business (which was
disposed of effective April 1, 1995). Second quarter 1995 discontinued
operations also reflects a $145.0 million after-tax charge for the settlement
discussed in Note 5 related to the OIG investigation.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Management assesses Caremark's liquidity in terms of its overall ability to
mobilize cash to support ongoing operating needs, including capital
expenditures, and to fund future acquisitions.
Caremark's total assets as of June 30, 1996 increased 11.0% over December 31,
1995 primarily as a result of the acquisition of the assets of CIGNA and capital
expenditures. Net working capital declined $277.9 million due primarily to the
impact of the private payor settlements discussed in Note 5 and the
classification of $215.0 million of debt borrowed under Caremark's long-term
<PAGE>
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
- -------------------------------------------
credit facility as current as of June 30, 1996 as discussed further below. Cash
balances increased as a result of the timing of cash disbursements and
borrowings. Restricted cash relates to $14.0 million placed in escrow and
required to be applied to fund a portion of the private payor settlements
discussed in Note 5. Accounts receivable increased as a result of the growth in
revenues. Short-term deferred tax assets increased due to the deferred tax
benefits related to the private payor settlements discussed in Note 5. Property
and equipment increased as a result of capital expenditures and assets acquired
in acquisitions. Goodwill and other intangibles increased due to the
acquisition of CIGNA. Long-term deferred tax assets declined as this amount is
expected to be realized within one year of June 30, 1996. The increase in
accounts payable is due to the pre-tax liability recorded in the first quarter
of 1996 for the private payor settlements discussed in Note 5 and the timing of
cash disbursements. Accrued liabilities increased primarily due to the
acquisition of CIGNA.
Short-term debt increased since December 31, 1995 due to higher borrowings under
Caremark's short-term credit facility and the inclusion as short-term, at June
30, 1996, of $215.0 million borrowed under Caremark's long-term credit facility.
This amount has been classified as current since the waiver granted by the
company's lenders in connection with the private payor settlements discussed in
Note 5 does not extend beyond one year. Long-term debt decreased since December
31, 1995 due to the short-term classification of the credit facility borrowings.
In total, debt increased $8.6 million since December 31, 1995 due to higher
borrowings. Total equity declined since December 31, 1995 primarily as a result
of the private payor settlements discussed in Note 5, partially offset by net
income from continuing operations.
Caremark's current ratio (current assets divided by current liabilities) as of
June 30, 1996 has declined to .77 versus 1.19 at December 31, 1995. This
decline is the result of the private payor settlement amount included as
accounts payable along with the classification as short-term debt of $215.0
million of borrowings under Caremark's long-term credit facility.
Management believes that the company's cash flows from operations and amounts
available under the company's existing credit facilities are sufficient to meet
its short-term and long-term operating and capital expenditure requirements.
The settlements with private payors discussed in Note 5 require payments
totaling $108.4 million of which $3.3 million has been paid as of March 31,
1996, $101.8 million is due during the remainder of 1996 and $3.3 million in
1997; or, under certain circumstances, $113.9 million plus interest would be due
as follows: $35.6 million in 1996 ($3.3 million of which has been paid), $33.3
million in 1997, $25.0 million in 1998 and $20.0 million in 1999.
Simultaneously with or shortly after the completion of the merger discussed in
Note 6, it is anticipated that Caremark's present credit facility will be
refinanced with a new revolving credit facility, with MedPartners/Mullikin as
the borrower, syndicated with a number of the same lenders that are presently
lenders under the Caremark credit facility. In the event that the merger is not
consummated prior to expiration of the waivers under the Caremark credit
facility, it is anticipated that Caremark's lenders will extend their waivers or
enter into a revised credit facility with Caremark.
Cash flows from continuing operations is the Company's principal source of
funding to support normal business activities. The Company's positive cash flow
from continuing operations was $85.2 million for the six months ended June 30,
1996 versus $65.8 million for the same period of 1995.
Cash flows for investing activities consist of capital expenditures and business
acquisition spending. The increase in capital expenditures occurred primarily
within the expanding Physician Practice Management and Pharmaceutical Services
businesses, including investments
<PAGE>
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
- -------------------------------------------
in information systems and technology. Acquisition spending in the first half
of 1996 reflects the acquisition of CIGNA as well as payments related to
obligations from physician practice affiliations initiated in prior years.
Acquisition spending in the first half of 1995 relates to the affiliations with
Friendly Hills Healthcare Network and Diagnostic Clinic.
Cash flows from financing activities of $47.3 million in the first half of 1996
consist of $19.8 million of cash received upon issuances of common stock under
employee benefit plans and $27.5 million of net borrowings. Cash flows from
discontinued operations in the first half of 1996 include the proceeds received
upon the divestiture of the Nephrology Services business. 1995 cash flows from
discontinued operations for the six months ended June 30 include the proceeds
received from the divestitures of Clozaril Patient Management System and the
Home Infusion business.
<PAGE>
18
PART II. OTHER INFORMATION
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
In May 1996, two stockholders, each purporting to represent a class, filed (but
have not yet served) complaints against Caremark and each of its directors in
the Court of Chancery of the State of Delaware alleging breached of the
directors' fiduciary duty in connection with Caremark's proposed merger with
Medpartners/Mullikin, Inc. The complaints seek unspecified damages, injunctive
relief, and attorneys' fees and expenses. The Company intends, if served, to
defend these cases vigorously. Management is unable at this time to estimate the
impact, if any, of the ultimate resolution of these matters.
On September 11, 1995, Coram Healthcare Company ("Coram") filed a complaint in
the San Francisco Superior Court against Caremark International Inc. and its
subsidiary, Caremark Inc., and 50 unnamed individual defendants. The complaint,
which arises from Caremark's sale to Coram of Caremark's Home Infusion business
in April 1995 for approximately $209.0 million in cash and $100.0 million in
securities, alleges breach of the Asset Sale and Note Purchase Agreement dated
January 29, 1995 as amended on April 1, 1995 between Coram and the company,
breach of related contracts, fraud, negligent misrepresentation and a right to
contractual indemnity. Requested relief in Coram's amended complaint includes
specific performance, declaratory relief, injunctive relief, and damages of $5.2
billion. The company filed motions in October 1995 in the Superior Court of
California seeking (i) to strike certain causes of action due to the speculative
nature of the claims and damages asserted and (ii) dismissal of Coram's lawsuit
on grounds of lack of jurisdiction over Illinois-based Caremark. The Superior
Court of California subsequently dismissed the case against the company (but not
against Caremark Inc.) on the basis of lack of jurisdiction. Caremark also filed
a lawsuit in the U.S. District Court in Chicago claiming that Coram committed
securities fraud in its sale to the company of its securities in connection with
the sale of the company's Home Infusion business to Coram. This case, which has
been dismissed, is on appeal and the company has filed counterclaims to the
lawsuit pending in San Francisco. Coram's lawsuit is currently in the discovery
phase.
Although the company cannot predict with certainty the outcome of these
proceedings, based on information currently available, management believes that
the ultimate resolution of this matter is not likely to have a material adverse
effect on Caremark's results of operations, cash flows or financial position.
The company intends to defend these cases vigorously.
In May 1996, three pharmacies, purporting to represent a class consisting of all
of Caremark's competitors in the alternate site infusion therapy industry, filed
a complaint against Caremark, a subsidiary of Caremark, and two other
corporations in the United States District Court for the District of Hawaii
alleging violations of the federal conspiracy statute, the antitrust laws and of
California's unfair business practice statute. The complaint seeks unspecified
treble damages, and attorneys' fees and expenses. Caremark intends to defend
this case vigorously. Management is unable at this time to estimate the impact,
if any, of the ultimate resolution of this matter.
In August and September 1994, stockholders, each purporting to represent a
class, filed complaints against Caremark and certain officers and employees of
Caremark in the United States District Court for the Northern District of
Illinois, alleging violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934, and fraud and negligence in connection with public
disclosures by Caremark regarding Caremark's business practices and the status
of the OIG investigation. The complaints seek unspecified damages, declaratory
and equitable relief, and attorneys' fees and expenses. In June 1996, the
complaint filed by one group of stockholders alleging violations of the
Securities Exchange Act of 1934 only, was certified as a class. The parties to
all of the complaints continue to engage in discovery proceedings. The company
<PAGE>
19
PART II. OTHER INFORMATION
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
intends to defend these cases vigorously. Management is unable at this time to
estimate the impact, if any, of the ultimate resolution of these matters.
In August 1994 and July 1995, stockholders filed derivative actions on behalf of
Caremark in the Court of Chancery of the State of Delaware, the United States
District Court for the Northern District of Illinois and the Circuit Court of
Cook County in Chicago, Illinois alleging breaches of fiduciary duty, negligence
in connection with Caremark's conduct of the business and lack of corporate
controls, and seeking unspecified damages, attorneys' fees and expenses. In June
1996, the parties entered into a Stipulation and Agreement of Compromise and
Settlement which established proposed terms for the settlement of the case. The
Delaware court will conduct a hearing on August 16, 1996 to consider the
proposed settlement. Although the proposed settlement does not contemplate the
payment of any damages by any defendant, plaintiffs are expected to seek an
award of attorneys' fees and expenses not in excess of $1.025 million in
conjunction with any approval of the settlement. The Illinois and Cook County
Courts have entered stays of all proceedings in those actions pending resolution
of the Delaware derivative action. In the event the proposed settlement of the
Delaware derivative action is approved by the Delaware court, Caremark
anticipates that the Illinois and Cook County derivative actions will be
dismissed. If the proposed settlement is not approved, Caremark intends to
defend these cases vigorously. Management is unable at this time to estimate the
impact, if any, of the ultimate resolution of these matters.
In late August 1994, certain patients of a physician who prescribed human growth
hormone distributed by Caremark and the sponsor of a health insurance plan of
one of those patients filed complaints against Caremark, employees of Caremark
and others in the United States District Court for the District of Minnesota.
Each complaint purported to be on behalf of a class and alleged violations of
the federal mail and wire fraud statutes, the federal conspiracy statute and the
state consumer fraud statute, as well as conspiracy to breach a fiduciary duty,
negligence and fraud. Each complaint sought unspecified treble damages, and
attorneys' fees and expenses. In July 1996, these plaintiffs also served (but
have not yet filed) a separate lawsuit in the Minnesota State Court in the
County of Hennepin against a subsidiary of Caremark purporting to be on behalf
of a class and alleging all of the claims contained in the complaint filed with
the Minnesota federal court other than the federal claims contained therein. The
complaint seeks unspecified damages, attorneys' fees and expenses and an award
of punitive damages. In July 1995, another patient of the same physician filed a
separate complaint in the District of South Dakota against the physician,
Caremark and another corporation alleging violations of the federal laws
prohibiting payment of remuneration to induce referral of Medicare and Medicaid
beneficiaries, and the federal mail fraud and conspiracy statutes. The complaint
also alleges the intentional infliction of emotional distress and seeks trebling
of at least $15.9 million in general damages, attorneys' fees and costs, and an
award of punitive damages. In August 1995, the parties to the case filed in
South Dakota agreed to a stay of all proceedings until final judgment has been
entered in a criminal case that is presently pending against this physician.
Caremark intends to defend these cases vigorously. Management is unable at this
time to estimate the impact, if any, of the ultimate resolution of these
matters.
Beginning in September 1994, Caremark was named as a defendant in a series of
new lawsuits added to a pending group of actions brought in 1993 under the
antitrust laws by local and chain retail pharmacies against brand name
pharmaceutical manufacturers, wholesalers and prescription benefit managers
other than Caremark. The new 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
<PAGE>
20
PART II. OTHER INFORMATION
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
complaints charge that certain defendant prescription benefit managers,
including Caremark, were favored buyers who knowingly induced or received
discriminatory prices from the manufacturers, in violation of the Robinson-
Patman Act. Each complaint seeks unspecified treble damages, declaratory and
equitable relief, and attorneys' fees and expenses. On April 21, 1995, the Court
entered a stay of pre-trial 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. The company intends to defend these cases vigorously. Management is
unable to estimate at this time the impact, if any, of the ultimate resolution
of this matter.
In December 1994, Caremark was notified by the Federal Trade Commission (the
"FTC") that it was conducting a civil investigation of the industry concerning
whether acquisitions, alliances, agreements or activities between pharmacy
benefit managers and pharmaceutical manufacturers, including Caremark's alliance
agreements with certain drug manufacturers, violate Sections 3 or 7 of the
Clayton Act or Section 5 of the Federal Trade Commission Act. The specific
nature, scope, timing and outcome of this investigation are not currently
determinable. Under the statutes, if violations are found, the FTC could seek
remedies in the form of injunctive relief to set aside or modify Caremark's
alliance agreements and an order to cease and desist from certain marketing
practices and from entering into or continuing with certain types of agreements.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of this matter.
Caremark is party to various other commitments, claims and routine litigation
arising in the ordinary course of business. Management does not believe that the
result of such commitments, claims and litigation, individually or in the
aggregate, will have a material effect on the company's business or its income,
cash flows or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index
(b) Reports on Form 8-K
Caremark filed a current report on Form 8-K dated May 13, 1996.
<PAGE>
21
SIGNATURE
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 INTERNATIONAL INC.
---------------------------------------
(Registrant)
Date: August 14, 1996 By: /s/ Thomas W. Hodson
---------------------------------------
Thomas W. Hodson
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
duly authorized Officer of
Registrant)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.1 Caremark International Inc. Bylaws, amended as of March 11, 1996
(incorporated by reference to Exhibit 3.2 of the Registrant's 1995
Annual Report on Form 10-K, File No. 1-11328)
10.3 Plan and Agreement of Merger, dated May 13, 1996 among the
Registrant, MedPartners/Mullikin, Inc. and PPM Merger Corporation
(incorporated by reference to Exhibit 1 of Registrant's Current
Report on Form 8-K dated May 13, 1996, File No. 1-11328)
11.1 Computation of Primary Earnings Per Common and Common Equivalent
Share
11.2 Computation of Fully Diluted Earnings Per Common and Common
Equivalent Share
12.1 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
EXHIBIT 11.1 - COMPUTATION OF PRIMARY EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
- -------------------------------------------------------------------------------------------
(Unaudited - in million, Three months ended Six months ended
except per share data) June 30 June 30
--------------------------------------------
1996 1995 1996 1995
--------------------------------------------
<S> <C> <C> <C> <C>
Earnings
Income from continuing operations $23.0 $ 17.4 $ 41.5 $ 30.5
Operating loss from
discontinued operations - (144.0) (68.9) (146.6)
Gain (loss) on sale of discontinued
operations - (3.8) 2.1 7.1
--------------------------------------------
Net income (loss) $23.0 $ (130.4) $ (25.3) $(109.0)
============================================
- -------------------------------------------------------------------------------------------
Shares
Weighted average number of common
shares outstanding 74.3 72.3 74.1 72.0
Additional shares assuming conversion
of stock options, stock purchase
plan subscriptions and contingent
stock rights 3.4 2.3 3.3 2.2
--------------------------------------------
Weighted average common and common
equivalent shares outstanding 77.7 74.6 77.4 74.2
=============================================
------------------------------------------------------------------------------------------
Primary earnings per common and
common equivalent shares (a)
Income from continuing operations $0.30 $ 0.23 $ 0.54 $ 0.41
Operating loss from
discontinued operations - $ (1.93) $ (0.89) $ (1.98)
Gain (loss) on sale of discontinued
operations - $ (0.05) $ 0.03 $ 0.10
Net income (loss) $0.30 $ (1.75) $ (0.33) $ (1.47)
- -------------------------------------------------------------------------------------------
</TABLE>
(a) Earnings per share for net income may not equal the sum of respective
earnings per share amounts for continued and discontinued operations due to
rounding.
<PAGE>
CAREMARK INTERNATIONAL INC. AND SUBSIDIARIES
EXHIBIT 11.2 - COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(Unaudited - in million, Three months ended Six months ended
except per share data) June 30 June 30
---------------------------------------
1996 1995 1996 1995
---------------------------------------
Earnings
<S> <C> <C> <C> <C>
Income from continuing operations $23.0 $ 17.4 $ 41.5 $ 30.5
Operating loss from
discontinued operations - (144.0) (68.9) (146.6)
Gain (loss) on sale of discontinued
operations - (3.8) 2.1 7.1
---------------------------------------
Net income (loss) $23.0 ($130.4) ($25.3) ($109.0)
=======================================
Shares
Weighted average number of common
shares outstanding 74.3 72.3 74.1 72.0
Additional shares assuming conversion
of stock options, stock purchase
plan subscriptions and contingent
stock rights 3.4 2.7 3.3 2.8
---------------------------------------
Weighted average common and common
equivalent shares outstanding 77.7 75.0 77.4 74.8
=======================================
- --------------------------------------------------------------------------------
Fully diluted earnings per common and
common equivalent shares (a)
Income from continuing operations $0.30 $ 0.23 $ 0.54 $ 0.41
Operating loss from
discontinued operations - ($1.93) ($0.89) ($1.98)
Gain (loss) on sale of discontinued
operations - ($0.05) $ 0.03 $ 0.09
Net income (loss) $0.30 ($1.75) ($0.33) ($1.47)
- ----------------------------------------------------------------------------------
</TABLE>
(a) Earnings per share for net income may not equal the sum of respective
earnings per share amounts for continued and discontinued operations due to
rounding.
<PAGE>
CAREMARK INTERNATIONAL INC.
EXHIBIT 12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
(In millions, except ratios)
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995(a) 1994(a) 1993(a)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax income from continuing operations $31.5 $ 91.2 $80.3
Add:
Interest costs 25.4 16.4 5.5
Estimated interest included in 13.2 15.3 12.6
rentals (b)
- -------------------------------------------------------------------------------
Fixed charges as defined 38.6 31.7 18.1
Interest costs capitalized (4.0) (3.6) (0.8)
- -------------------------------------------------------------------------------
Income as adjusted $66.1 $119.3 $97.6
- -------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.71 3.76 5.39
=========================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 1996
- -------------------------------------------------------------------------------
<S> <C>
Pretax income from continuing operations $64.4
Add:
Interest costs 13.2
Estimated interest included in 7.1
rentals (b)
- -------------------------------------------------------------------------------
Fixed charges as defined 20.3
Interest costs capitalized (1.3)
- -------------------------------------------------------------------------------
Income as adjusted $83.4
- -------------------------------------------------------------------------------
Ratio of earnings to fixed charges 4.1
=====================
- -------------------------------------------------------------------------------
</TABLE>
(a) Results have been restated to adjust for discontinued operations.
(b) Represents the estimated interest portion of rents.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
unaudited consolidated financial statements of Caremark International Inc. as of
and for the three and six months ended June 30, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 63 63<F1>
<SECURITIES> 0 0
<RECEIVABLES> 448 448
<ALLOWANCES> 72 72
<INVENTORY> 100 100
<CURRENT-ASSETS> 627 627
<PP&E> 455 455
<DEPRECIATION> 88 88
<TOTAL-ASSETS> 1404 1404
<CURRENT-LIABILITIES> 814 814
<BONDS> 100 100
<COMMON> 82 82
0 0
0 0
<OTHER-SE> 306 306
<TOTAL-LIABILITY-AND-EQUITY> 1404 1404
<SALES> 806 1570
<TOTAL-REVENUES> 806 1570
<CGS> 696 1350
<TOTAL-COSTS> 767 1497
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5 9
<INCOME-PRETAX> 34 64
<INCOME-TAX> 11 23
<INCOME-CONTINUING> 23 41
<DISCONTINUED> 0 (67)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23 (25)
<EPS-PRIMARY> 0.30 (0.33)
<EPS-DILUTED> 0.30 (0.33)
<FN>
<F1> $14 million of cash is restricted.
</FN>
</TABLE>
