| | | | (a) | In accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“EITF No. 01-14”), Omnicare, Inc. (“Omnicare” or the “Company”) has recorded reimbursements received for “out-of-pocket” expenses on a grossed-up basis in the income statement as net sales and cost of sales. The respective amounts are disclosed at the “Segment Reconciliations – CRO Services” section of the Financial Information. EITF No. 01-14 relates solely to the Company’s contract research services business. | | | | (b) | Both the results as presented in accordance with GAAP and as adjusted for special items for the three months and year ended December 31, 2006 reflect a change, effective in the third quarter of 2006 and thereafter, to the equity method of accounting for certain pharmacy joint venture operations in which the Company owns less than 100%. Accordingly, the deconsolidation of these operations reduced reported sales by approximately $26 million and $48 million for the three months and year ended December 31, 2006, respectively, but had no impact on earnings. | | | | (c) | The three months ended December 31, 2006 and 2005 include the following special charges: | | | | | (i) | For the three months ended December 31, 2006 and 2005, operating income includes restructuring and other related charges of $4,841 and $9,829 before taxes ($3,214 and $6,161 after taxes, or $0.03 and $0.05 per diluted share), respectively. The $4,841 pretax charge for the year ended December 31, 2006 relates to the implementation of the “Omnicare Full Potential” Plan, a major initiative designed to re-engineer the pharmacy operating model to increase efficiency and enhance customer growth. The $9,829 pretax charge for the year ended December 31, 2005 relates to the Company’s previously disclosed consolidation and productivity initiatives related, in part, to the integration of the NeighborCare, Inc. (“NeighborCare”) acquisition and other related activities (“2005 Program”). | | | | | (ii) | The three months ended December 31, 2006 also includes special litigation charges of $6,310 before taxes ($4,190 after taxes, or $0.03 per diluted share) for litigation-related professional expenses in connection with the administrative subpoenas from the United States Attorney’s Office, District of Massachusetts, the purported class and derivative actions, the Company’s lawsuit against UnitedHealth Group and its Affiliates (“United”), and the investigation by the federal government and certain states relating to drug substitutions. | | | | | (iii) | For the three months ended December 31, 2006, operating income includes a special charge of $8,741 before taxes ($4,894 and $3,847 was recorded in the cost of sales and operating expense sections of the income statement, respectively) ($5,804 after taxes, or $0.05 per diluted share) for costs associated with the | | |
17
Omnicare, Inc. and Subsidiary Companies
Footnotes to Financial Information
(000s, except per share amounts)
Unaudited | | | previously disclosed Heartland Repack Services quality control, product recall and fire issues. | | | | | | | (iv) | Operating income for the three months ended December 31, 2005 includes a $4,909 pretax ($3,078 after taxes, or $0.03 per diluted share) special charge for settlement of litigation relating to certain contractual issues with two vendors. | | | | | (v) | Operating income for the three months ended December 31, 2005 also includes a special charge of $1,725 before taxes ($1,081 after taxes, or $0.01 per diluted share), relating to professional fees and expenses incurred in connection with the Series B 4.00% Trust Preferred Income Equity Redeemable Securities (“New Trust PIERS”) exchange offer, as further discussed in footnote (m) below, and with the repurchase of approximately 98% of the 8.125% senior subordinated notes, due 2011. | | | | | | | (vi) | Interest expense for the three months ended December 31, 2005 includes a special charge of $25,037 before taxes ($15,694 after taxes, or $0.14 per diluted share) in connection with the debt extinguishment and new debt issuance costs in connection with the financing arrangement undertaken to provide final funding for the NeighborCare, RxCrossroads, L.L.C. and excelleRx, Inc. transactions, and the repurchase of approximately 98% of the 8.125% senior subordinated notes, due 2011. In addition to the aforementioned items, interest expense for this same period also includes a special charge of $2,543 before taxes ($1,594 after taxes, or $0.01 per diluted share) in connection with vendor litigation settlements at (c) (iv) above. | | |
| (d) | Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). Operating income for the three months and year ended December 31, 2006 includes additional equity-based compensation expense for stock options and stock awards of approximately $1.0 million and $7.1 million before taxes (approximately $0.7 million and $4.5 million after taxes, or approximately $0.005 and $0.04 per diluted share), respectively, related to the adoption of SFAS 123R. | | | | (e) | The year ended December 31, 2006 and 2005 include the following special charges: | | | | | (i) | For the year ended December 31, 2006 and 2005, operating income includes restructuring and other related charges of $29,562 and $18,779 before taxes ($18,758 and $11,760 after taxes, or $0.15 and $0.11 per diluted share), respectively. Approximately $17,466 of the pretax charge for the year ended December 31, 2006 ($11,088 after taxes, or $0.09 per diluted share) relates to the implementation of the aforementioned “Omnicare Full Potential” Plan. The remaining $12,096 and $18,779 of the pretax charge ($7,670 and $11,760 after taxes, or $0.06 and $0.11 per diluted share), respectively, relates to the 2005 Program. For the year ended December 31, 2006, operating income also includes | | | | |
18
Omnicare, Inc. and Subsidiary Companies
Footnotes to Financial Information
(000s, except per share amounts)
Unaudited | | | a $6,132 pretax ($3,918 after tax, or $0.03 per diluted share) special charge associated with retention payments for certain NeighborCare employees as required under the acquisition agreement. | | | | | | | (ii) | The year ended December 31, 2006 also includes special litigation charges of $125,128 before taxes ($100,507 after taxes, or $0.82 per diluted share) consisting of approximately $57,499 before taxes ($45,283 after taxes, or $0.37 per diluted share) relating to the establishment of a settlement reserve relating to the inquiry by the federal government and certain states concerning the substitution of three generic pharmaceuticals by the Company, $54,005 before taxes ($10,350 and $43,655 was recorded in the net sales and litigation charges lines of the income statement, respectively) ($46,674 after taxes, or $0.38 per diluted share) for the establishment of a reserve relating to an inquiry being conducted by the Attorney General’s Office in Michigan relating to certain billing issues under the Michigan Medicaid program, and $13,624 before taxes ($8,550 after taxes, or $0.07 per diluted share) for litigation-related professional expenses in connection with the administrative subpoenas from the United States Attorney’s Office, District of Massachusetts, the purported class and derivative actions and the Company’s lawsuit against United. | | | | | (iii) | For the year ended December 31, 2006, operating income includes a special charge of $33,726 before taxes ($27,663 and $6,063 was recorded in the cost of sales and operating expense sections of the income statement, respectively) ($21,232 after taxes, or $0.17 per diluted share) for costs associated with the previously disclosed Heartland Repack Services quality control, product recall and fire issues. | | | | | (iv) | For the year ended December 31, 2005, operating income includes a special charge of $2,962 before taxes ($1,854 after taxes, or $0.02 per diluted share), relating to professional fees and expenses incurred in connection with the New Trust PIERS exchange offering in the first quarter of 2005, as further discussed in footnote (m) below, and with the repurchase of approximately 98% of the 8.125% senior subordinated notes, due 2011. Operating income also includes a special charge of $1,147 before taxes ($719 after taxes, or $0.01 per diluted share), for acquisition-related expenses pertaining to a proposed transaction that was not consummated. | | | | | (v) | Operating income for the year ended December 31, 2005 includes a $4,909 pretax ($3,078 after taxes, or $0.03 per diluted share) special charge for the settlement of litigation relating to certain contractual issues with two vendors. | | | | | (vi) | Interest expense for the year ended December 31, 2005 includes a special charge of $32,502 before taxes ($20,364 after taxes, or $0.19 per diluted share), in | | |
19
Omnicare, Inc. and Subsidiary Companies
Footnotes to Financial Information
(000s, except per share amounts)
Unaudited | | connection with the debt extinguishment and new debt issuance costs relating to the financing arrangement undertaken to provide interim and final funding for the NeighborCare, RxCrossroads, L.L.C. and excelleRx, Inc. transactions, and the repurchase of approximately 98% of the 8.125% senior subordinated notes, due 2011. In addition to the aforementioned items, interest expense also includes a special charge of $2,543 before taxes ($1,594 after taxes, or $0.01 per diluted share) in connection with the vendor litigation settlements mentioned at (e)(v) above. | | | | | (f) | Operating income for the three months and year ended December 31, 2006 includes estimated expenses of approximately $4.0 million and $27.3 million before taxes (approximately $2.7 million and $17.4 million after taxes, or approximately $0.02 and $0.14 per diluted share), respectively, comprising temporary labor, administrative and operating costs incurred in connection with the implementation of the new Medicare Drug Benefit, which went into effect on January 1, 2006. Operating income was also impacted by the unilateral reduction by United in the reimbursement rates paid by United to Omnicare under its pharmacy network contract for services rendered by Omnicare to beneficiaries of United’s drug benefit plans under the Medicare Part D program. The impact of United’s action was to reduce sales and operating profit for the three months and year ended December 31, 2006 by approximately $21.7 million and $68.2 million before taxes (approximately $14.4 million and $43.3 million after taxes, or approximately $0.12 and $0.35 per diluted share), respectively. This matter is currently the subject of litigation initiated by Omnicare in federal court. | | | | (g) | Income tax expense during the three months and year ended December 31, 2006 was reduced by approximately $5.0 million ($0.04 per diluted share) primarily for the favorable effect of an increase in the tax benefit of certain state income tax net operating losses. | | | | (h) | In December 2004, the EITF of the Financial Accounting Standards Board ratified EITF No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share" ("EITF No. 04-8"), which requires the shares underlying contingently convertible debt instruments to be included in diluted earnings per share computations using the "if-converted" accounting method, regardless of whether the market price threshold has been met. Under that method, the convertible debentures are assumed to be converted to common shares (weighted for the number of days assumed to be outstanding during the period), and interest expense, net of taxes, related to the convertible debentures is added back to net income. Diluted earnings per common share amounts were retroactively restated for all prior periods to give effect to the application of EITF No. 04-8 relating to the Company's 4.00% junior subordinated convertible debentures ("Old 4.00% Debentures") issued in the second quarter of 2003.The effect of Omnicare's fourth quarter 2004 adoption of EITF No. 04-8 was to | | |
20
Omnicare, Inc. and Subsidiary Companies
Footnotes to Financial Information
(000s, except per share amounts)
Unaudited | | decrease diluted earnings per share $0.02 for the year ended December 31, 2005. There was no impact relating to this change on reported diluted earnings per share for the three months or year ended December 31, 2006 or the three months ended December 31, 2005. | | | | | (i) | Omnicare believes that investors' understanding of Omnicare's performance is enhanced by the Company's disclosure of certain non-GAAP financial measures as presented in this financial information. Omnicare management believes that the adjusted non-GAAP financial results information is useful to investors by providing added insight into the Company's performance through focusing on the results generated by the Company's ongoing core operations, which is also the primary purpose that Omnicare management uses the adjusted non-GAAP financial results. Omnicare's method of calculating these measures may differ from those used by other companies and, therefore, comparability may be limited. | | | | (j) | The noted presentation excludes amounts that Omnicare is required to record in its income statement pursuant to EITF No. 01-14, as previously discussed in footnote (a) above. | | | | (k) | The noted presentation for the three months and year ended December 31, 2006 and 2005 excludes the special charges discussed in footnotes (c) and (e) above. Management believes these items are not related to Omnicare’s ordinary course of business, as previously discussed at footnote (i). | | | | (l) | EBITDA represents earnings before interest expense (net of investment income), income taxes, depreciation and amortization. Omnicare believes that certain investors find EBITDA to be a useful tool for measuring a company's ability to service its debt, which is also the primary purpose for which management uses this financial measure. However, EBITDA does not represent net cash flows from operating activities, as defined by U.S. GAAP, and should not be considered as a substitute for operating cash flows as a measure of liquidity. Omnicare's calculation of EBITDA may differ from the calculation of EBITDA by others. | | | | (m) | On March 8, 2005, Omnicare completed its offer to exchange up to $345,000 aggregate liquidation amount of the 4.00% Trust Preferred Income Equity Redeemable Securities ("Old Trust PIERS") of Omnicare's subsidiary, Omnicare Capital Trust I, for an equal amount of the New Trust PIERS of Omnicare's subsidiary, Omnicare Capital Trust II, plus an exchange fee of $0.125 per $50 stated liquidation amount of the Old Trust PIERS. After the expiration of the exchange offer, approximately $334 million of the Old 4.00% Debentures was replaced with Series B 4.00% junior subordinated convertible debentures ("New 4.00% Debentures"), with approximately $11 million of the Old 4.00% Debentures still outstanding. Omnicare commenced the exchange offer to remove the effect to diluted earnings per share the Old 4.00% Debentures had after the issuance of EITF No. 04-8, as further discussed in footnote (h) above. At December | | |
21
Omnicare, Inc. and Subsidiary Companies
Footnotes to Financial Information
(000s, except per share amounts)
Unaudited
| | 31, 2005, the contingent threshold of the Old Trust PIERS and the New Trust PIERS had been attained. Accordingly, the Old 4.00% Debentures and the New 4.00% Debentures were convertible as of December 31, 2005, to cash and Omnicare common stock, and have been classified as current versus long-term debt on the December 31, 2005 consolidated balance sheet. As of December 31, 2006, the aforementioned contingent threshold had not been met and the Old 4.00% Debentures and the New 4.00% Debentures have been classified as long-term debt on the December 31, 2006 consolidated balance sheet. | | | | | (n) | During the fourth quarter of 2005, the Company completed its offering of 12,825,000 shares of common stock (not including the underwriters’ option to purchase additional shares), $1 par value, at $59.72 per share. In the first quarter of 2006, the underwriters exercised their option, in part, to purchase an additional 850,000 shares of common stock at $59.72 per share, for gross cash proceeds of approximately $51 million (before underwriting discounts, commissions and expenses). | | | | (o) | Free cash flow represents net cash flows from operating activities less capital expenditures and dividends paid by the Company. Omnicare believes that certain investors find free cash flow to be a helpful measure of cash generated from current operations, net of cash used for its ongoing capital expenditures and dividend payment requirements. Omnicare's calculation of free cash flow may differ from the calculation of free cash flow by others. | | | | | (p) | EPS (basic EPS; special items, net of taxes; adjusted basic EPS; diluted EPS; and adjusted diluted EPS) is reported independently for each amount presented. Accordingly, the sum of the individual amounts may not necessarily equal the separately calculated amounts for the corresponding period. | | |
22
|
