FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended March 31, 2002
Commission File Number 1-8269
OMNICARE, INC.
--------------
Incorporated under the laws of the I.R.S. Employer Identification
State of Delaware No. 31-1001351
100 East RiverCenter Boulevard, Covington, Kentucky 41011
---------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (859) 392-3300
------------------------------------------------------------------
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 requirement for the past 90 days.
Yes x No
--------- ------
COMMON STOCK OUTSTANDING
- ------------------------
Number of
Shares Date
------ ----
Common Stock, $1 par value 94,130,088 March 31, 2002
OMNICARE, INC. AND
SUBSIDIARY COMPANIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Income -
Three months ended -
March 31, 2002 and 2001 3
Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows -
Three months ended -
March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 24
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Omnicare, Inc. and Subsidiary Companies
UNAUDITED
(In thousands, except per share data)
Three Months Ended
March 31,
-----------------------
2002 2001
------ -------
Sales $632,015 $523,645
Reimbursable out-of-pocket expenses (Note 2) 6,299 5,763
-------- --------
Total net sales 638,314 529,408
-------- --------
Cost of sales 467,811 383,381
Reimbursed out-of-pocket expenses (Note 2) 6,299 5,763
-------- --------
Total direct costs 474,110 389,144
-------- --------
Gross profit 164,204 140,264
Selling, general and administrative expenses 99,618 87,754
Goodwill amortization - 8,162
Restructuring charges (Note 4) 4,797 -
Other expense (Note 5) - 1,817
-------- --------
Operating income 59,789 42,531
Investment income 798 474
Interest expense (14,176) (13,909)
-------- --------
Income before income taxes 46,411 29,096
Income taxes 17,635 11,052
-------- --------
Net income $ 28,776 $ 18,044
======== ========
Earnings per share:
Basic $ 0.31 $ 0.20
======== ========
Diluted $ 0.30 $ 0.19
======== ========
Weighted average number of common shares outstanding:
Basic 93,963 92,422
======== ========
Diluted 94,598 93,170
======== ========
Comprehensive income $ 29,003 $ 18,167
======== ========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
CONSOLIDATED BALANCE SHEETS
Omnicare, Inc. and Subsidiary Companies
UNAUDITED
(In thousands, except share data)
March 31, December 31,
2002 2001
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 144,119 $ 168,396
Restricted cash 6,342 2,922
Accounts receivable, less allowances
of $65,661 (2001-$45,573) 517,056 478,077
Unbilled receivables 30,244 23,621
Inventories 172,721 149,134
Deferred income tax benefits 27,230 28,147
Other current assets 95,203 77,297
---------- ----------
Total current assets 992,915 927,594
Properties and equipment, at cost less accumulated
depreciation of $165,193 (2001-$160,164) 159,511 155,073
Goodwill 1,182,458 1,123,800
Other noncurrent assets 82,872 83,809
---------- ----------
Total assets $2,417,756 $2,290,276
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 171,387 $ 140,327
Amounts payable pursuant to acquisition agreements 5,440 5,440
Current debt 465 393
Accrued employee compensation 18,143 25,015
Deferred revenue 32,294 39,338
Income taxes payable 11,869 9,256
Other current liabilities 58,247 49,504
---------- ----------
Total current liabilities 297,845 269,273
Long-term debt 100,450 30,669
5.0% convertible subordinated debentures, due 2007 345,000 345,000
8.125% senior subordinated notes, due 2011 375,000 375,000
Deferred income taxes 80,708 81,495
Amounts payable pursuant to acquisition agreements 4,946 4,966
Other noncurrent liabilities 37,592 34,090
---------- ----------
Total liabilities 1,241,541 1,140,493
---------- ----------
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized,
none issued and outstanding - -
Common stock, $1 par value, 200,000,000 shares authorized,
95,229,500 shares issued and outstanding (2001-94,671,800
shares issued and outstanding) 95,230 94,672
Paid-in capital 733,761 722,701
Retained earnings 408,155 381,441
---------- ----------
1,237,146 1,198,814
Treasury stock, at cost-1,099,400 shares (2001-986,600 shares) (22,641) (19,824)
Deferred compensation (33,583) (24,273)
Accumulated other comprehensive income (4,707) (4,934)
---------- ----------
Total stockholders' equity 1,176,215 1,149,783
---------- ----------
Total liabilities and stockholders' equity $2,417,756 $2,290,276
========== ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Omnicare, Inc. and Subsidiary Companies
UNAUDITED
(In thousands)
Three Months Ended
March 31,
------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 28,776 $ 18,044
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 8,211 8,266
Amortization 3,480 9,870
Provision for doubtful accounts 6,558 7,219
Deferred tax provision 2,042 (3,058)
Non-cash portion of restructuring charges 2,420 -
Changes in assets and liabilities, net of effects from acquisition of
businesses:
Accounts receivable and unbilled receivables (22,930) (9,132)
Inventories (10,930) 13,590
Current and noncurrent assets (14,861) (3,045)
Accounts payable 27,364 (4,474)
Accrued employee compensation (5,974) (6,283)
Deferred revenue (7,044) (5,784)
Current and noncurrent liabilities 5,786 6,895
--------- --------
Net cash flows from operating activities 22,898 32,108
--------- --------
Cash flows from investing activities:
Acquisition of businesses (105,029) (5,154)
Capital expenditures (4,975) (4,606)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust (3,420) (4,096)
Other 45 286
--------- --------
Net cash flows from investing activities (113,379) (13,570)
--------- --------
Cash flows from financing activities:
Borrowings on line of credit facilities 90,000 70,000
Proceeds from long-term borrowings - 375,000
Payments on line of credit facilities (20,000) (445,000)
Fees paid for financing arrangements - (14,314)
(Payments for) proceeds from stock awards and exercise of
stock options, net of stock tendered in payment (2,101) 1,964
Dividends paid (2,118) (2,083)
Other (115) (350)
--------- --------
Net cash flows from financing activities 65,666 (14,783)
--------- --------
Effect of exchange rate changes on cash 538 (96)
--------- --------
Net (decrease) increase in cash and cash equivalents (24,277) 3,659
Cash and cash equivalents at beginning of period - unrestricted 168,396 111,607
--------- --------
Cash and cash equivalents at end of period - unrestricted $ 144,119 $115,266
========= ========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements
1. Interim Financial Data
The interim financial data is unaudited; however, in the opinion of the
management of Omnicare, Inc., the interim data includes all adjustments (which
include only normal adjustments, except as described in Notes 4 and 5)
considered necessary for a fair presentation of the consolidated financial
position, results of operations and cash flows of Omnicare, Inc. and its
consolidated subsidiaries ("Omnicare" or the "Company"). These financial
statements should be read in conjunction with the Consolidated Financial
Statements and related notes included in Omnicare's Annual Report on Form 10-K
for the year ended December 31, 2001. Certain reclassifications of prior year
amounts have been made to conform with the current year presentation.
2. Recently Issued Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS 141"),
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144")
and 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"). All accounting and disclosure relevant to this
authoritative guidance has been incorporated into this Quarterly Report on Form
10-Q.
SFAS 141 and SFAS 144 did not have a significant impact on the
Company's consolidated financial position, results of operations and cash flows.
The adoption of SFAS 142 did not require the Company to record an
adjustment to the carrying value of goodwill, but will affect the Company's
results of operations in 2002 and future years due to the requirement to cease
amortization of goodwill, as further described in Note 7. The Company will
continue to review goodwill on an annual basis for impairment in accordance with
SFAS 142.
EITF No. 01-14 requires reimbursements received for "out-of-pocket"
expenses to be classified in the income statement as revenue, with the actual
expenses classified in the appropriate cost caption. Prior to adoption, the
Company's Contract Research Organization ("CRO") segment classified the net
amount of reimbursed "out-of-pocket" expenses for its clinical study activities
as a component of net revenues. With the adoption of EITF No. 01-14, the Company
has recorded these amounts gross and reclassified prior periods presented to
conform with the current year presentation. The adoption in the first quarter
had no impact on the Company's consolidated financial position, results of
operations and cash flows. However, the adoption of EITF No. 01-14 did impact
the CRO segment's revenues, costs and operating profit as a percentage of
revenues.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13,
6
and Technical Corrections." This Statement updates, clarifies and simplifies
existing accounting pronouncements. Management does not expect the standard to
have any material impact on the Company's consolidated financial position,
results of operations and cash flows.
3. Segment Information
Based on the "management approach," as defined by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," Omnicare
has two business segments. The Company's largest segment is Pharmacy Services.
Pharmacy Services provides distribution of pharmaceuticals, related pharmacy
consulting, data management services and medical supplies to long-term care
facilities in 45 states in the United States of America ("USA"). The Company's
other reportable segment is CRO Services, which provides comprehensive product
development services to client companies in pharmaceutical, biotechnology,
medical devices and diagnostics industries in 27 countries around the world,
including the USA.
The table below presents information about the reportable segments as
of and for the three months ended March 31, 2002 and 2001 and should be read in
connection with the paragraph that follows (in thousands):
Three Months Ended March 31,
----------------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2002: Services Services Consolidating Totals
- -------------------------------------------------------------------------------------------------------------------------
Net sales $ 596,265 $ 42,049 $ - $ 638,314
Depreciation and amortization 10,435 618 638 11,691
Operating income (expense), excluding restructuring
charges 68,205 4,915 (8,534) 64,586
Restructuring charges (1,126) (3,671) - (4,797)
Operating income (expense) 67,079 1,244 (8,534) 59,789
Total assets 2,089,305 141,106 187,345 2,417,756
Expenditures for additions to long-lived assets 4,452 150 373 4,975
========================================================================================================================
2001:
- ------------------------------------------------------------------------------------------------------------------------
Net sales $ 495,401 $ 34,007 $ - $ 529,408
Depreciation and amortization 16,624 1,137 375 18,136
Operating income (expense), excluding other expense 49,222 2,012 (6,886) 44,348
Other expense (1,817) - - (1,817)
Operating income (expense) 47,405 2,012 (6,886) 42,531
Total assets 1,955,775 111,299 148,932 2,216,006
Expenditures for additions to long-lived assets 4,310 77 219 4,606
========================================================================================================================
In accordance with the previously discussed EITF No. 01-14, the Company
included $6.3 million and $5.8 million pretax in its CRO Services segment
reported net sales amounts for the three months ended March 31, 2002 and 2001,
respectively. Further, in accordance with Omnicare's adoption of SFAS 142, the
Company discontinued amortization of goodwill as of January 1, 2002.
Accordingly, no goodwill amortization was recorded during the first quarter of
2002. Pretax goodwill amortization for the first quarter of 2001 totaled $7.9
million and $0.3 million for the Pharmacy Services and CRO Services segments,
respectively.
7
4. Restructuring Charges
In 2001, the Company announced the implementation of a second phase
(the "Phase II Program") of its previously disclosed productivity and
consolidation initiative. The Phase II Program is intended to further streamline
operations, increase efficiency and enhance the Company's position as a high
quality, cost-effective provider of pharmaceutical services. Building on the
previous efforts, the Phase II Program includes the merging or closing of seven
pharmacy locations and the reconfiguration in size and function of an additional
ten locations. The Phase II Program also includes a reduction in occupied
building space in certain locations and the rationalization or reduction of
staffing levels in the CRO business in order to better garner the efficiencies
of the integration and functional reorganization of that business. The Company
expects the Phase II Program measures to lead to a net reduction of
approximately 460 employees, or about 5% of its total workforce, across both the
Pharmacy Services and CRO Services segments.
In connection with the Phase II Program, the Company expensed $18.3
million pretax ($11.4 million aftertax, or $0.12 per diluted share) during the
2001 year. Further, approximately $4.8 million ($3.0 million aftertax, or $0.03
per diluted share) was recorded in the first quarter ended March 31, 2002. The
remaining costs will be taken over the following two quarters when the amounts
are required to be recognized in accordance with generally accepted accounting
principles. The restructuring charges include severance pay, the buy-out of
employment agreements, the buy-out of lease obligations, the write-off of
leasehold improvements and other assets, and related fees and facility exit
costs.
Details of the pretax restructuring charges recorded in 2001 and the
first quarter of 2002 relating to the Phase II Program follow (in thousands):
2001 Utilized Balance at 2002 Utilized Balance at
Provision/ during December 31, Provision/ during March 31,
Accrual 2001 2001 Accrual 2002 2002
-------- -------- -------- -------- -------- --------------
Restructuring charges:
Employee severance $ 4,256 $ (2,614) $ 1,642 $ 315 $ (163) $ 1,794
Employment agreement buy-outs 2,086 (1,578) 508 - (136) 372
Lease terminations 2,711 (2,105) 606 1,431 (524) 1,513
Other assets, fees
and facility exit costs 9,291 (6,264) 3,027 3,051 (1,974) 4,104
-------- -------- -------- -------- -------- --------
Total restructuring charges $ 18,344 $(12,561) $ 5,783 $ 4,797 $ (2,797) $ 7,783
======== ======== ======== ======== ======== ========
As of March 31, 2002, the Company had incurred approximately $4.5
million of severance and other employee-related costs relating to the reduction
of approximately 230 employees. The remaining liabilities recorded at March 31,
2002 are primarily related to activities that the Company anticipates will be
finalized within the next year, and which are classified as current liabilities.
In connection with the previously disclosed first phase of its
productivity and consolidation initiative (the "Phase I Program"), Omnicare had
liabilities of $1.5 million at December 31, 2001, of which $0.3 million was
utilized in the first quarter of 2002. The
8
remaining liabilities at March 31, 2002 of $1.2 million represent amounts not
yet paid relating to actions taken in connection with the Phase I Program
(largely comprised of remaining lease payments), and will be adjusted as these
matters are settled.
5. Other Expense
Included in the first quarter 2001 results is an other expense item
totaling $1.8 million pretax ($1.1 million aftertax, or $0.01 per diluted
share). The $1.8 million one-time charge represents a repayment to the Medicare
Part B program of overpayments made to one of the Company's pharmacy units
during the period from January 1997 through April 1998. As part of its corporate
compliance program, the Company learned of the overpayments, which related to
Medicare Part B claims that contained documentation errors, and notified the
Health Care Financing Administration for review and determination of the amount
of overpayment.
6. Acquisitions
In January, 2002, Omnicare announced the completion of the acquisition
of the assets comprising the pharmaceutical business of American Pharmaceutical
Services, Inc. and other related entities (collectively, "APS"). The acquisition
included cash consideration at closing of $93.1 million (which is subject to
adjustment based on the closing balance sheet review). Up to an additional $18.0
million in deferred payments may become payable, contingent upon future
performance. The Company has completed its initial purchase price allocation,
including the identification of goodwill and other intangible assets based on an
appraisal performed by an independent valuation firm.
At the time of the acquisition, APS provided professional pharmacy and
related consulting services to approximately 60,000 residents of skilled nursing
and assisted living facilities through its network of 32 pharmacies in 15
states, as well as respiratory and Medicare Part B services for residents of
long-term care facilities. From the acquisition, Omnicare expects to achieve
certain economies of scale and cost synergies. The net assets and operating
results of APS have been included in the Company's financial statements
beginning in the first quarter of 2002.
Unaudited pro forma combined results of operations of the Company and
APS for the three months ended March 31, 2001 are presented below. Such pro
forma presentation has been prepared assuming that the APS acquisition had been
made as of January 1, 2001. Pro forma information is not presented for the three
months ended March 31, 2002 as the results of APS are included in those of the
Company from the closing date of January 7, 2002, and the difference from the
beginning of the period would not be significant.
9
The unaudited pro forma combined financial information, including other
expense, follows (in thousands, except per share data):
Three Months Ended
March 31, 2001
--------------
Net sales $595,365
Net income $ 17,615
Earnings per Share:
Basic $ 0.19
Diluted $ 0.19
In connection with the purchase of APS, the Company acquired
amortizable intangible assets comprised of non-compete agreements and customer
relationship assets totaling $1.3 million and $3.1 million, respectively.
Amortization periods for the non-compete agreements and customer relationship
assets are 10.0 years and 4.7 years, respectively, and 6.3 years on a
weighted-average basis. The Company has also initially recorded goodwill
totaling approximately $55 million in connection with the acquisition, although
this amount is subject to adjustment based on certain open matters, including
the finalization of the closing balance sheet review and the payment of any
deferred consideration, as discussed above. Further discussion of goodwill and
other intangible assets is included below in Note 7.
7. Goodwill and Other Intangible Assets
In accordance with SFAS 142, the Company discontinued the amortization
of goodwill effective January 1, 2002. A reconciliation of previously reported
net income and earnings per share (including restructuring charges and other
expense) to the amounts adjusted for the exclusion of goodwill amortization, net
of tax, follows (in thousands, except per share data):
Three Months Ended
March 31,
-------------------------
2002 2001
------- -------
Net income, as reported $28,776 $18,044
Add: Goodwill amortization, net of tax - 5,060
------- -------
Adjusted net income $28,776 $23,104
======= =======
Basic earnings per share:
- ------------------------
Net income, as reported $ 0.31 $ 0.20
Add: Goodwill amortization, net of tax - 0.05
------- -------
Adjusted net income $ 0.31 $ 0.25
======= =======
Diluted earnings per share:
- --------------------------
Net income, as reported $ 0.30 $ 0.19
Add: Goodwill amortization, net of tax - 0.05
------- -------
Adjusted net income $ 0.30 $ 0.24
======= =======
10
Changes in the carrying amount of goodwill for the quarter ended
March 31, 2002, by business segment, are as follows (in thousands):
Pharmacy CRO
Services Services Total
---------- ------- ----------
Balance as of January 1, 2002 $1,085,938 $37,862 $1,123,800
Goodwill acquired in the three
months ended March 31, 2002 55,119 - 55,119
Other 3,697 (158) 3,539
---------- ------- ----------
Balance as of March 31, 2002 $1,144,754 $37,704 $1,182,458
========== ======= ==========
The "Other" caption above includes payments pursuant to acquisition
agreements relating to pre-2002 acquisitions (including deferred payments,
indemnification payments and payments originating from earnout provisions) and
the effect of translation adjustments due to foreign currency translations.
The table below presents the Company's other intangible assets at March
31, 2002 and December 31, 2001, all of which are subject to amortization (in
thousands):
March 31, 2002
-------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------- ------------ -------
Non-compete agreements $10,063 $(5,940) $4,123
Customer relationship assets 3,100 (166) 2,934
Other 373 (164) 209
------- ------- -------
Total $13,536 $(6,270) $7,266
======= ======= =======
December 31, 2001
------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------- ------------ -------
Non-compete agreements $ 8,963 $(5,754) $ 3,209
Other 190 (149) 41
------- ------- -------
Total $ 9,153 $(5,903) $ 3,250
======= ======= =======
Pretax amortization expense related to intangible assets other than
goodwill was $0.3 million and $0.4 million for the three months ended March 31,
2002 and 2001, respectively.
Estimated annual amortization expense for intangible assets subject to
amortization for the next five fiscal years is as follows (in thousands):
Amortization
Years ended December 31, Expense
-------
2002 $1,416
2003 1,329
2004 1,160
2005 1,095
2006 750
11
8. Guarantor Subsidiaries
The Company's $375.0 million senior subordinated notes due 2011 are
fully and unconditionally guaranteed on an unsecured, joint and several basis by
certain wholly owned subsidiaries of the Company (the "Guarantor Subsidiaries").
The following condensed consolidating financial data illustrates the composition
of Omnicare, Inc. ("Parent"), the Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries as of March 31, 2002 and December 31, 2001 for the balance sheets,
and the statements of income and cash flows for each of the three month periods
ended March 31, 2002 and 2001. Separate complete financial statements of the
respective Guarantor Subsidiaries would not provide additional information which
would be useful in assessing the financial condition of the Guarantor
Subsidiaries and thus are not presented. No eliminations column is presented
for the condensed consolidating statement of cash flows since there were no
significant eliminating amounts during the periods presented.
Summary Consolidating Statements of Income
(in thousands) Three Months Ended March 31,
--------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2002 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $611,177 $27,137 $ -- $638,314
Total direct costs -- 452,092 22,018 -- 474,110
-------- -------- ------- -------- --------
Gross profit -- 159,085 5,119 -- 164,204
Selling, general and administrative expenses 5,390 88,758 5,470 -- 99,618
Restructuring charges -- 4,797 -- -- 4,797
-------- -------- ------- -------- --------
Operating income (loss) (5,390) 65,530 (351) -- 59,789
Investment income 739 30 29 -- 798
Interest expense (13,962) (35) (179) -- (14,176)
-------- -------- ------- -------- --------
Income (loss) before income taxes (18,613) 65,525 (501) -- 46,411
Income tax (benefit) expense (7,073) 24,953 (245) -- 17,635
Equity in net income of subsidiaries 40,316 -- -- (40,316) --
-------- -------- ------- -------- --------
Net income (loss) $ 28,776 $ 40,572 $ (256) $(40,316) $ 28,776
============================================================================================================================
2001
- ----------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $504,622 $44,398 $(19,612) $529,408
Total direct costs -- 369,669 39,087 (19,612) 389,144
-------- -------- ------- -------- --------
Gross profit -- 134,953 5,311 -- 140,264
Selling, general and administrative expenses 3,893 85,671 6,352 -- 95,916
Other expense -- 1,817 -- -- 1,817
-------- -------- ------- -------- --------
Operating income (loss) (3,893) 47,465 (1,041) -- 42,531
Investment income 395 11 68 -- 474
Interest expense (13,402) (139) (368) -- (13,909)
-------- -------- ------- -------- --------
Income (loss) before income taxes (16,900) 47,337 (1,341) -- 29,096
Income tax (benefit) expense (6,422) 17,854 (380) -- 11,052
Equity in net income of subsidiaries 28,522 -- -- (28,522) --
-------- -------- ------- -------- --------
Net income (loss) $ 18,044 $ 29,483 $ (961) $(28,522) $ 18,044
============================================================================================================================
12
8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands) Guarantor Non-Guarantor Omnicare, Inc. and
March 31, 2002: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 98,658 $ 36,703 $ 8,758 $ -- $ 144,119
Restricted cash -- 6,342 -- -- 6,342
Accounts receivable, net (including intercompany) -- 515,830 18,178 (16,952) 517,056
Inventories -- 167,859 4,862 -- 172,721
Other current assets 1,179 150,162 1,336 -- 152,677
---------- ---------- -------- ----------- ----------
Total current assets 99,837 876,896 33,134 (16,952) 992,915
---------- ---------- -------- ----------- ----------
Properties and equipment, net 3,283 143,873 12,355 -- 159,511
Goodwill -- 1,119,820 62,638 -- 1,182,458
Other noncurrent assets 29,125 52,693 1,054 -- 82,872
Investment in subsidiaries 1,889,553 -- -- (1,889,553) --
---------- ---------- -------- ----------- ----------
Total assets $2,021,798 $2,193,282 $109,181 $(1,906,505) $2,417,756
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $ 24,649 $ 273,452 $ 16,696 $ (16,952) $ 297,845
Long-term debt 100,000 405 45 -- 100,450
5.0% convertible subordinated debentures, due 2007 345,000 -- -- -- 345,000
8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000
Other noncurrent liabilities 934 121,554 758 -- 123,246
Stockholders' equity 1,176,215 1,797,871 91,682 (1,889,553) 1,176,215
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders' equity $2,021,798 $2,193,282 $109,181 $(1,906,505) $2,417,756
==========================================================================================================================
December 31, 2001:
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 127,110 $ 37,304 $ 3,982 $ -- $ 168,396
Restricted cash -- 2,922 -- -- 2,922
Accounts receivable, net (including intercompany) -- 462,882 24,648 (9,453) 478,077
Inventories -- 144,833 4,301 -- 149,134
Other current assets 944 126,049 2,072 -- 129,065
---------- ---------- -------- ----------- ----------
Total current assets 128,054 773,990 35,003 (9,453) 927,594
---------- ---------- -------- ----------- ----------
Properties and equipment, net 3,192 139,130 12,751 -- 155,073
Goodwill, net -- 1,060,523 63,277 -- 1,123,800
Other noncurrent assets 30,023 53,317 469 -- 83,809
Investment in subsidiaries 1,754,149 -- -- (1,754,149) --
---------- ---------- -------- ----------- ----------
Total assets $1,915,418 $2,026,960 $111,500 $(1,763,602) $2,290,276
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $ 14,797 $ 246,338 $ 17,591 $ (9,453) $ 269,273
Long-term debt 30,000 609 60 -- 30,669
5.0% convertible subordinated debentures, due 2007 345,000 -- -- -- 345,000
8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000
Other noncurrent liabilities 838 119,227 486 -- 120,551
Stockholders' equity 1,149,783 1,660,786 93,363 (1,754,149) 1,149,783
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders' equity $1,915,418 $2,026,960 $111,500 $(1,763,602) $2,290,276
==========================================================================================================================
13
8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows
(in thousands)
Three Months Ended March 31,
-----------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2002: Parent Subsidiaries Subsidiaries and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 5,764 $ 794 $ 6,558
Other (1,020) 12,571 4,789 16,340
--------- --------- ------- ---------
Net cash flows from operating activities (1,020) 18,335 5,583 22,898
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (103,856) (1,173) (105,029)
Capital expenditures -- (4,803) (172) (4,975)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust -- (3,420) -- (3,420)
Other -- 45 -- 45
--------- --------- ------- ---------
Net cash flows from investing activities -- (112,034) (1,345) (113,379)
--------- --------- ------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 90,000 -- -- 90,000
Payments on line of credit facilities (20,000) -- -- (20,000)
Other (97,432) 93,098 -- (4,334)
--------- --------- ------- ---------
Net cash flows from financing activities (27,432) 93,098 -- 65,666
--------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- 538 538
--------- --------- ------- ---------
Net increase (decrease) in cash and cash equivalents (28,452) (601) 4,776 (24,277)
Cash and cash equivalents at beginning of period - unrestricted 127,110 37,304 3,982 168,396
--------- --------- ------- ---------
Cash and cash equivalents at end of period - unrestricted $ 98,658 $ 36,703 $ 8,758 $ 144,119
==============================================================================================================================
2001:
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 6,805 $ 414 $ 7,219
Other (18,478) 45,525 (2,158) 24,889
--------- --------- ------- ---------
Net cash flows from operating activities (18,478) 52,330 (1,744) 32,108
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (5,154) -- (5,154)
Capital expenditures -- (4,011) (595) (4,606)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust -- (4,096) -- (4,096)
Other -- 9 277 286
--------- --------- ------- ---------
Net cash flows from investing activities -- (13,252) (318) (13,570)
--------- --------- ------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 70,000 -- -- 70,000
Proceeds from long-term borrowings 374,930 -- 70 375,000
Payments on line of credit facilities (445,000) -- -- (445,000)
Fees paid for financing arrangements (14,314) -- -- (14,314)
Other 61,431 (66,319) 4,419 (469)
--------- --------- ------- ---------
Net cash flows from financing activities 47,047 (66,319) 4,489 (14,783)
--------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- (96) (96)
--------- --------- ------- ---------
Net increase (decrease) in cash and cash equivalents 28,569 (27,241) 2,331 3,659
Cash and cash equivalents at beginning of period - unrestricted 48,663 59,274 3,670 111,607
--------- --------- ------- ---------
Cash and cash equivalents at end of period - unrestricted $ 77,232 $ 32,033 $ 6,001 $ 115,266
==============================================================================================================================
14
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion should be read in conjunction with the
consolidated financial statements, related notes and other financial information
appearing elsewhere in this Filing. In addition, consideration should be given
to the disclosures at the "Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995 Regarding Forward-Looking Information" caption
below.
Results of Operations
Quarter Ended March 31, 2002 vs. 2001
Consolidated
Diluted earnings per share for the three months ended March 31, 2002
were $0.30 versus $0.19 earned in the same prior year period, including the
impact of restructuring charges in the 2002 period and other expense in the 2001
period, as discussed below. Net income, on this basis, for the 2002 first
quarter was $28.8 million versus $18.0 million earned in the comparable 2001
period. Earnings before interest, taxes, depreciation and amortization
("EBITDA") totaled $71.5 million for the three months ended March 31, 2002 as
compared with EBITDA of $60.7 million in the same period of 2001. Sales for the
three months ended March 31, 2002 rose to $638.3 million from the $529.4 million
recorded in the comparable prior year period.
Effective January 1, 2002, in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP"), Omnicare adopted Financial Accounting Standards
Board Statement No. 142, "Goodwill and Other Intangible Assets," eliminating the
amortization of goodwill related to acquisitions. Accordingly, no goodwill
amortization was recorded during the first quarter of 2002. In the first quarter
of 2001, this accounting standard would have had the effect of adding
approximately $5.1 million aftertax ($0.05 per diluted share) to net income.
In addition, the Company adopted Emerging Issues Task Force ("EITF")
Issue No. 01-14, "Income Statement Characterization of Reimbursements Received
for 'Out-of-Pocket' Expenses Incurred," which requires that, in cases where a
company acts as a principal, reimbursements received for "out-of-pocket"
expenses incurred be characterized as revenue and the associated costs be
included as expenses in the company's income statement. As a result of this
accounting pronouncement, which affects only the contract research organization
("CRO") business, CRO revenues and direct costs may fluctuate significantly
based on the timing of when reimbursable expenses are incurred. EITF No. 01-14
had the effect of increasing both sales and cost of sales by $6.3 million in
the 2002 period and $5.8 million in the 2001 period. Accordingly, it had no
impact on operating or net income.
Included in the 2002 and 2001 first quarters were charges of $4.8
million and $1.8 million pretax ($3.0 million and $1.1 million aftertax, or
$0.03 and $0.01 per diluted share, respectively) related to the second phase of
a productivity and consolidation initiative (the "Phase II Program"), and other
expense, respectively. The restructuring programs are further discussed at the
"Restructuring Charges" section below.
15
Diluted earnings per share for the first quarter of 2002 were $0.34,
excluding the impact of restructuring charges associated with the Phase II
Program, as compared with $0.26 earned in the prior year quarter, excluding
goodwill amortization and other expense as previously discussed above. Net
income, on that basis, was $31.8 million for the 2002 first quarter versus the
$24.2 million earned in the comparable 2001 quarter. EBITDA, on the same basis,
totaled $76.3 million for the three months ended March 31, 2002 as compared with
$62.5 million in the first quarter of 2001.
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $596.3 million
for the first quarter of 2002 as compared with $495.4 million recorded in the
same prior year period, representing an increase of $100.9 million. Operating
income in this segment reached $68.2 million, representing an increase of $19.0
million above the prior year quarter amount of $49.2 million (excluding
restructuring charges and other expense from the 2002 and 2001 periods,
respectively). Owing to the acquisition of American Pharmaceutical Services
("APS") as discussed below, and the efforts of the Company's National Sales &
Marketing Group and pharmacy staff in developing new contracts, net of the
elimination of certain high credit risk or uneconomic accounts, the number of
residents served at March 31, 2002 increased to approximately 729,500 from
645,100 one year earlier. Additionally, the continued implementation of the
Company's clinical programs along with the increasing market penetration of
newer drugs, which often carry higher prices but are significantly more
effective in reducing overall healthcare costs than those they replace, as well
as the acquisition of APS, served to increase pharmacy sales. The increase in
sales in relation to a lower operating cost structure brought about largely by
the previously disclosed Phase II Program, in addition to the exclusion of
goodwill amortization which was $7.9 million in the comparable prior year
quarter, produced increased operating margins in the Pharmacy Services segment.
These factors, along with a gradually improving operating environment in the
skilled nursing facility market, due in part to higher reimbursements under
the Balanced Budget Refinement Act of 1999 and the Benefits Improvement and
Protection Act of 2000, favorably impacted the performance of the Pharmacy
Services segment during the quarter.
In January, 2002, Omnicare announced the completion of the acquisition
of the assets comprising the pharmaceutical business of American Pharmaceutical
Services, Inc. and other related entities (collectively, "APS"). The acquisition
included cash consideration at closing of $93.1 million (which is subject to
adjustment based on the closing balance sheet review). Up to an additional $18.0
million in deferred payments may become payable, contingent upon future
performance. The Company has completed its initial purchase price allocation,
including the identification of goodwill and other intangible assets based on an
appraisal performed by an independent valuation firm.
At the time of the acquisition, APS provided professional pharmacy and
related consulting services to approximately 60,000 residents of skilled nursing
and assisted living facilities through its network of 32 pharmacies in 15
states, as well as respiratory and Medicare Part B services for residents of
long-term care facilities. From the acquisition, Omnicare expects to achieve
certain economies of scale and cost synergies. The net assets and operating
results of APS have been included in the Company's financial statements
beginning in the first quarter of 2002. Based upon historical financial
information, during the full 2002 fiscal year the acquired APS assets are
expected to generate approximately $240.0 million in incremental revenues.
16
CRO Services Segment
Omnicare's Clinical Research ("CRO Services") segment recorded revenues
of $42.0 million during the first quarter of 2002 as compared to $34.0 million
recorded in the same prior year period, representing an increase of $8.0
million. In accordance with EITF No. 01-14, the Company included $6.3 million
and $5.8 million in its CRO Services segment reported revenue and direct cost
amounts for the three months ended March 31, 2002 and 2001, respectively.
Furthermore, operating income in this segment for the first quarter of 2002 was
$4.9 million, an increase of $2.9 million in comparison to the same prior year
quarter operating income of $2.0 million (excluding restructuring charges from
the 2002 period). The improvements in revenue, owing to strong business gains in
prior quarters and the recovery of the overall drug research market, coupled
with efforts made to integrate and streamline the organization, and the
exclusion of goodwill amortization which was $0.3 million in the comparable
prior year quarter, produced these substantial increases in profitability.
Backlog at March 31, 2002 was $197.0 million, representing a decrease of
approximately 8% from the prior year due to projects moving out of backlog at
a more rapid pace in the first quarter of 2002, and an increase of $1.5 million
from December 31, 2001 backlog.
Consolidated
The Company's consolidated gross profit increased $23.9 million from
the prior year to $164.2 million. Gross profit as a percentage of total net
sales decreased to 25.7% in the first quarter of 2002 from 26.5% in 2001 (26.0%
and 26.8%, respectively, excluding the previously disclosed impact of EITF No.
01-14). Positively impacting overall gross profit was the Company's purchasing
leverage associated with the procurement of pharmaceuticals and benefits
realized from the Company's formulary compliance program, as well as the
leveraging of fixed and variable overhead costs at the Company's pharmacies and
the reduced cost structure brought about by the previously disclosed Phase II
Program. These favorable factors were more than offset by the initial impact of
the lower-margin APS business, the adoption of EITF No. 01-14, and the
previously mentioned shift in mix towards newer, branded drugs which typically
produce higher gross profit, but lower gross profit margins.
Omnicare's selling, general and administrative ("operating") expenses
for the quarter ended March 31, 2002 of $99.6 million were higher than the
comparable prior year amount of $87.8 million (excluding goodwill amortization
of $8.2 million pretax, or $5.1 million aftertax), by $11.8 million, due to the
overall growth of the business. However, operating expenses as a percentage of
total net sales totaled 15.6% in the 2002 first quarter, representing a decline
from the 16.6% experienced in the comparable prior year period, excluding
goodwill amortization (15.8% and 16.8%, respectively, excluding the previously
disclosed impact of EITF No. 01-14). This decline is primarily due to improved
leveraging of fixed and variable overhead costs over a higher sales base in the
2002 first quarter, and the year-over-year favorable impact of the Phase II
Program.
In connection with the Phase II Program discussed at the "Restructuring
Charges" section below, the Company recorded pretax restructuring charges of
$4.8 million ($3.0 million aftertax, or $0.03 per diluted share) in the three
months ended March 31, 2002, primarily comprised of
17
employee severance, employment agreement buy-out costs, lease termination costs,
other assets, fees and facility exit costs.
Included in the first quarter 2001 results is an other expense item
totaling $1.8 million pretax ($1.1 million aftertax, or $0.01 per diluted
share). The $1.8 million one-time charge represents a repayment to the Medicare
Part B program of overpayments made to one of the Company's pharmacy units
during the period from January 1997 through April 1998. As part of its corporate
compliance program, the Company learned of the overpayments, which related to
Medicare Part B claims that contained documentation errors, and notified the
Health Care Financing Administration for review and determination of the amount
of overpayment.
Investment income for the three months ended March 31, 2002 was $0.8
million, an improvement of $0.3 million over the same period of 2001. Larger
average invested cash balances in the first quarter of 2002 versus the
comparable prior year period was the primary driver of the year-to-year increase
in investment income.
Interest expense for the three months ended March 31, 2002 of $14.2
million was relatively consistent with the comparable prior year quarter.
The effective tax rate was 38.0% in the first quarter of 2002,
consistent with the comparable prior year quarter rate. The effective tax rates
in the 2002 and 2001 first quarters are higher than the federal statutory rate
largely as a result of the combined impact of state and local income taxes,
various nondeductible expenses and tax-accrual adjustments.
Restructuring Charges
In 2001, the Company announced the Phase II Program, which is intended
to further streamline operations, increase efficiency and enhance the Company's
position as a high quality, cost-effective provider of pharmaceutical services.
Building on the previous efforts, the Phase II Program includes the merging or
closing of seven pharmacy locations and the reconfiguration in size and function
of an additional ten locations. The Phase II Program also includes a reduction
in occupied building space in certain locations and the rationalization or
reduction of staffing levels in the CRO business in order to better garner the
efficiencies of the integration and functional reorganization of that business.
The Company expects the Phase II Program measures to lead to a net reduction of
approximately 460 employees, or about 5% of its total workforce, across both the
Pharmacy Services and CRO Services segments.
In connection with the Phase II Program, the Company expensed $18.3
million pretax ($11.4 million aftertax, or $0.12 per diluted share) during the
2001 year. Further, approximately $4.8 million ($3.0 million aftertax, or $0.03
per diluted share) was recorded in the first quarter ended March 31, 2002. The
remaining costs will be taken over the following two quarters when the amounts
are required to be recognized in accordance with generally accepted accounting
principles. The restructuring charges include severance pay, the buy-out of
employment agreements, the buy-out of lease obligations, the write-off of
leasehold improvements and other assets, and related fees and facility exit
costs.
18
Details of the pretax restructuring charges recorded in 2001 and the
first quarter of 2002 relating to the Phase II Program follow (in thousands):
2001 Utilized Balance at 2002 Utilized Balance at
Provision/ during December 31, Provision/ during March 31,
Accrual 2001 2001 Accrual 2002 2002
---------- -------- ------------ ---------- -------- --------------
Restructuring charges:
Employee severance $ 4,256 $ (2,614) $1,642 $ 315 $ (163) $ 1,794
Employment agreement buy-outs 2,086 (1,578) 508 - (136) 372
Lease terminations 2,711 (2,105) 606 1,431 (524) 1,513
Other assets, fees
and facility exit costs 9,291 (6,264) 3,027 3,051 (1,974) 4,104
-------- -------- ------ ------ ------- -------
Total restructuring charges $18,344 $(12,561) $5,783 $4,797 $(2,797) $7,783
======== ======== ====== ====== ======= =======
As of March 31, 2002, the Company had incurred approximately $4.5
million of severance and other employee-related costs relating to the reduction
of approximately 230 employees. The remaining liabilities recorded at March 31,
2002 are primarily related to activities that the Company anticipates will be
finalized within the next year, and which are classified as current liabilities.
In connection with the previously disclosed first phase of its
productivity and consolidation initiative (the "Phase I Program"), Omnicare had
liabilities of $1.5 million at December 31, 2001, of which $0.3 million was
utilized in the first quarter of 2002. The remaining liabilities at March 31,
2002 of $1.2 million represent amounts not yet paid relating to actions taken in
connection with the Phase I Program (largely comprised of remaining lease
payments), and will be adjusted as these matters are settled.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2002 were $150.5 million
compared with $171.3 million at December 31, 2001 (including restricted cash
amounts of $6.3 million and $2.9 million, respectively). The Company generated
positive net cash flows from operating activities of $22.9 million (including
the impact of purchasing pharmaceuticals in advance of price increases, or
"prebuys," of $37.2 million) during the three months ended March 31, 2002.
These funds, and borrowings of $90 million under the Company's line of credit
facility, were used primarily for acquisition-related payments (including
amounts payable pursuant to acquisition agreements relating to pre-2002
acquisitions), debt repayment, capital expenditures and dividends.
Net cash used in investing activities was $113.4 million and $13.6
million for the three months ended March 31, 2002 and 2001, respectively. The
Company's capital requirements are primarily related to its acquisition program,
as well as capital expenditures, including those related to investments in the
Company's information technology systems. There are no material commitments and
contingencies outstanding at March 31, 2002, other than certain
acquisition-related payments potentially due in the future, including deferred
payments, indemnification payments and payments originating from earnout
provisions (including up to an additional $18.0 million relating to APS,
contingent upon performance).
19
Net cash flows provided by financing activities totaled $65.7 million
for the 2002 first quarter compared to a net use of $14.8 million for the 2001
first quarter. On March 20, 2001, the Company completed the offering of $375.0
million of 8.125% senior subordinated notes due 2011 (the "Senior Notes"),
issued at par through a private placement. On October 24, 2001, the Company's
offer to exchange the originally issued Senior Notes for Senior Notes which have
been registered under the Securities Act of 1933 expired with all Senior Notes
having been exchanged. Concurrent with the original issuance of the Senior
Notes, the Company entered into a new three-year syndicated $495.0 million
revolving credit facility (the "Revolving Credit Facility"), including a $25.0
million letter of credit subfacility, with various lenders. Net proceeds from
the Senior Notes of approximately $365.0 million and borrowings under the new
credit facility of $70.0 million were used to repay outstanding indebtedness in
connection with terminating the Company's then existing facilities. Subsequent
to the closing of the Revolving Credit Facility, the Company received
commitments from additional banks that allowed it to increase the size of the
Revolving Credit Facility to $500.0 million. As of March 31, 2002, the Revolving
Credit Facility bears an interest rate of LIBOR plus 1.375%, incurs commitment
fees on the unused portion at a rate of 0.375% and has no utilization fee.
The Company's current ratio of 3.3 to 1.0 at March 31, 2002 is
relatively consistent with the 3.4 to 1.0 in existence at December 31, 2001.
On February 6, 2002, the Company's Board of Directors declared a
quarterly cash dividend of 2.25 cents per share for an indicated annual rate of
9 cents per share in 2002. Dividends of $2.1 million paid during the three
months ended March 31, 2002 were relatively consistent with those paid in the
comparable prior year period.
The Company believes that cash flows from operations, credit facilities
and other short- and long-term debt financings, if any, will be sufficient to
satisfy its future working capital, acquisition contingency commitments, capital
expenditures, debt servicing and other financing requirements for the
foreseeable future. However, the Company may in the future incur additional
indebtedness or issue additional equity as deemed appropriate. The Company
believes that, if needed, these additional external sources of financing are
readily available.
Recently Issued Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), SFAS No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144")
and EITF Issue No. 01-14, "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred" ("EITF No. 01-14"). All
accounting and disclosure relevant to this authoritative guidance has been
incorporated into this Quarterly Report on Form 10-Q.
SFAS 141 and SFAS 144 did not have a significant impact on the
Company's consolidated financial position, results of operations and cash flows.
The adoption of SFAS 142 did not require the Company to record any
adjustment to the carrying value of goodwill, but will affect the Company's
results of operations in future years due to the requirement to cease
amortization of goodwill as further described in Note 7 of the
20
2002 first quarter consolidated financial statements. The Company will continue
to review goodwill on an annual basis for impairment in accordance with SFAS
142.
EITF No. 01-14 requires reimbursements received for "out-of-pocket"
expenses to be classified in the income statement as revenue, with the actual
expenses classified in the appropriate cost caption. Prior to adoption, the
Company's CRO segment classified the net amount of reimbursed "out-of-pocket"
expenses for its clinical study activities as a component of net revenues. With
the adoption of EITF No. 01-14, the Company has recorded these amounts gross and
reclassified prior periods presented to conform with the current year
presentation. The adoption in the first quarter had no impact on the Company's
consolidated financial position, results of operations and cash flows. However,
the adoption of EITF No. 01-14 did impact the CRO segment's revenues, costs and
operating profit as a percentage of revenues.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This Statement updates, clarifies
and simplifies existing accounting pronouncements. Management does not expect
the standard to have any material impact on the Company's consolidated financial
position, results of operations and cash flows.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Regarding Forward-Looking Information
In addition to historical information, this report contains
forward-looking statements and performance trends that are subject to certain
known and unknown risks, uncertainties, contingencies and other factors that
could cause actual results, performance or achievements to differ materially
from those stated. Such forward-looking statements and trends include those
relating to Omnicare's business outlook or position or future economic
performance; the impact of the acquisition of APS; internal growth resulting
from the development of new contracts; the impact of clinical programs; the
impact of penetration of new drugs; the impact of the productivity and
consolidation programs; the operating environment for skilled nursing
facilities; the impact of higher reimbursement; the impact of prior period
business gains on current quarter CRO performance; the operating environment in
the CRO industry; the impact of the integration and streamlining of the CRO
organization; purchasing leverage; the formulary compliance program; the
leveraging of costs; expectations concerning pharmaceutical price increases and
the impact of pre-buys on costs; the adequacy and availability of Omnicare's
sources of liquidity and capital; the availability of external sources of
financing; and the impact of new accounting rules and standards including SFAS
141, SFAS 142, SFAS 144, SFAS 145 and EITF No. 01-14. Such forward-looking
statements involve actual known and unknown risks, uncertainties, contingencies
and other factors that could cause actual results, performance or achievements
to differ materially from those stated. Such risks, uncertainties, contingencies
and other factors, many of which are beyond the control of Omnicare, include,
but are not limited to: overall economic, financial and business conditions;
trends for the continued growth of the businesses of Omnicare; the ability to
implement productivity, consolidation and cost reduction efforts and to realize
anticipated benefits; delays in reimbursement by the government and other payors
to customers and to Omnicare; the overall financial condition of Omnicare's
customers; Omnicare's ability to assess and react to the financial condition of
customers; the impact of seasonality on the business of Omnicare; the continued
successful integration of the CRO
21
business and acquired companies, including APS, and the ability to realize
anticipated economies of scale and cost synergies; the impact and pace of
pharmaceutical price increases; the effect of new government regulations,
executive orders and/or legislative initiatives, including those relating to
reimbursement and drug pricing policies and in the interpretation and
application of such policies; government budgetary pressures and shifting
priorities; the outcome of litigation; the ability of vendors to provide needed
products and services; the failure of Omnicare to obtain or maintain required
regulatory approvals or licenses; loss or delay of CRO contracts for regulatory
or other reasons; the ability of CRO projects to produce revenues in future
periods; the ability to attract and retain needed management; the impact and
pace of technological advances; the ability to obtain or maintain rights to
data, technology and other intellectual property; the impact of consolidation in
the pharmaceutical and long-term care industries; the continued availability of
suitable acquisition candidates; changes in tax law and regulation; volatility
in Omnicare's stock price; access to capital and financing; the demand for
Omnicare's products and services; pricing and other competitive factors in the
industry; variations in costs or expenses; and changes in accounting rules and
standards.
22
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Omnicare's primary market risk exposure relates to interest rate risk
exposure through its borrowings. The Company's debt obligations at March 31,
2002 include $100.0 million outstanding under its three-year, $500.0 million
variable-rate Revolving Credit Facility at an interest rate of LIBOR plus
1.375%, or 3.3% at March 31, 2002 (a one-hundred basis point change in the
interest rate would impact pretax interest expense by approximately $1.0 million
per year); $345.0 million outstanding under its 5.0% fixed rate convertible
debentures, due 2007 (the "Convertible Debentures"); and $375.0 million
outstanding under its 8.125% fixed rate Senior Notes, due 2011. At March 31,
2002, the fair value of Omnicare's Revolving Credit Facility approximates its
carrying value, and the fair value of the Convertible Debentures and Senior
Notes is approximately $327.3 million and approximately $394.7 million,
respectively.
The Company has operations and revenue that occur outside of the United
States ("U.S.") and transactions that are settled in currencies other than the
U.S. dollar, exposing it to market risk related to changes in foreign currency
exchange rates. However, the substantial portion of the Company's operations and
revenues and the substantial portion of the Company's cash settlements are
exchanged in U.S. dollars. Therefore, changes in foreign currency exchange rates
do not represent a substantial market risk exposure to the Company.
The Company does not have any financial instruments held for trading
purposes, and does not hedge any of its market risks with derivative
instruments.
23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
11 Computation of Earnings Per Common Share
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
March 31, 2002.
24
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.
Omnicare, Inc.
--------------
Registrant
Date: May 14, 2002 By: /s/ David W. Froesel, Jr.
--------------- ------------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25