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 June 30, 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 94,220,115 June 30, 2002
OMNICARE, INC. AND
SUBSIDIARY COMPANIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income -
Three and six months ended -
June 30, 2002 and 2001 3
Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows -
Six months ended -
June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 29
PART II. OTHER INFORMATION:
- --------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 31
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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- ---------- ---------
Sales $647,101 $530,065 $1,279,116 $1,053,710
Reimbursable out-of-pockets 7,054 6,427 13,353 12,190
-------- -------- ---------- ----------
Total net sales 654,155 536,492 1,292,469 1,065,900
-------- -------- ---------- ----------
Cost of sales 476,171 388,002 943,982 771,383
Reimbursed out-of-pocket expenses 7,054 6,427 13,353 12,190
-------- -------- ---------- ----------
Total direct costs 483,225 394,429 957,335 783,573
-------- -------- ---------- ----------
Gross profit 170,930 142,063 335,134 282,327
Selling, general and administrative expenses 102,501 85,755 202,119 173,509
Goodwill amortization (Note 7) - 8,335 - 16,497
Restructuring charges (Note 4) 7,302 - 12,099 -
Other expense (Note 5) - 3,000 - 4,817
-------- -------- ---------- ----------
Operating income 61,127 44,973 120,916 87,504
Investment income 667 748 1,465 1,222
Interest expense (14,475) (14,415) (28,651) (28,324)
-------- -------- ---------- ----------
Income before income taxes 47,319 31,306 93,730 60,402
Income taxes 17,961 11,910 35,596 22,962
-------- -------- ---------- ----------
Net income $ 29,358 $ 19,396 $ 58,134 $ 37,440
======== ======== ========== ==========
Earnings per share:
Basic $ 0.31 $ 0.21 $ 0.62 $ 0.40
======== ======== ========== ==========
Diluted $ 0.31 $ 0.21 $ 0.61 $ 0.40
======== ======== ========== ==========
Weighted average number of common shares outstanding:
Basic 94,175 93,198 94,070 92,812
======== ======== ========== ==========
Diluted 95,292 94,042 94,984 93,692
======== ======== ========== ==========
Comprehensive income $ 30,977 $ 18,758 $ 59,980 $ 36,925
======== ======== ========== ==========
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)
June 30, December 31,
2002 2001
-------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 178,239 $ 168,396
Restricted cash 6,305 2,922
Accounts receivable, less allowances
of $67,299 (2001-$45,573) 518,016 478,077
Unbilled receivables 35,968 23,621
Inventories 146,902 149,134
Deferred income tax benefits 27,677 28,147
Other current assets 81,265 77,297
---------- ----------
Total current assets 994,372 927,594
Properties and equipment, at cost less accumulated
depreciation of $172,785 (2001-$160,164) 154,994 155,073
Goodwill 1,176,181 1,123,800
Other noncurrent assets 91,115 83,809
---------- ----------
Total assets $2,416,662 $2,290,276
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 145,446 $ 140,327
Current debt 369 393
Accrued employee compensation 23,762 25,015
Deferred revenue 25,840 39,338
Income taxes payable 11,770 9,256
Other current liabilities 77,467 54,944
---------- ----------
Total current liabilities 284,654 269,273
Long-term debt 80,384 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 tax liabilities 82,857 81,495
Other noncurrent liabilities 44,138 39,056
---------- ----------
Total liabilities 1,212,033 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,
95,330,500 shares issued and outstanding (2001-94,671,800
shares issued and outstanding) 95,331 94,672
Paid-in capital 732,379 722,701
Retained earnings 435,060 381,441
---------- ----------
1,262,770 1,198,814
Treasury stock, at cost-1,110,400 shares (2001-986,600 shares) (22,869) (19,824)
Deferred compensation (32,184) (24,273)
Accumulated other comprehensive income (3,088) (4,934)
---------- ----------
Total stockholders' equity 1,204,629 1,149,783
---------- ----------
Total liabilities and stockholders' equity $2,416,662 $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)
Six Months Ended June 30,
----------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $ 58,134 $ 37,440
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 16,510 16,322
Amortization 6,492 20,092
Provision for doubtful accounts 14,176 13,841
Deferred tax provision 4,375 22,101
Non-cash portion of restructuring charges 5,633 -
Changes in assets and liabilities, net of effects
from acquisition of businesses:
Accounts receivable and unbilled receivables (33,913) (15,131)
Inventories 14,744 (4,668)
Current and noncurrent assets (11,524) (7,080)
Accounts payable 3,422 (1,927)
Accrued employee compensation (269) (6,294)
Deferred revenue (13,498) (7,234)
Current and noncurrent liabilities 19,019 (13,406)
--------- ---------
Net cash flows from operating activities 83,301 54,056
--------- ---------
Cash flows from investing activities:
Acquisition of businesses (107,794) (5,993)
Capital expenditures (8,827) (11,402)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust (3,383) (4,017)
Other 253 293
--------- ---------
Net cash flows from investing activities (119,751) (21,119)
--------- ---------
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 (40,000) (455,000)
Principal payments on long-term obligations (244) (1,429)
Fees paid for financing arrangements - (14,418)
(Payments for) proceeds from stock awards and exercise of
stock options, net of stock tendered in payment (763) 3,587
Dividends paid (4,237) (4,181)
Other 72 -
--------- ---------
Net cash flows from financing activities 44,828 (26,441)
--------- ---------
Effect of exchange rate changes on cash 1,465 (400)
--------- ---------
Net increase in cash and cash equivalents 9,843 6,096
Cash and cash equivalents at beginning of period - unrestricted 168,396 111,607
--------- ---------
Cash and cash equivalents at end of period - unrestricted $ 178,239 $ 117,703
========= =========
The Notes to Consolidated Financial Statements are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
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
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 a material impact on the Company's consolidated financial position,
results of operations and cash flows.
The FASB has issued SFAS No. 146 ("SFAS 146"), "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to exit an Activity (including Certain Costs Incurred
in a Restructuring)" and requires liabilities associated with exit and disposal
activities to be expensed as incurred. SFAS 146 will be effective for exit or
disposal activities of the Company that are initiated after December 31, 2002.
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 Contract Research Organization ("CRO") Services,
which provides comprehensive product development services to client companies
in pharmaceutical,
6
biotechnology, medical devices and diagnostics industries in 28 countries around
the world, including the USA.
The table below presents information about the reportable segments as
of and for the three and six months ended June 30, 2002 and 2001 and should be
read in connection with the paragraph that follows (in thousands):
Three Months Ended June 30,
----------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2002: Services Services Consolidating Totals
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 610,412 $ 43,743 $ -- $ 654,155
Depreciation and amortization 9,948 592 771 11,311
Operating income (expense), excluding restructuring
charges 71,614 5,273 (8,458) 68,429
Restructuring charges (2,732) (4,570) -- (7,302)
Operating income (expense) 68,882 703 (8,458) 61,127
Total assets 2,063,608 143,398 209,656 2,416,662
Capital expenditures 3,358 164 330 3,852
- ---------------------------------------------------------------------------------------------------------------
2001:
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 498,178 $ 38,314 $ -- $ 536,492
Depreciation and amortization 16,966 920 392 18,278
Operating income (expense), excluding other expense 52,305 2,801 (7,133) 47,973
Other expense (3,000) -- -- (3,000)
Operating income (expense) 49,305 2,801 (7,133) 44,973
Total assets 1,961,808 115,296 142,456 2,219,560
Capital expenditures 6,205 297 294 6,796
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
----------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2002: Services Services Consolidating Totals
- ---------------------------------------------------------------------------------------------------------------
Net sales $1,206,677 $ 85,792 $ -- $1,292,469
Depreciation and amortization 20,383 1,210 1,409 23,002
Operating income (expense), excluding restructuring
charges 139,819 10,188 (16,992) 133,015
Restructuring charges (3,858) (8,241) -- (12,099)
Operating income (expense) 135,961 1,947 (16,992) 120,916
Total assets 2,063,608 143,398 209,656 2,416,662
Capital expenditures 7,810 314 703 8,827
- ---------------------------------------------------------------------------------------------------------------
2001:
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 993,579 $ 72,321 $ -- $1,065,900
Depreciation and amortization 33,590 2,057 767 36,414
Operating income (expense), excluding other expense 101,527 4,813 (14,019) 92,321
Other expense (4,817) -- -- (4,817)
Operating income (expense) 96,710 4,813 (14,019) 87,504
Total assets 1,961,808 115,296 142,456 2,219,560
Capital expenditures 10,515 374 513 11,402
- ---------------------------------------------------------------------------------------------------------------
In accordance with EITF Issue No. 01-14, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred," the Company included in its reported CRO segment net sales amounts of
$7.1 million and $13.4 million pretax for the three and six months ended June
30, 2002, respectively ($6.4 million and $12.2 million pretax for the comparable
prior year periods ended June 30, 2001, respectively).
7
In accordance with Omnicare's adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), the Company discontinued amortization of
goodwill as of January 1, 2002. Accordingly, no goodwill amortization was
recorded during the three and six months ended June 30, 2002. Pretax goodwill
amortization for the three and six months ended June 30, 2001 totaled $8.0
million and $15.9 million, respectively, for the Pharmacy Services segment, and
$0.3 million and $0.6 million, respectively, for the CRO Services segment.
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 to encompass 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 $7.3 million and $12.1 million ($4.5 million
and $7.5 million aftertax, or $0.05 and $0.08 per diluted share, respectively)
were recorded during the three and six months ended June 30, 2002, respectively.
The remaining costs will be taken over the remainder of the program 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
six months ended June 30, 2002 relating to the Phase II Program follow (in
thousands):
2001 Utilized Balance at 2002 Utilized Balance at
Provision/ during December 31, Provision/ during June 30,
Accrual 2001 2001 Accrual 2002 2002
------- -------- ------ ------- ------- -------
Restructuring charges:
Employee severance $ 4,256 $ (2,614) $1,642 $ 628 $ (723) $ 1,547
Employment agreement buy-outs 2,086 (1,578) 508 -- (161) 347
Lease terminations 2,711 (2,105) 606 2,819 (1,088) 2,337
Other assets, fees
and facility exit costs 9,291 (6,264) 3,027 8,652 (4,473) 7,206
------- -------- ------ ------- ------- -------
Total restructuring charges $18,344 $(12,561) $5,783 $12,099 $(6,445) $11,437
======= ======== ====== ======= ======= =======
8
As of June 30, 2002, the Company had paid approximately $5.1 million of
severance and other employee-related costs relating to the reduction of
approximately 370 employees. The remaining liabilities recorded at June 30, 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 $0.5 million was
utilized in the six months ended June 30, 2002. The remaining liabilities at
June 30, 2002 of $1.0 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 year-to-date June 2001 results are other expense items
totaling $1.8 million pretax ($1.1 million aftertax, or $0.01 per diluted share)
and $3.0 million pretax ($1.9 million aftertax, or $0.02 per diluted share). The
$1.8 million special charge recorded in the first quarter of 2001 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. The $3.0 million special
charge recorded in the second quarter of 2001 represents a settlement during
June 2001 of certain contractual issues with a customer, which issues and amount
relate to prior year periods.
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 and six months ended June 30, 2001 are presented below. Such
pro forma presentation has
9
been prepared assuming that the APS acquisition had been made as of January 1,
2001. Pro forma information is not presented for the three and six months ended
June 30, 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.
The unaudited pro forma combined financial information follows (in
thousands, except per share data):
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Net sales $603,767 $1,199,132
Net income $ 19,387 $ 37,002
Earnings per Share:
Basic $ 0.21 $ 0.40
Diluted $ 0.21 $ 0.39
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 recorded goodwill totaling
approximately $52 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 in Note 7.
10
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 to the amounts adjusted for the exclusion of
goodwill amortization, net of tax, follows (in thousands, except per share
data):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income, as reported $29,358 $19,396 $58,134 $37,440
Add: Goodwill amortization, net of tax -- 5,168 -- 10,228
------- ------- ------- -------
Adjusted net income $29,358 $24,564 $58,134 $47,668
======= ======= ======= =======
Basic earnings per share:
Net income, as reported $ 0.31 $ 0.21 $ 0.62 $ 0.40
Add: Goodwill amortization, net of tax -- 0.05 -- 0.11
------- ------- ------- -------
Adjusted net income $ 0.31 $ 0.26 $ 0.62 $ 0.51
======= ======= ======= =======
Diluted earnings per share:
Net income, as reported $ 0.31 $ 0.21 $ 0.61 $ 0.40
Add: Goodwill amortization, net of tax -- 0.05 -- 0.11
------- ------- ------- -------
Adjusted net income $ 0.31 $ 0.26 $ 0.61 $ 0.51
======= ======= ======= =======
Additionally, the adoption of SFAS 142 did not require the Company to
record an adjustment to the carrying value of goodwill.
Changes in the carrying amount of goodwill for the six months ended
June 30, 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 six
months ended June 30, 2002 51,518 -- 51,518
Other 380 483 863
---------- ------- ----------
Balance as of June 30, 2002 $1,137,836 $38,345 $1,176,181
========== ======= ==========
The "Other" caption above includes the settlement of acquisition
matters relating to pre-2002 acquisitions (including payments pursuant to
acquisition agreements such as deferred payments, indemnification payments and
payments originating from earnout provisions), as well as the effect of
translation adjustments due to foreign currency translations.
11
The table below presents the Company's other intangible assets at June
30, 2002 and December 31, 2001, all of which are subject to amortization (in
thousands):
June 30, 2002
---------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Non-compete agreements $10,106 $(6,122) $3,984
Customer relationship assets 3,100 (332) 2,768
Other 373 (166) 207
------- ------- ------
Total $13,579 $(6,620) $6,959
======= ======= ======
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 $0.7 million and $0.9 million for the six months ended June 30,
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):
Years Ended Amortization
December 31, Expense
----------- -------
2002 $1,416
2003 1,329
2004 1,160
2005 1,095
2006 750
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 June 30, 2002 and December 31, 2001 for the balance sheet,
the statement of income for each of the three and six month periods ended June
30, 2002 and 2001, and the statement of cash flows for the six months ended June
30, 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.
12
8. Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income
(in thousands) Three Months Ended June 30,
----------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2002 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $626,812 $27,343 $ -- $654,155
Total direct costs -- 460,776 22,449 -- 483,225
-------- -------- ------- -------- --------
Gross profit -- 166,036 4,894 -- 170,930
Selling, general and administrative expenses 6,374 90,799 5,328 -- 102,501
Restructuring charges -- 6,504 798 -- 7,302
-------- -------- ------- -------- --------
Operating income (loss) (6,374) 68,733 (1,232) -- 61,127
Investment income 301 289 77 -- 667
Interest expense (14,279) (193) (3) -- (14,475)
-------- -------- ------- -------- --------
Income (loss) before income taxes (20,352) 68,829 (1,158) -- 47,319
Income tax (benefit) expense (7,734) 26,135 (440) -- 17,961
Equity in net income of subsidiaries 41,976 -- -- (41,976) --
-------- -------- ------- -------- --------
Net income (loss) $ 29,358 $ 42,694 $ (718) $(41,976) $ 29,358
- -----------------------------------------------------------------------------------------------------------------------
2001
- -----------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $511,825 $43,782 $(19,115) $536,492
Total direct costs -- 374,073 39,471 (19,115) 394,429
-------- -------- ------- -------- --------
Gross profit -- 137,752 4,311 -- 142,063
Selling, general and administrative expenses 4,052 84,174 5,864 -- 94,090
Other expense -- 3,000 -- -- 3,000
-------- -------- ------- -------- --------
Operating income (loss) (4,052) 50,578 (1,553) -- 44,973
Investment income 617 86 45 -- 748
Interest expense (13,616) (587) (212) -- (14,415)
-------- -------- ------- -------- --------
Income (loss) before income taxes (17,051) 50,077 (1,720) -- 31,306
Income tax (benefit) expense (6,479) 19,017 (628) -- 11,910
Equity in net income of subsidiaries 29,968 -- -- (29,968) --
-------- -------- ------- -------- --------
Net income (loss) $ 19,396 $ 31,060 $(1,092) $(29,968) $ 19,396
- -----------------------------------------------------------------------------------------------------------------------
13
8. Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income
(in thousands) Six Months Ended June 30,
----------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2002 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $1,237,989 $54,480 $ -- $1,292,469
Total direct costs -- 912,868 44,467 -- 957,335
-------- ---------- ------- -------- ----------
Gross profit -- 325,121 10,013 -- 335,134
Selling, general and administrative expenses 11,764 179,557 10,798 -- 202,119
Restructuring charges -- 11,301 798 -- 12,099
-------- ---------- ------- -------- ----------
Operating income (loss) (11,764) 134,263 (1,583) -- 120,916
Investment income 1,040 319 106 -- 1,465
Interest expense (28,241) (228) (182) -- (28,651)
-------- ---------- ------- -------- ----------
Income (loss) before income taxes (38,965) 134,354 (1,659) -- 93,730
Income tax (benefit) expense (14,807) 51,088 (685) -- 35,596
Equity in net income of subsidiaries 82,292 -- -- (82,292) --
-------- ---------- ------- -------- ----------
Net income (loss) $ 58,134 $83,266 $(974) $(82,292) $58,134
- --------------------------------------------------------------------------------------------------------------------------
2001
- --------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $1,016,447 $88,180 $(38,727) $1,065,900
Total direct costs -- 743,742 78,558 (38,727) 783,573
-------- ---------- ------- -------- ----------
Gross profit -- 272,705 9,622 -- 282,327
Selling, general and administrative expenses 7,945 169,685 12,376 -- 190,006
Other expense -- 4,817 -- -- 4,817
-------- ---------- ------- -------- ----------
Operating income (loss) (7,945) 98,203 (2,754) -- 87,504
Investment income 1,012 97 113 -- 1,222
Interest expense (27,018) (886) (420) -- (28,324)
-------- ---------- ------- -------- ----------
Income (loss) before income taxes (33,951) 97,414 (3,061) -- 60,402
Income tax (benefit) expense (12,901) 36,871 (1,008) -- 22,962
Equity in net income of subsidiaries 58,490 -- -- (58,490) --
-------- ---------- ------- -------- ----------
Net income (loss) $ 37,440 $ 60,543 $(2,053) $(58,490) $ 37,440
- --------------------------------------------------------------------------------------------------------------------------
14
8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands)
Guarantor Non-Guarantor Omnicare, Inc.
June 30, 2002: Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 134,549 $ 34,975 $ 8,715 $ -- $ 178,239
Restricted cash -- 6,305 -- -- 6,305
Accounts receivable, net (including
intercompany) -- 524,085 12,334 (18,403) 518,016
Inventories -- 142,742 4,160 -- 146,902
Other current assets 2,964 141,178 768 -- 144,910
---------- ---------- -------- ----------- ----------
Total current assets 137,513 849,285 25,977 (18,403) 994,372
---------- ---------- -------- ----------- ----------
Properties and equipment, net 3,272 141,305 10,417 -- 154,994
Goodwill -- 1,113,434 62,747 -- 1,176,181
Other noncurrent assets 32,496 57,852 767 -- 91,115
Investment in subsidiaries 1,862,381 -- -- (1,862,381) --
---------- ---------- -------- ----------- ----------
Total assets $2,035,662 $2,161,876 $ 99,908 $(1,880,784) $2,416,662
---------- ---------- -------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $29,184 $264,386 $ 9,487 $ (18,403) $284,654
Long-term debt 80,000 384 -- -- 80,384
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 1,849 124,928 218 -- 126,995
Stockholders' equity 1,204,629 1,772,178 90,203 (1,862,381) 1,204,629
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders'
equity $2,035,662 $2,161,876 $ 99,908 $(1,880,784) $2,416,662
- -------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
15
8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows
(in thousands) Six Months Ended June 30,
----------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2002: Parent Subsidiaries Subsidiaries and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 13,716 $ 460 $ 14,176
Other (13,333) 78,278 4,180 69,125
--------- --------- --------- ---------
Net cash flows from operating activities (13,333) 91,994 4,640 83,301
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (106,544) (1,250) (107,794)
Capital expenditures -- (8,588) (239) (8,827)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust -- (3,383) -- (3,383)
Other -- 136 117 253
--------- --------- --------- ---------
Net cash flows from investing activities -- (118,379) (1,372) (119,751)
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 90,000 -- -- 90,000
Payments on line of credit facilities (40,000) -- -- (40,000)
Other (29,228) 24,056 -- (5,172)
--------- --------- --------- ---------
Net cash flows from financing activities 20,772 24,056 -- 44,828
--------- --------- --------- ---------
Effect of exchange rate changes on cash -- -- 1,465 1,465
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 7,439 (2,329) 4,733 9,843
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 $ 134,549 $ 34,975 $ 8,715 $ 178,239
- ---------------------------------------------------------------------------------------------------------------------------
2001:
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 13,109 $ 732 $ 13,841
Other (20,440) 57,465 3,190 40,215
--------- --------- --------- ---------
Net cash flows from operating activities (20,440) 70,574 3,922 54,056
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (5,993) -- (5,993)
Capital expenditures -- (9,987) (1,415) (11,402)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust -- (4,017) -- (4,017)
Other -- 16 277 293
--------- --------- --------- ---------
Net cash flows from investing activities -- (19,981) (1,138) (21,119)
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 70,000 -- -- 70,000
Proceeds from long-term borrowings 375,000 -- -- 375,000
Payments on line of credit facilities (455,000) -- -- (455,000)
Fees paid for financing arrangements (14,418) -- -- (14,418)
Other 86,532 (88,236) (319) (2,023)
--------- --------- --------- ---------
Net cash flows from financing activities 62,114 (88,236) (319) (26,441)
--------- --------- --------- ---------
Effect of exchange rate changes on cash -- -- (400) (400)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 41,674 (37,643) 2,065 6,096
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 $ 90,337 $ 21,631 $ 5,735 $ 117,703
- ---------------------------------------------------------------------------------------------------------------------------
16
9. Subsequent Event
On July 29, 2002, the Company made public its July 26, 2002 offer to
acquire NCS Healthcare, Inc. ("NCS"). Under that proposal, Omnicare would
acquire NCS in a merger transaction pursuant to which NCS stockholders would
receive $3.00 per share in cash and the Company would assume and/or retire
existing NCS debt at its full principal amount plus accrued interest, bringing
the total value of the Omnicare offer to nearly $400 million.
Subsequent to the Company's offer, NCS announced the signing of a
merger agreement with Genesis Health Ventures, Inc. ("Genesis"), whereby NCS
stockholders would receive 0.1 share of Genesis stock for each outstanding NCS
share held and Genesis would retire existing NCS debt at its full principal
amount, a deal valued at approximately half of Omnicare's offer for the equity
component of the proposed transaction.
On August 1, 2002, the Company increased its offer to $3.50 per share
and on August 8, 2002 commenced a cash tender offer for all of the outstanding
shares of NCS at $3.50 per share. Additionally, the Company filed a lawsuit in
Delaware Chancery Court to set aside the merger agreement between Genesis and
NCS and certain related voting agreements.
To date, NCS has not responded to the Company concerning its offer.
17
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 Report. 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 June 30, 2002 vs. 2001
Consolidated
Diluted earnings per share for the three months ended June 30, 2002
were $0.31 versus $0.21 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 second
quarter was $29.4 million versus $19.4 million earned in the comparable 2001
period. Earnings before interest, taxes, depreciation and amortization
("EBITDA") totaled $72.4 million for the three months ended June 30, 2002 as
compared with EBITDA of $63.3 million in the same period of 2001. Total net
sales for the three months ended June 30, 2002 rose to $654.2 million from the
$536.5 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 ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," ("SFAS 142") eliminating the
amortization of goodwill related to acquisitions. Accordingly, no goodwill
amortization was recorded during the second quarter of 2002. In the second
quarter of 2001, this accounting standard would have had the effect of adding
approximately $5.2 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 $7.1 million in the
2002 period and $6.4 million in the 2001 period. Accordingly, it had no impact
on operating or net income.
Included in the 2002 and 2001 second quarters were charges of $7.3
million and $3.0 million pretax ($4.5 million and $1.9 million aftertax, or
$0.05 and $0.02 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. Other expense represents a settlement
18
during the second quarter of 2001 of certain contractual issues with a customer,
which issues and amount related to a prior period.
Diluted earnings per share for the second quarter of 2002 were $0.36,
excluding the impact of restructuring charges associated with the Phase II
Program, as compared with $0.28 earned in the prior year quarter, excluding
goodwill amortization and other expense as previously discussed above. Net
income, on that basis, was $33.9 million for the 2002 second quarter versus the
$26.4 million earned in the comparable 2001 quarter. EBITDA, on the same basis,
totaled $79.7 million for the three months ended June 30, 2002 as compared with
$66.3 million in the second quarter of 2001.
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $610.4 million
for the second quarter of 2002 as compared with $498.2 million recorded in the
same prior year period, representing an increase of $112.2 million. Operating
income in this segment reached $71.6 million, representing an increase of $19.3
million above the prior year quarter amount of $52.3 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, the number of
residents served at June 30, 2002 increased to approximately 738,000 from
650,100 one year earlier. Additionally, the continued implementation of the
Company's clinical programs along with drug price inflation and 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, partially offset by lower
government reimbursement formulas in some states, 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 $8.0 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. At the same
time, other healthcare funding issues remain, including pressures on federal and
state Medicaid budgets due to the economic downturn which has led to decreasing
reimbursement rates in certain states. While the Company has successfully
adjusted to these pricing pressures, pricing pressures are likely to continue if
the economic recovery fails to emerge.
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.
19
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.
On July 29, 2002, the Company made public its July 26, 2002 offer to
acquire NCS Healthcare, Inc. ("NCS"). Under that proposal, Omnicare would
acquire NCS in a merger transaction pursuant to which NCS stockholders would
receive $3.00 per share in cash and the Company would assume and/or retire
existing NCS debt at its full principal amount plus accrued interest, bringing
the total value of the Omnicare offer to nearly $400 million.
Subsequent to the Company's offer, NCS announced the signing of a
merger agreement with Genesis Health Ventures, Inc. ("Genesis"), whereby NCS
stockholders would receive 0.1 share of Genesis stock for each outstanding NCS
share held and Genesis would retire existing NCS debt at its full principal
amount, a deal valued at approximately half of Omnicare's offer for the equity
component of the proposed transaction.
On August 1, 2002, the Company increased its offer to $3.50 per share
and on August 8, 2002 commenced a cash tender offer for all of the outstanding
shares of NCS at $3.50 per share. Additionally, the Company filed a lawsuit in
Delaware Chancery Court to set aside the merger agreement between Genesis and
NCS and certain related voting agreements.
To date, NCS has not responded to the Company concerning its offer.
CRO Services Segment
Omnicare's Clinical Research ("CRO Services") segment recorded revenues
of $43.7 million during the second quarter of 2002 as compared with $38.3
million recorded in the same prior year period, representing an increase of $5.4
million. In accordance with EITF No. 01-14, the Company included $7.1 million
and $6.4 million in its CRO Services segment reported revenue and direct cost
amounts for the three months ended June 30, 2002 and 2001, respectively.
Operating income in this segment for the second quarter of 2002 was $5.3
million, an increase of $2.5 million in comparison to the same prior year
quarter operating income of $2.8 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 totaling $0.3 million in the comparable prior
year quarter, produced these substantial increases in profitability. Backlog at
June 30, 2002 was $194.7 million, representing a decrease of approximately 7.9%
from June 30, 2001 and $2.1 million from March 31, 2002 backlog of $196.8
million due to projects moving out of backlog at a more rapid pace in the second
quarter of 2002.
20
Consolidated
The Company's consolidated gross profit increased $28.8 million from
the prior year to $170.9 million. Gross profit as a percentage of total net
sales decreased to 26.1% in the second quarter of 2002 from 26.5% in the same
period of 2001 (26.4% 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, the previously mentioned shift in mix towards newer, branded
drugs which typically produce higher gross profit, but lower gross profit
margins, and the effect of lower government reimbursement formulas in some
states.
Omnicare's selling, general and administrative ("operating") expenses
for the quarter ended June 30, 2002 of $102.5 million were higher than the
comparable prior year amount of $85.8 million (excluding goodwill amortization
of $8.3 million pretax, or $5.2 million aftertax), by $16.7 million, due to the
overall growth of the business, including the APS acquisition. However,
operating expenses as a percentage of total net sales totaled 15.7% in the 2002
second quarter, representing a decline from the 16.0% experienced in the
comparable prior year period, excluding goodwill amortization (15.8% and 16.2%,
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 second 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
$7.3 million ($4.5 million aftertax, or $0.05 per diluted share) in the three
months ended June 30, 2002, primarily comprised of employee severance,
employment agreement buy-out costs, lease termination costs, other assets, fees
and facility exit costs.
Investment income for the three months ended June 30, 2002 was $ 0.7
million, consistent with the same period of 2001. Lower interest rates served to
offset the favorable impact of larger invested cash balances during the three
months ended June 30, 2002 versus the same period of 2001.
Interest expense for the three months ended June 30, 2002 of $14.5
million was relatively consistent with the comparable prior year quarter.
The effective tax rate was 38% in the second quarter of 2002,
consistent with the comparable prior year quarter rate. The effective tax rates
in the 2002 and 2001 second 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.
21
Year-to-Date June 30, 2002 vs. 2001
Consolidated
Diluted earnings per share for the six months ended June 30, 2002 were
$0.61 versus $0.40 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 six months ended June 30,
2002 was $58.1 million versus $37.4 million earned in the comparable 2001
period. EBITDA totaled $143.9 million for the six months ended June 30, 2002 as
compared with EBITDA of $123.9 million in the same period of 2001. Total net
sales for the six months ended June 30, 2002 rose to $1,292.5 million from the
$1,065.9 million recorded in the comparable prior year period.
In connection with the previously discussed SFAS 142, no goodwill
amortization was recorded during the six months ended June 30, 2002. In the six
months ended June 30, 2001, this accounting standard would have had the effect
of adding approximately $10.2 million aftertax ($0.11 per diluted share) to net
income. Further, in connection with the previously discussed EITF No. 01-14,
sales and cost of sales increased by $13.4 million and $12.2 million in the six
months ended June 30, 2002 and 2001, respectively.
Included in the year-to-date June 30, 2002 and 2001 periods were
charges of $12.1 million and $4.8 million pretax ($7.5 million and $3.0 million
aftertax, or $0.08 and $0.03 per diluted share, respectively) related to the
Phase II Program, and other expense, respectively (both of which are further
discussed below).
Diluted earnings per share for the six months ended June 30, 2002 were
$0.69, excluding the impact of restructuring charges associated with the Phase
II Program, as compared with $0.54 earned in the prior year period, excluding
goodwill amortization and other expense. Net income, on that basis, was $65.6
million for the 2002 six month period versus the $50.7 million earned in the
comparable 2001 period. EBITDA, on the same basis, totaled $156.0 million for
the six months ended June 30, 2002 as compared with $128.7 million in the
comparable 2001 period.
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $1,206.7 million
for the six months ended June 30, 2002 as compared with $993.6 million recorded
in the same prior year period, representing an increase of $213.1 million.
Operating income in this segment reached $139.8 million, representing an
increase of $38.3 million above the prior year period amount of $101.5 million
(excluding restructuring charges and other expense from the 2002 and 2001
periods, respectively). A higher number of residents served, the continued
implementation of the Company's clinical programs, drug price inflation and 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 aforementioned acquisition of APS, partially
offset by lower government reimbursement formulas in some states, served to
increase pharmacy sales. The increase in sales in relation to a lower operating
cost structure brought about largely by the Phase II Program, in addition to the
exclusion of goodwill amortization which was $15.9 million in the comparable
prior year period, produced increased
22
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 overall performance of the Pharmacy Services segment. At
the same time, other healthcare funding issues remain, including pressures on
federal and state Medicaid budgets due to the economic downturn which has led
to decreasing reimbursement rates in certain states. While the Company has
successfully adjusted to these pricing pressures, pricing pressures are likely
to continue if the economic recovery fails to emerge.
CRO Services Segment
The CRO Services segment recorded revenues of $85.8 million during the
six months ended June 30, 2002 as compared with $72.3 million recorded in the
same prior year period, representing an increase of $13.5 million. In accordance
with EITF No. 01-14, the Company included $13.4 million and $12.2 million in its
CRO Services segment reported revenue and direct cost amounts for the six months
ended June 30, 2002 and 2001, respectively. Operating income in this segment for
the six months ended June 30, 2002 was $10.2 million, an increase of $5.4
million in comparison to the prior year period operating income of $4.8 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 totaling
$0.6 million in the comparable prior year period, produced these substantial
increases in profitability.
Consolidated
The Company's consolidated gross profit increased $52.8 million from
the prior year to $335.1 million. Gross profit as a percentage of total net
sales decreased to 25.9% in the six months ended June 30, 2002 from 26.5% in the
same period of 2001 (26.2% 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 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, the shift in
mix towards newer, branded drugs which typically produce higher gross profit,
but lower gross profit margins, and the effect of lower government reimbursement
formulas in some states.
Operating expenses for the six months ended June 30, 2002 of $202.1
million were higher than the comparable prior year amount of $173.5 million
(excluding goodwill amortization of $16.5 million pretax, or $10.2 million
aftertax), by $28.6 million, due to the overall growth of the business. However,
operating expenses as a percentage of total net sales totaled 15.6% in the six
months ended June 30, 2002, representing a decline from the 16.3% experienced in
the comparable prior year period, excluding goodwill amortization (15.8% and
16.5%, 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
23
base in the six months ended June 30, 2002, 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
$12.1 million ($7.5 million aftertax, or $0.08 per diluted share) in the six
months ended June 30, 2002, primarily comprised of employee severance,
employment agreement buy-out costs, lease termination costs, other assets, fees
and facility exit costs.
Included in the year-to-date June 2001 results are other expense items
totaling $1.8 million pretax ($1.1 million aftertax, or $0.01 per diluted share)
and $3.0 million pretax ($1.9 million aftertax, or $0.02 per diluted share). The
$1.8 million special charge recorded in the first quarter of 2001 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. The $3.0 million special
charge recorded in the second quarter of 2001 represents a settlement during
June 2001 of certain contractual issues with a customer, which issues and amount
relate to prior year periods.
Investment income for the six months ended June 30, 2002 was $1.5
million, an improvement of $0.3 million over the same period of 2001. Larger
average invested cash balances during the six months ended June 30, 2002 versus
the comparable prior year period, partially offset by the impact of lower
interest rates in the 2002 versus 2001 period, was the primary driver of the
year-to-year increase in investment income.
Interest expense for the six months ended June 30, 2002 of $28.7
million was relatively consistent with the comparable prior year period.
The effective tax rate was 38% in the year-to-date June 30, 2002
period, consistent with the comparable prior year period. The effective tax
rates in the 2002 and 2001 six months periods 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 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 to encompass a net reduction of
approximately 460 employees, or about 5% of its total workforce, across both the
Pharmacy Services and CRO Services segments.
24
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 $7.3 million and $12.1 million ($4.5 million
and $7.5 million aftertax, or $0.05 and $0.08 per diluted share, respectively)
were recorded in the three and six months ended June 30, 2002, respectively. The
remaining costs will be taken over the remainder of the program 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
six months ended June 30, 2002 relating to the Phase II Program follow (in
thousands):
2001 Utilized Balance at 2002 Utilized Balance at
Provision/ during December 31, Provision/ during June 30,
Accrual 2001 2001 Accrual 2002 2002
---------- ---------- -------------- ---------- ----------- ------------
Restructuring charges:
Employee severance $4,256 $(2,614) $1,642 $628 $(723) $1,547
Employment agreement buy-outs 2,086 (1,578) 508 -- (161) 347
Lease terminations 2,711 (2,105) 606 2,819 (1,088) 2,337
Other assets, fees
and facility exit costs 9,291 (6,264) 3,027 8,652 (4,473) 7,206
------- -------- ------ ------- ------- -------
Total restructuring charges $18,344 $(12,561) $5,783 $12,099 $(6,445) $11,437
======= ======== ====== ======= ======= =======
As of June 30, 2002, the Company had paid approximately $5.1 million of
severance and other employee-related costs relating to the reduction of
approximately 370 employees. The remaining liabilities recorded at June 30, 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 $0.5 million was
utilized in six months ended June 30, 2002. The remaining liabilities at June
30, 2002 of $1.0 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 June 30, 2002 were $184.5 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 $83.3 million (including the impact of
purchasing pharmaceuticals in advance of price increases, or "prebuys") during
the six months ended June 30, 2002. These funds, and borrowings of $90 million
under the Company's line of credit facility, were used primarily for
acquisition-related payments (primarily the aforementioned APS acquisition, as
well as amounts payable pursuant to acquisition agreements relating to pre-2002
acquisitions), debt repayment, capital expenditures and dividends.
25
Net cash used in investing activities was $119.8 million and $21.1
million for the six months ended June 30, 2002 and 2001, respectively. The large
increase is primarily the result of the APS acquisition in the first quarter of
2002. 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 June 30, 2002, other than
the Company's cash tender offer for all of the outstanding shares of NCS, as
well as 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).
Net cash flows provided by financing activities totaled $44.8 million
for the six months ended June 30, 2002 compared to a net use of $26.4 million
for the comparable prior year period. 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 June 30, 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. In
connection with the APS acquisition, the Company borrowed $90 million on the
Revolving Credit Facility, of which $40 million has been repaid during the six
month period ended June 30, 2002.
The Company's current ratio of 3.5 to 1.0 at June 30, 2002 is
relatively consistent with the 3.4 to 1.0 in existence at December 31, 2001.
On May 20, 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 $4.2 million paid during the six months ended
June 30, 2002 were consistent with those paid in the comparable prior year
period.
If the Company acquires NCS pursuant to the Company's cash tender
offer, it will use funds of approximately $405 million, of which approximately
$95 million would be for the purchase of NCS's shares and the payment of
expenses and approximately $310 million would be for the pay off of NCS's
indebtedness and the redemption of NCS's notes. The Company presently intends to
use available cash and additional borrowings under its Revolving Credit Facility
to fund these payments. 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. The Company may, in the future,
refinance its indebtedness, issue additional indebtedness, or issue additional
equity as
26
deemed appropriate. The Company believes that, if needed, these additional
external sources of financing are readily available.
Recently Issued Accounting Pronouncements
In April 2002, the 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 a
material impact on the Company's consolidated financial position, results of
operations and cash flows.
The FASB has issued SFAS No. 146 ("SFAS 146"), "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to exit an Activity (including Certain Costs Incurred in a Restructuring)" and
requires liabilities associated with exit and disposal activities to be expensed
as incurred. SFAS 146 will be effective for exit or disposal activities of the
Company that are initiated after December 31, 2002.
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; the impact of lower
government reimbursement formulas in some states; internal growth resulting
from the development of new contracts; the impact of clinical programs; the
impact of drug price inflation; 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 under the
BBRA and BIPA; governmental pricing pressures due to the continuing economic
downturn; the impact of Omnicare's efforts to acquire NCS; 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; trends concerning CRO backlog; trends concerning the
number of residents served; purchasing leverage; the formulary compliance
program; the leveraging of costs; expectations concerning pharmaceutical price
increases and the impact of prebuys 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 146. 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
27
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 and further reductions in governmental
reimbursement to customers and to Omnicare as a result of pressures on federal
and state budgets due to the continuing economic downturn and other factors; 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 ability of vendors to provide
products and services to Omnicare; the continued successful integration of the
CRO business and acquired companies, including APS, and the ability to realiz
anticipated economies of scale and cost synergies; the impact and pace of
pharmaceutical price increases; increases or decreases in reimbursement; the
effect of new government regulations, executive orders and/or legislative
initiatives, including those relating to reimbursement and drug pricing policies
and changes in the interpretation and application of such policies; government
budgetary pressures and shifting priorities; efforts by payors to control costs;
the ability to consummate an acquisition transaction involving NCS; the outcome
of litigation; 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 and in the financial markets generally; 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.
28
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 June 30, 2002
include $80.0 million outstanding under its three-year, $500.0 million
variable-rate Revolving Credit Facility at an interest rate of LIBOR plus
1.375%, or 3.2% at June 30, 2002 (a one-hundred basis point change in the
interest rate would impact pretax interest expense by approximately $0.8 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 June 30,
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 $326.5 million and approximately $386.3 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.
29
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Omnicare held its Annual Meeting of Stockholders on May 20, 2002.
(b) The names of each director elected at this Annual Meeting, as well as the
corresponding number of shares voted for, and withheld from, each nominee
follows:
Votes For Votes Withheld
--------- --------------
Edward L. Hutton 84,199,516 3,077,410
Joel F. Gemunder 84,250,633 3,026,293
Timothy E. Bien, R.Ph., FASCP 84,248,051 3,028,875
Charles H. Erhart, Jr. 84,550,551 2,726,375
David W. Froesel, Jr. 84,257,337 3,019,589
Cheryl D. Hodges 84,250,905 3,026,021
Patrick E. Keefe 84,247,033 3,029,893
Sandra E. Laney 84,058,195 3,218,731
Andrea R. Lindell, DNSc, RN 84,602,535 2,674,391
Sheldon Margen, M.D. 84,992,477 2,284,449
Kevin J. McNamara 84,499,079 2,777,847
John H. Timoney 84,614,380 2,662,546
(c) The Stockholders ratified the selection by the Board of Directors of
PricewaterhouseCoopers LLP as independent accountants for the Company and
its consolidated subsidiaries for the 2002 year. A total of 83,461,063
votes were cast in favor of the proposal; 3,777,071 votes were cast against
it; 38,792 votes abstained; and there were no Broker non-votes.
(d) The Stockholders re-approved amendments to the Company's 1992 Long-Term
Stock Incentive Plan. A total of 76,846,224 votes were cast in favor of the
proposal; 10,243,161 were cast against it; 187,541 votes abstained; and
there were no Broker non-votes.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
11 Computation of Earnings Per Common Share
99.1 Certification of Chief Executive Officer
of Omnicare, Inc. in accordance with
Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Certification of Chief Financial Officer
of Omnicare, Inc. in accordance with
Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended June 30, 2002.
31
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: August 14, 2002 By: /s/David W. Froesel, Jr.
--------------------- ------------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
32