FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8269
OMNICARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 31-1001351
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 East RiverCenter Boulevard, Covington, Kentucky 41011
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (859) 392-3300
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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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
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COMMON STOCK OUTSTANDING
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Number of
Shares Date
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Common Stock, $1 par value 94,273,576 September 30, 2002
OMNICARE, INC. AND
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SUBSIDIARY COMPANIES
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INDEX
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PAGE
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PART I. FINANCIAL INFORMATION:
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ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income -
Three and nine months ended -
September 30, 2002 and 2001 3
Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows -
Nine months ended -
September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 33
ITEM 4. CONTROLS AND PROCEDURES 33
PART II. OTHER INFORMATION:
- --------------------------
ITEM 1. LEGAL PROCEEDINGS 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 35
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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CONSOLIDATED STATEMENTS OF INCOME
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
Sales $657,270 $541,193 $1,936,386 $1,594,903
Reimbursable out-of-pockets 7,448 6,650 20,801 18,840
-------- -------- ---------- ----------
Total net sales 664,718 547,843 1,957,187 1,613,743
-------- -------- ---------- ----------
Cost of sales 481,703 395,662 1,425,685 1,167,045
Reimbursed out-of-pocket expenses 7,448 6,650 20,801 18,840
-------- -------- ---------- ----------
Total direct costs 489,151 402,312 1,446,486 1,185,885
-------- -------- ---------- ----------
Gross profit 175,567 145,531 510,701 427,858
Selling, general and administrative expenses 103,888 86,359 306,007 259,868
Goodwill amortization (Note 7) -- 8,393 -- 24,890
Restructuring charges (Note 4) 11,096 15,409 23,195 15,409
Other expense (Note 5) -- -- -- 4,817
-------- -------- ---------- ----------
Operating income 60,583 35,370 181,499 122,874
Investment income 651 701 2,116 1,923
Interest expense (14,339) (14,201) (42,990) (42,525)
-------- -------- ---------- ----------
Income before income taxes 46,895 21,870 140,625 82,272
Income taxes 17,829 8,310 53,425 31,272
-------- -------- ---------- ----------
Net income $ 29,066 $ 13,560 $ 87,200 $ 51,000
======== ======== ========== ==========
Earnings per share:
Basic $ 0.31 $ 0.15 $ 0.93 $ 0.55
======== ======== ========== ==========
Diluted $ 0.31 $ 0.14 $ 0.92 $ 0.54
======== ======== ========== ==========
Weighted average number of common shares outstanding:
Basic 94,245 93,345 94,129 92,992
======== ======== ========== ==========
Diluted 94,710 94,117 94,920 93,622
======== ======== ========== ==========
Comprehensive income $ 31,030 $ 14,825 $ 91,010 $ 51,750
======== ======== ========== ==========
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)
September 30, December 31,
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 169,282 $ 168,396
Restricted cash 6,322 2,922
Accounts receivable, less allowances
of $69,573 (2001-$45,573) 504,920 478,077
Unbilled receivables 33,640 23,621
Inventories 162,231 149,134
Deferred income tax benefits 25,913 28,147
Other current assets 95,633 77,297
---------- ----------
Total current assets 997,941 927,594
Properties and equipment, at cost less accumulated
depreciation of $180,800 (2001-$160,164) 155,379 155,073
Goodwill 1,188,462 1,123,800
Other noncurrent assets 93,748 83,809
---------- ----------
Total assets $2,435,530 $2,290,276
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 161,553 $ 140,327
Current debt 364 393
Accrued employee compensation 23,456 25,015
Deferred revenue 26,278 39,338
Income taxes payable 6,353 9,256
Other current liabilities 84,310 54,944
---------- ----------
Total current liabilities 302,314 269,273
Long-term debt 40,344 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 87,731 81,495
Other noncurrent liabilities 46,042 39,056
---------- ----------
Total liabilities 1,196,431 1,140,493
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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,
95,410,700 shares issued and outstanding (2001-94,671,800
shares issued and outstanding) 95,411 94,672
Paid-in capital 736,743 722,701
Retained earnings 461,999 381,441
---------- ----------
1,294,153 1,198,814
Treasury stock, at cost-1,137,100 shares (2001-986,600 shares) (23,419) (19,824)
Deferred compensation (30,511) (24,273)
Accumulated other comprehensive income (1,124) (4,934)
---------- ----------
Total stockholders' equity 1,239,099 1,149,783
---------- ----------
Total liabilities and stockholders' equity $2,435,530 $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)
Nine Months Ended
September 30,
----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 87,200 $ 51,000
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 24,920 24,356
Amortization 9,444 30,777
Provision for doubtful accounts 22,114 20,116
Deferred tax provision 12,342 19,805
Non-cash portion of restructuring charges 9,060 1,229
Changes in assets and liabilities, net of effects
from acquisition of businesses:
Accounts receivable and unbilled receivables (25,621) (16,683)
Inventories (539) (28,655)
Current and noncurrent assets (32,526) (16,523)
Accounts payable 20,736 9,514
Accrued employee compensation (527) (5,154)
Deferred revenue (13,060) (3,097)
Current and noncurrent liabilities 17,056 3,177
--------- ---------
Net cash flows from operating activities 130,599 89,862
--------- ---------
Cash flows from investing activities:
Acquisition of businesses (115,893) (16,207)
Capital expenditures (16,762) (19,293)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust (3,400) (4,075)
Other 263 314
--------- ---------
Net cash flows from investing activities (135,792) (39,261)
--------- ---------
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 (80,000) (465,000)
Principal payments on long-term obligations (64) (2,808)
Fees paid for financing arrangements -- (14,418)
Proceeds from stock awards and exercise of stock options,
net of stock tendered in payment 352 6,057
Dividends paid (6,364) (6,293)
Other 72 --
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Net cash flows from financing activities 3,996 (37,462)
--------- ---------
Effect of exchange rate changes on cash 2,083 125
--------- ---------
Net increase in cash and cash equivalents 886 13,264
Cash and cash equivalents at beginning of period - unrestricted 168,396 111,607
--------- ---------
Cash and cash equivalents at end of period - unrestricted $ 169,282 $ 124,871
========= =========
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. This Statement will be effective for the
Company beginning January 1, 2003. Management does not expect the standard to
have a material impact on the Company's consolidated financial position, results
of operations and cash flows.
In June 2002, the FASB 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.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions," which is not applicable to the Company.
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
6
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,
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 nine months ended September 30, 2002 and 2001 and
should be read in conjunction with the paragraphs that follow (in thousands):
Three Months Ended September 30,
--------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2002: Services Services Consolidating Totals
- -----------------------------------------------------------------------------------------------------------
Net sales $ 623,241 $ 41,477 $ - $ 664,718
Depreciation and amortization 10,176 524 662 11,362
Operating income (expense), excluding restructuring
charges 75,084 5,354 (8,759) 71,679
Restructuring charges (2,911) (8,185) - (11,096)
Operating income (expense) 72,173 (2,831) (8,759) 60,583
Total assets 2,079,031 147,949 208,550 2,435,530
Capital expenditures 7,560 217 158 7,935
- -----------------------------------------------------------------------------------------------------------
2001:
- -----------------------------------------------------------------------------------------------------------
Net sales $ 509,816 $ 38,027 $ - $ 547,843
Depreciation and amortization 17,317 952 450 18,719
Operating income (expense), excluding restructuring
charges 54,914 3,327 (7,462) 50,779
Restructuring charges (6,840) (8,569) - (15,409)
Operating income (expense) 48,074 (5,242) (7,462) 35,370
Total assets 2,000,800 124,885 148,764 2,274,449
Capital expenditures 6,839 744 308 7,891
- -----------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2002: Services Services Consolidating Totals
- -----------------------------------------------------------------------------------------------------------
Net sales $1,829,918 $127,269 $ - $1,957,187
Depreciation and amortization 30,559 1,734 2,071 34,364
Operating income (expense), excluding restructuring
charges 214,903 15,542 (25,751) 204,694
Restructuring charges (6,769) (16,426) - (23,195)
Operating income (expense) 208,134 (884) (25,751) 181,499
Total assets 2,079,031 147,949 208,550 2,435,530
Capital expenditures 15,370 531 861 16,762
- -----------------------------------------------------------------------------------------------------------
2001:
- -----------------------------------------------------------------------------------------------------------
Net sales $1,503,395 $110,348 $ - $1,613,743
Depreciation and amortization 50,907 3,009 1,217 55,133
Operating income (expense), excluding restructuring
charges and other expense 156,441 8,140 (21,481) 143,100
Restructuring charges (6,840) (8,569) - (15,409)
Other expense (4,817) - - (4,817)
Operating income (expense) 144,784 (429) (21,481) 122,874
Total assets 2,000,800 124,885 148,764 2,274,449
Capital expenditures 17,354 1,118 821 19,293
- -----------------------------------------------------------------------------------------------------------
7
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
$7.4 million and $20.8 million pretax for the three and nine months ended
September 30, 2002, respectively ($6.7 million and $18.8 million pretax for the
comparable prior year periods ended September 30, 2001, respectively).
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 nine months ended September 30, 2002. Pretax
goodwill amortization for the three and nine months ended September 30, 2001
totaled $8.1 million and $24.1 million, respectively, for the Pharmacy Services
segment, and $0.3 million and $0.8 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, completed on September 30, 2002,
further streamlined operations, increased efficiencies and helped enhance the
Company's position as a high quality, cost-effective provider of pharmaceutical
services. Building on the previous efforts, the Phase II Program included 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 included
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 Phase II Program encompassed a net reduction of
approximately 460 employees, or about 5% of the Company's 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 $11.1 million and $23.2 million ($6.9 million
and $14.4 million aftertax, or $0.07 and $0.15 per diluted share, respectively)
were recorded during the three and nine months ended September 30, 2002,
respectively. The restructuring charges included 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.
8
Details of the pretax restructuring charges recorded in 2001 and the
nine months ended September 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 September 30,
Accrual 2001 2001 Accrual 2002 2002
---------- -------- ------------ ---------- -------- -------------
Restructuring charges:
Employee severance $ 4,256 $ (2,614) $1,642 $ 2,177 $(1,699) $ 2,120
Employment agreement buy-outs 2,086 (1,578) 508 - (186) 322
Lease terminations 2,711 (2,105) 606 5,862 (1,395) 5,073
Other assets, fees
and facility exit costs 9,291 (6,264) 3,027 15,156 (6,341) 11,842
------- -------- ------ ------- ------- -------
Total restructuring charges $18,344 $(12,561) $5,783 $23,195 $(9,621) $19,357
======= ======== ====== ======= ======= =======
As of September 30, 2002, the Company had paid approximately $6.1
million of severance and other employee-related costs relating to the reduction
of approximately 460 employees. The remaining liabilities recorded at September
30, 2002 represent amounts not yet paid or settled relating to actions taken,
and will be adjusted in future periods as these matters are finalized.
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 $0.6 million was
utilized in the nine months ended September 30, 2002. The remaining liabilities
at September 30, 2002 of $0.9 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 September 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
required cash consideration of $93.5 million (including an adjustment based on
the closing balance sheet review). Up to an additional $18.0 million in total
deferred payments may become payable in annual increments of up to $6.0 million
each, contingent upon future performance, as evaluated in the first quarter of
each of the
9
next three years. The Company has completed its initial purchase price
allocations, 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 has achieved 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 nine months ended September 30, 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 and nine months ended September 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 is not significant.
The unaudited pro forma combined financial information follows (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Net sales $615,066 $1,814,198
Net income $ 13,598 $ 50,600
Earnings per share:
Basic $ 0.15 $ 0.54
Diluted $ 0.14 $ 0.54
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 $54 million in connection with the acquisition, although this
amount is subject to adjustment based on certain open matters, including the
payment of any deferred consideration, as discussed above. Further discussion of
goodwill and other intangible assets is included in Note 7.
On July 29, 2002, the Company made public its July 26, 2002 offer to
acquire NCS HealthCare, Inc. ("NCS"). Under that proposal, the Company would
acquire NCS in a merger transaction pursuant to which holders of Class A common
stock, par value $0.01 per share, of NCS ("NCS Class A Common Stock") and Class
B common stock, par value $0.01 per share, of NCS ("NCS Class B Common Stock"
and, together with the NCS Class A Common Stock, the "Shares") 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 approximately $400 million.
10
Subsequent to the Company's offer, NCS announced the signing of a
merger agreement with Genesis Health Ventures, Inc. ("Genesis"), whereby each
outstanding Share would be converted into the right to receive 0.1 of a share of
common stock, par value $0.02 per share, of Genesis and Genesis would retire or
repay existing NCS debt, including any accrued and unpaid interest, a deal
valued at less than one half of Omnicare's offer for the equity component of the
proposed transaction.
On August 1, 2002, the Company announced that it had filed a lawsuit in
the Delaware Chancery Court to set aside the merger agreement between NCS and
Genesis and certain related voting agreements and that it would commence a
tender offer to acquire all of the outstanding Shares at an offer price per
share of $3.50 in cash. On August 8, 2002, the Company commenced a cash tender
offer for all of the outstanding Shares at $3.50 per share in cash. The cash
tender offer remains ongoing.
On August 20, 2002, the NCS Board of Directors announced that it had
determined that the Company's offer was not in the best interest of NCS
stakeholders and recommended that stockholders reject the offer and not tender
their shares in the offer.
By letter dated October 6, 2002, the Company forwarded to the NCS Board
of Directors an executed Agreement and Plan of Merger (the "Omnicare Merger
Agreement"). The letter further indicated that by executing the proposed
Omnicare Merger Agreement, the Company had irrevocably committed itself (for the
duration set forth in the letter) to a transaction with NCS pursuant to which
the Company would acquire all of the outstanding Shares at a price of $3.50 per
share in cash.
On October 22, 2002, the NCS Board of Directors withdrew its
recommendation that stockholders vote in favor of NCS's pending merger with
Genesis. Moreover, as set forth in its proxy statement dated November 1, 2002,
the NCS Board of Directors unanimously recommends that the NCS stockholders
vote "against" the adoption of the merger agreement with Genesis.
On October 25, 2002, the Delaware Chancery Court held that the Company
had standing to assert a claim that by executing voting agreements with Genesis,
the shares of NCS Class B Common Stock (ten votes per share) owned by Jon H.
Outcalt, chairman of the Board of Directors of NCS ("Outcalt"), and Kevin B.
Shaw, president and chief executive officer of NCS ("Shaw"), automatically
converted into shares of NCS Class A Common Stock (one vote per share). The
Court also found that because the Company was not an NCS stockholder on July 28,
2002, the date on which the NCS Board of Directors approved the merger agreement
with Genesis and the voting agreements, it did not have standing to bring claims
that the NCS Board of Directors breached their fiduciary duties.
On October 29, 2002, the Delaware Chancery Court denied Omnicare's
motion for summary judgment as to the first count of Omnicare's complaint, which
sought a declaration that the execution of the voting agreements by Messrs.
Outcalt and Shaw, in connection with the proposed NCS/Genesis merger, resulted
in the automatic conversion of their NCS Class B Common Stock (ten votes per
share) into NCS Class A Common Stock (one vote per share), and granted summary
judgment in favor of NCS, Outcalt, Shaw, Boake A. Sells (a member of the
11
NCS Board), Richard L. Osbourne (a member of the NCS Board), Genesis and
Geneva Sub, Inc., a wholly owned subsidiary of Genesis.
Omnicare has filed an appeal with respect to the Court's rulings.
Notwithstanding the Court's rulings, the NCS Directors are being sued
by other NCS stockholder-plaintiffs for breaching their fiduciary duties in
approving the merger agreement with Genesis and the related voting agreements.
The Court's rulings do not address these claims. A motion for preliminary
injunction relating to these stockholder claims is expected to be heard by the
Delaware Chancery Court on November 14, 2002.
If the Company acquires NCS pursuant to the Company's cash tender
offer, it will use funds of approximately $423 million, of which approximately
$100 million would be for the purchase of NCS's shares and the payment of
expenses and approximately $323 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.
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 Nine Months Ended
September 30, September 30,
--------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income, as reported $29,066 $13,560 $87,200 $51,000
Goodwill amortization, net of tax - 5,204 - 15,432
------- ------- ------- -------
Adjusted net income $29,066 $18,764 $87,200 $66,432
======= ======= ======= =======
Basic earnings per share(a):
Net income, as reported $ 0.31 $ 0.15 $ 0.93 $ 0.55
Goodwill amortization, net of tax - 0.06 - 0.17
Adjusted net income $ 0.31 $ 0.20 $ 0.93 $ 0.71
======= ======= ======= =======
Diluted earnings per share(a):
Net income, as reported $ 0.31 $ 0.14 $ 0.92 $ 0.54
Goodwill amortization, net of tax - 0.06 - 0.16
Adjusted net income $ 0.31 $ 0.20 $ 0.92 $ 0.71
======= ======= ======= =======
(a) Earnings per share (net income, as reported, and goodwill amortization,
net of tax) is calculated independently for each amount presented.
Accordingly, the sum of the individual net income, as reported, and
goodwill amortization, net of tax disclosures may
12
not necessarily equal the earnings per share (adjusted net income) amount for
the corresponding period.
The Company determined that there was no adjustment required to the
carrying value of goodwill at the date of adoption of SFAS 142. During the third
quarter of 2002, the Company completed its annual impairment evaluation of
goodwill and determined that no such impairment exists.
Changes in the carrying amount of goodwill for the nine months ended
September 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 nine
months ended September 30, 2002 55,177 - 55,177
Other 8,745 740 9,485
---------- ------- ----------
Balance as of September 30, 2002 $1,149,860 $38,602 $1,188,462
========== ======= ==========
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
adjustments due to foreign currency translations.
The table below presents the Company's other intangible assets at
September 30, 2002 and December 31, 2001, all of which are subject to
amortization (in thousands):
September 30, 2002
------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Non-compete agreements $10,106 $(6,312) $3,794
Customer relationship assets 3,100 (498) 2,602
Other 373 (227) 146
------- ------- ------
Total $13,579 $(7,037) $6,542
======= ======= ======
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 $1.1 million for the nine months ended September 30, 2002 and 2001.
13
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 September 30, 2002 and December 31, 2001 for the balance
sheet, the statement of income for each of the three and nine month periods
ended September 30, 2002 and 2001, and the statement of cash flows for the nine
months ended September 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.
14
8. Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income
(in thousands) Three Months Ended September 30,
--------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2002 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $636,159 $28,559 $ -- $664,718
Total direct costs -- 465,856 23,295 -- 489,151
-------- -------- ------- -------- --------
Gross profit -- 170,303 5,264 -- 175,567
Selling, general and administrative expenses 5,325 92,965 5,598 -- 103,888
Restructuring charges -- 11,096 -- -- 11,096
-------- -------- ------- -------- --------
Operating income (loss) (5,325) 66,242 (334) -- 60,583
Investment income 497 70 84 -- 651
Interest expense (14,332) (7) -- -- (14,339)
-------- -------- ------- -------- --------
Income (loss) before income taxes (19,160) 66,305 (250) -- 46,895
Income tax (benefit) expense (7,281) 25,205 (95) -- 17,829
Equity in net income of subsidiaries 40,945 -- -- (40,945) --
-------- -------- ------- -------- --------
Net income (loss) $ 29,066 $ 41,100 $ (155) $(40,945) $ 29,066
===========================================================================================================================
2001
- ---------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $523,906 $35,388 $(11,451) $547,843
Total direct costs -- 383,751 30,012 (11,451) 402,312
-------- -------- ------- -------- --------
Gross profit -- 140,155 5,376 -- 145,531
Selling, general and administrative expenses 4,337 85,510 4,905 -- 94,752
Restructuring charges -- 15,409 -- -- 15,409
-------- -------- ------- -------- --------
Operating income (loss) (4,337) 39,236 471 -- 35,370
Investment income 383 258 60 -- 701
Interest expense (13,467) (529) (205) -- (14,201)
-------- -------- ------- -------- --------
Income (loss) before income taxes (17,421) 38,965 326 -- 21,870
Income tax (benefit) expense (6,620) 14,806 124 -- 8,310
Equity in net income of subsidiaries 24,361 -- -- (24,361) --
-------- -------- ------- -------- --------
Net income (loss) $ 13,560 $ 24,159 $ 202 $(24,361) $ 13,560
===========================================================================================================================
15
8. Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income
(in thousands) Nine Months Ended September 30,
------------------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc. and
2002 Parent Subsidiaries Subsidiaries Eliminations Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $1,874,148 $ 83,039 $ -- $1,957,187
Total direct costs -- 1,378,724 67,762 -- 1,446,486
-------- ---------- -------- --------- ----------
Gross profit -- 495,424 15,277 -- 510,701
Selling, general and administrative
expenses 17,089 272,522 16,396 -- 306,007
Restructuring charges -- 22,397 798 -- 23,195
-------- ---------- -------- --------- ----------
Operating income (loss) (17,089) 200,505 (1,917) -- 181,499
Investment income 1,537 389 190 -- 2,116
Interest expense (42,573) (235) (182) -- (42,990)
-------- ---------- -------- --------- ----------
Income (loss) before income taxes (58,125) 200,659 (1,909) -- 140,625
Income tax (benefit) expense (22,088) 76,293 (780) -- 53,425
Equity in net income of subsidiaries 123,237 -- -- (123,237) --
-------- ---------- -------- --------- ----------
Net income (loss) $ 87,200 $ 124,366 $ (1,129) $(123,237) $ 87,200
============================================================================================================================
2001
- ----------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $1,540,353 $123,568 $ (50,178) $1,613,743
Total direct costs -- 1,127,493 108,570 (50,178) 1,185,885
-------- ---------- -------- --------- ----------
Gross profit -- 412,860 14,998 -- 427,858
Selling, general and administrative
expenses 12,282 255,195 17,281 -- 284,758
Restructuring charges -- 15,409 -- -- 15,409
Other expense -- 4,817 -- -- 4,817
-------- ---------- -------- --------- ----------
Operating income (loss) (12,282) 137,439 (2,283) -- 122,874
Investment income 1,395 355 173 -- 1,923
Interest expense (40,485) (1,415) (625) -- (42,525)
-------- ---------- -------- --------- ----------
Income (loss) before income taxes (51,372) 136,379 (2,735) -- 82,272
Income tax (benefit) expense (19,521) 51,677 (884) -- 31,272
Equity in net income of subsidiaries 82,851 -- -- (82,851) --
-------- ---------- -------- --------- ----------
Net income (loss) $ 51,000 $ 84,702 $ (1,851) $ (82,851) $ 51,000
============================================================================================================================
16
8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands)
Guarantor Non-Guarantor Omnicare, Inc.
September 30, 2002: Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 124,800 $ 38,696 $ 5,786 $ -- $ 169,282
Restricted cash -- 6,322 -- -- 6,322
Accounts receivable, net (including
intercompany) -- 504,133 12,539 (11,752) 504,920
Inventories -- 157,775 4,456 -- 162,231
Other current assets 2,565 151,498 1,123 -- 155,186
---------- ---------- -------- ----------- ----------
Total current assets 127,365 858,424 23,904 (11,752) 997,941
---------- ---------- -------- ----------- ----------
Properties and equipment, net 2,870 141,127 11,382 -- 155,379
Goodwill -- 1,124,656 63,806 -- 1,188,462
Other noncurrent assets 33,330 59,455 963 -- 93,748
Investment in subsidiaries 1,865,944 -- -- (1,865,944) --
---------- ---------- -------- ----------- ----------
Total assets $2,029,509 $2,183,662 $100,055 $(1,877,696) $2,435,530
===========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $ 28,406 $ 276,375 $ 9,285 $ (11,752) $ 302,314
Long-term debt 40,000 344 -- -- 40,344
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 2,004 131,416 353 -- 133,773
Stockholders' equity 1,239,099 1,775,527 90,417 (1,865,944) 1,239,099
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders'
equity $2,029,509 $2,183,662 $100,055 $(1,877,696) $2,435,530
=============================================================================================================================
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
=============================================================================================================================
17
8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows
(in thousands) Nine Months Ended September 30,
---------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2002: Parent Subsidiaries Subsidiaries and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 21,440 $ 674 $ 22,114
Other (25,868) 133,934 419 108,485
--------- --------- ------- ---------
Net cash flows from operating activities (25,868) 155,374 1,093 130,599
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (114,643) (1,250) (115,893)
Capital expenditures -- (16,523) (239) (16,762)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust -- (3,400) -- (3,400)
Other -- 146 117 263
--------- --------- ------- ---------
Net cash flows from investing activities -- (134,420) (1,372) (135,792)
--------- --------- ------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 90,000 -- -- 90,000
Payments on line of credit facilities (80,000) -- -- (80,000)
Other 13,558 (19,562) -- (6,004)
--------- --------- ------- ---------
Net cash flows from financing activities 23,558 (19,562) -- 3,996
--------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- 2,083 2,083
--------- --------- ------- ---------
Net increase (decrease) in cash and cash equivalents (2,310) 1,392 1,804 886
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 $ 124,800 $ 38,696 $ 5,786 $ 169,282
===========================================================================================================
2001:
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 19,092 $ 1,024 $ 20,116
Other (55,848) 121,317 4,277 69,746
--------- --------- ------- ---------
Net cash flows from operating activities (55,848) 140,409 5,301 89,862
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (16,207) -- (16,207)
Capital expenditures (703) (16,102) (2,488) (19,293)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust -- (4,075) -- (4,075)
Other -- 162 152 314
--------- --------- ------- ---------
Net cash flows from investing activities (703) (36,222) (2,336) (39,261)
--------- --------- ------- ---------
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 (465,000) -- -- (465,000)
Fees paid for financing arrangements (14,418) -- -- (14,418)
Other 123,825 (126,619) (250) (3,044)
--------- --------- ------- ---------
Net cash flows from financing activities 89,407 (126,619) (250) (37,462)
--------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- 125 125
--------- --------- ------- ---------
Net increase (decrease) in cash and cash equivalents 32,856 (22,432) 2,840 13,264
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 $ 81,519 $ 36,842 $ 6,510 $ 124,871
===========================================================================================================
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 September 30, 2002 vs. 2001
Consolidated
Diluted earnings per share for the three months ended September 30,
2002 were $0.31 versus $0.14 earned in the same prior year period, including the
impact of restructuring charges in both periods, as discussed below. Net income
for the 2002 third quarter was $29.1 million versus $13.6 million earned in the
comparable 2001 period. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") totaled $71.9 million for the three months ended
September 30, 2002 as compared with EBITDA of $54.1 million in the same period
of 2001. Total net sales for the three months ended September 30, 2002 rose to
$664.7 million from the $547.8 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 third quarter of 2002. In the third quarter
of 2001, this accounting standard would have had the effect of adding
approximately $5.2 million aftertax ($0.06 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 $7.4 million in the
third quarter of 2002 and $6.7 million in the same 2001 period. Accordingly, it
had no impact on operating or net income.
Included in the 2002 and 2001 third quarters were charges of $11.1
million and $15.4 million pretax, respectively, ($6.9 million and $9.6 million
aftertax, or $0.07 and $0.10 per diluted share, respectively) related to the
second phase of a productivity and consolidation
19
initiative (the "Phase II Program"). The restructuring program is further
discussed at the "Restructuring Charges" section below.
Diluted earnings per share for the third quarter of 2002 were $0.38,
excluding the impact of restructuring charges associated with the Phase II
Program, as compared with $0.30 earned in the prior year quarter, excluding
goodwill amortization and restructuring charges as previously discussed above.
Net income, on that basis, was $35.9 million for the 2002 third quarter versus
the $28.3 million earned in the comparable 2001 quarter. EBITDA, on the same
basis, totaled $83.0 million for the three months ended September 30, 2002 as
compared with $69.5 million in the third quarter of 2001.
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $623.2 million
for the third quarter of 2002 as compared with $509.8 million recorded in the
same prior year period, representing an increase of $113.4 million. Operating
income (including restructuring charges) in this segment was $72.2 million for
the third quarter of 2002, representing an increase of $24.1 million above the
prior year quarter amount of $48.1 million. Excluding restructuring charges from
both periods, operating income in this segment reached $75.1 million for the
three months ended September 30, 2002 as compared with $54.9 million in the same
prior year quarter. The number of residents served at September 30, 2002
increased to approximately 746,000 from 655,400 one year earlier. Pharmacy sales
and residents served increased primarily due to the addition of American
Pharmaceutical Services ("APS"), as discussed below, combined with new contract
additions as a result of the efforts of the Company's National Sales & Marketing
Group and pharmacy staff. Additionally, 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 and the
continuing growth of the clinical and other service programs, partially offset
by lower government reimbursement formulas in some states, served to increase
overall pharmacy sales. The increase in sales was leveraged by the lower
operating cost structure brought about largely by the previously disclosed Phase
II Program and the anticipated synergies as a result of the ongoing APS
integration, in addition to the exclusion of goodwill amortization which was
$8.1 million in the comparable prior year quarter. 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
third quarter. At the same time, certain portions of these acts expired on
October 1, 2002 with Congress adjourning until after the 2002 elections before
clarifying these Medicare funding issues. Congress is expected to consider these
funding issues upon its return. 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 economic recovery does not 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
required cash consideration of $93.5
20
million (including an adjustment based on the closing balance sheet review). Up
to an additional $18.0 million in total deferred payments may become payable in
annual increments of up to $6.0 million each, contingent upon future
performance, as evaluated in the first quarter of each of the next three years.
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 has achieved 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, the Company would
acquire NCS in a merger transaction pursuant to which holders of Class A common
stock, par value $0.01 per share, of NCS ("NCS Class A Common Stock") and Class
B common stock, par value $0.01 per share, of NCS ("NCS Class B Common Stock"
and, together with the NCS Class A Common Stock, the "Shares") 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 approximately $400 million.
Subsequent to the Company's offer, NCS announced the signing of a
merger agreement with Genesis Health Ventures, Inc. ("Genesis"), whereby each
outstanding Share would be converted into the right to receive 0.1 of a share of
common stock, par value $0.02 per share, of Genesis and Genesis would retire or
repay existing NCS debt, including any accrued and unpaid interest, a deal
valued at less than one half of Omnicare's offer for the equity component of the
proposed transaction.
On August 1, 2002, the Company announced that it had filed a lawsuit in
the Delaware Chancery Court to set aside the merger agreement between NCS and
Genesis and certain related voting agreements and that it would commence a
tender offer to acquire all of the outstanding Shares at an offer price per
share of $3.50 in cash. On August 8, 2002, the Company commenced a cash tender
offer for all of the outstanding Shares at $3.50 per share in cash. The cash
tender offer remains ongoing.
On August 20, 2002, the NCS Board of Directors announced that it had
determined that the Company's offer was not in the best interest of NCS
stakeholders and recommended that stockholders reject the offer and not tender
their shares in the offer.
21
By letter dated October 6, 2002, the Company forwarded to the NCS Board
of Directors the executed Omnicare Agreement and Plan of Merger (the "Omnicare
Merger Agreement"). The letter further indicated that by executing the proposed
Omnicare Merger Agreement, the Company had irrevocably committed itself (for the
duration set forth in the letter) to a transaction with NCS pursuant to which
the Company would acquire all of the outstanding Shares at a price of $3.50 per
share in cash.
On October 22, 2002, the NCS Board of Directors withdrew its
recommendation that stockholders vote in favor of NCS's pending merger with
Genesis. Moreover, as set forth in its proxy statement dated November 1, 2002,
the NCS Board of Directors unanimously recommends that the NCS stockholders
vote "against" the adoption of the merger agreement with Genesis.
On October 25, 2002, the Delaware Chancery Court held that the Company
had standing to assert a claim that by executing voting agreements with Genesis,
the shares of NCS Class B Common Stock (ten votes per share) owned by Jon H.
Outcalt, chairman of the Board of Directors of NCS ("Outcalt"), and Kevin B.
Shaw, president and chief executive officer of NCS ("Shaw"), automatically
converted into shares of NCS Class A Common Stock (one vote per share). The
Court also found that because the Company was not an NCS stockholder on July 28,
2002, the date on which the NCS Board of Directors approved the merger agreement
with Genesis and the voting agreements, it did not have standing to bring claims
that the NCS Board of Directors breached their fiduciary duties.
On October 29, 2002, the Delaware Chancery Court denied Omnicare's
motion for summary judgment as to the first count of Omnicare's complaint, which
sought a declaration that the execution of the voting agreements by Messrs.
Outcalt and Shaw, in connection with the proposed NCS/Genesis merger, resulted
in the automatic conversion of their NCS Class B Common Stock (ten votes per
share) into NCS Class A Common Stock (one vote per share), and granted summary
judgment in favor of NCS, Outcalt, Shaw, Boake A. Sells (a member of the NCS
Board), Richard L. Osbourne (a member of the NCS Board), Genesis and Geneva Sub,
Inc., a wholly owned subsidiary of Genesis.
Omnicare has filed an appeal with respect to the Court's rulings.
Notwithstanding the Court's rulings, the NCS Directors are being sued
by other NCS stockholder-plaintiffs for breaching their fiduciary duties in
approving the merger agreement with Genesis and the related voting agreements.
The Court's rulings do not address these claims. A motion for preliminary
injunction relating to these stockholder claims is expected to be heard by the
Delaware Chancery Court on November 14, 2002.
CRO Services Segment
Omnicare's Clinical Research ("CRO Services") segment recorded revenues
of $41.5 million during the third quarter of 2002 as compared with $38.0 million
recorded in the same prior year period, representing an increase of $3.5
million. In accordance with EITF No. 01-14, the Company included $7.4 million
and $6.7 million in its CRO Services segment reported revenue and direct cost
amounts for the three months ended September 30, 2002 and 2001,
22
respectively. Operating loss (including restructuring charges in both periods)
in this segment was $2.8 million for the third quarter of 2002 as compared with
an operating loss of $5.2 million in the same prior year quarter. Excluding
restructuring charges from both periods, operating income in this segment was
$5.4 million for the three months ended September 30, 2002, an increase of
$2.1 million above the same prior year quarter amount of $3.3 million. The
improvements in revenue, owing to solid business gains in prior quarters and
the recovery of the overall drug research market, coupled with efforts made to
streamline the organization and reduce fixed costs to better match expenses
with revenues, and the exclusion of goodwill amortization totaling $0.3 million
in the comparable prior year quarter, produced these substantial increases in
profitability. Backlog at September 30, 2002 was $201.0 million, representing
an increase of approximately $10.4 million from September 30, 2001 and
$6.3 million from June 30, 2002 backlog of $194.7 million due to new business
wins in the third quarter of 2002.
Consolidated
The Company's consolidated gross profit increased $30.1 million in the
third quarter of 2002 from the prior year to $175.6 million. Gross profit as a
percentage of total net sales decreased to 26.4% in the third quarter of 2002
from 26.6% in the same period of 2001 (26.7% and 26.9%, 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, in part, due to efforts in integrating the APS
business, 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 September 30, 2002 of $103.9 million were higher than the
comparable prior year amount of $86.4 million (excluding goodwill amortization
of $8.4 million pretax, or $5.2 million aftertax), by $17.5 million, due to the
overall growth of the business, including the APS acquisition. However,
operating expenses as a percentage of total net sales totaled 15.6% in the 2002
third quarter, representing a decline from the 15.8% experienced in the
comparable prior year period, excluding goodwill amortization (15.8% and 16.0%,
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 third 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
$11.1 million and $15.4 million ($6.9 million and $9.6 million aftertax, or
$0.07 and $0.10 per diluted share, respectively) in the third quarter of 2002
and 2001, respectively. The charges were primarily comprised of employee
23
severance pay, employment agreement buy-out costs, lease termination costs, the
write-off of leasehold improvements and other assets, and related fees and
facility exit costs.
Investment income for the three months ended September 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 September 30, 2002 versus the same period of 2001.
Interest expense for the three months ended September 30, 2002 of
$14.3 million was relatively consistent with the comparable prior year quarter.
The effective tax rate of 38% in the third quarter of 2002 was
consistent with the comparable prior year quarter rate. The effective tax rates
in the 2002 and 2001 third 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.
Year-to-Date September 30, 2002 vs. 2001
Consolidated
Diluted earnings per share for the nine months ended September 30, 2002
were $0.92 versus $0.54 earned in the same prior year period, including the
impact of restructuring charges in both periods and other expense in the 2001
period, as discussed below. Net income for the nine months ended September 30,
2002 was $87.2 million versus $51.0 million earned in the comparable 2001
period. EBITDA totaled $215.9 million for the nine months ended September 30,
2002 as compared with EBITDA of $178.0 million in the same period of 2001. Total
net sales for the nine months ended September 30, 2002 rose to $1,957.2 million
from the $1,613.7 million recorded in the comparable prior year period.
In connection with the previously discussed SFAS 142, no goodwill
amortization was recorded during the nine months ended September 30, 2002. In
the nine months ended September 30, 2001, this accounting standard would have
had the effect of adding approximately $15.4 million aftertax ($0.16 per diluted
share) to net income. Further, in connection with the previously discussed EITF
No. 01-14, sales and cost of sales increased by $20.8 million and $18.8 million
in the nine months ended September 30, 2002 and 2001, respectively.
Included in the year-to-date September 30, 2002 and 2001 periods,
respectively, were charges of $23.2 million and $15.4 million pretax ($14.4
million and $9.6 million aftertax, or $0.15 and $0.10 per diluted share,
respectively) related to the Phase II Program. The year-to-date September 30,
2001 period included other expense charges of $4.8 million pretax ($3.0 million
aftertax, or $0.03 per diluted share). The Phase II Program and other expense
are further discussed below.
Diluted earnings per share for the nine months ended September 30, 2002
were $1.07, excluding the impact of restructuring charges associated with the
Phase II Program, as compared
24
with $0.84 earned in the prior year period, excluding goodwill amortization,
restructuring charges and other expense. Net income, on that basis, was
$101.6 million for the 2002 nine month period versus the $79.0 million earned
in the comparable 2001 period. EBITDA, on the same basis, totaled
$239.1 million for the nine months ended September 30, 2002 as compared with
$198.2 million in the comparable 2001 period.
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $1,829.9 million
for the nine months ended September 30, 2002 as compared with $1,503.4 million
recorded in the same prior year period, representing an increase of $326.5
million. Operating income (including restructuring charges in both periods and
other expense in the 2001 period) in this segment was $208.1 million for the
nine months ended September 30, 2002, representing an increase of $63.3 million
above the same prior year period amount of $144.8 million. Excluding
restructuring charges from both periods and other expense in the 2001 period,
operating income in this segment reached $214.9 million in the year-to-date
September 30, 2002 period as compared with $156.4 million in the same 2001
period. A higher number of residents served, primarily due to the addition of
the aforementioned APS business and new contract additions, the continued growth
of the Company's clinical and other service 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, partially offset by lower government reimbursement
formulas in some states, served to increase overall pharmacy sales. The increase
in sales in relation to a lower operating cost structure brought about largely
by the Phase II Program and the anticipated synergies as a result of the ongoing
APS acquisition, in addition to the exclusion of goodwill amortization which was
$24.1 million in the comparable prior year period, 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
overall performance of the Pharmacy Services segment. At the same time, certain
portions of these acts expired on October 1, 2002 with Congress adjourning until
after the 2002 elections before clarifying these Medicare funding issues.
Congress is expected to consider these funding issues upon its return. 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
economic recovery does not emerge.
CRO Services Segment
The CRO Services segment recorded revenues of $127.3 million during the
nine months ended September 30, 2002 as compared with $110.3 million recorded in
the same prior year period, representing an increase of $17.0 million. In
accordance with EITF No. 01-14, the Company included $20.8 million and $18.8
million in its CRO Services segment reported revenue and direct cost amounts for
the nine months ended September 30, 2002 and 2001, respectively. Operating loss
(including restructuring charges in both periods) in this segment was $0.9
million for the nine months ended September 30, 2002 as compared with an
operating
25
loss of $0.4 million in the same prior year period. Excluding restructuring
charges from both periods, operating income in this segment was $15.5 million
in the year-to-date September 30, 2002 period, an increase of $7.4 million
above the same prior year period amount of $8.1 million. The improvements in
revenue, owing to solid business gains in prior quarters and the recovery of
the overall drug research market, coupled with efforts made to streamline the
organization and reduce fixed costs to better match expenses with revenues, and
the exclusion of goodwill amortization totaling $0.8 million in the comparable
prior year period, produced these substantial increases in profitability.
Consolidated
The year-to-date September 30, 2002 consolidated gross profit increased
$82.8 million from the prior year to $510.7 million. Gross profit as a
percentage of total net sales decreased to 26.1% in the nine months ended
September 30, 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, in part, due to efforts in
integrating the APS business 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 nine months ended September 30, 2002 of
$306.0 million were higher than the comparable prior year amount of $259.9
million (excluding goodwill amortization of $24.9 million pretax, or $15.4
million aftertax), by $46.1 million, due to the overall growth of the business.
However, operating expenses as a percentage of total net sales totaled 15.6% in
the nine months ended September 30, 2002, representing a decline from the 16.1%
experienced in the comparable prior year period, excluding goodwill amortization
(15.8% and 16.3%, 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 nine months ended
September 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
$23.2 million and $15.4 million ($14.4 million and $9.6 million aftertax, or
$0.15 and $0.10 per diluted share, respectively) in the nine months ended
September 30, 2002 and 2001, respectively. The charges were primarily comprised
of employee severance pay, employment agreement buy-out costs, lease termination
costs, the write-off of leasehold improvements and other assets, and related
fees and facility exit costs.
Included in the year-to-date September 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
26
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 nine months ended September 30, 2002 was $2.1
million, an improvement of $0.2 million over the same period of 2001. Larger
average invested cash balances during the nine months ended September 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 nine months ended September 30, 2002 of $43.0
million was relatively consistent with the comparable prior year period amount
of $42.5 million.
The effective tax rate of 38% in the year-to-date September 30, 2002
period was consistent with the comparable prior year period. The effective tax
rates in the 2002 and 2001 nine 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 of its productivity
and consolidation initiative. The Phase II Program, completed on September 30,
2002, further streamlined operations, increased efficiencies and helped enhance
the Company's position as a high quality, cost-effective provider of
pharmaceutical services. Building on previous efforts, the Phase II Program
included 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 included 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 Phase II Program encompassed a
net reduction of approximately 460 employees, or about 5% of the Company's 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 $11.1 million and $23.2 million ($6.9 million
and $14.4 million aftertax, or $0.07 and $0.15 per diluted share, respectively)
were recorded in the three and nine months ended September 30, 2002,
respectively. The restructuring charges included 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.
27
Details of the pretax restructuring charges recorded in 2001 and the
nine months ended September 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 September 30,
Accrual 2001 2001 Accrual 2002 2002
---------- --------- ------------ ---------- --------- -------------
Restructuring charges:
Employee severance $ 4,256 $ (2,614) $1,642 $ 2,177 $(1,699) $ 2,120
Employment agreement buy-outs 2,086 (1,578) 508 -- (186) 322
Lease terminations 2,711 (2,105) 606 5,862 (1,395) 5,073
Other assets, fees
and facility exit costs 9,291 (6,264) 3,027 15,156 (6,341) 11,842
------- -------- ------ ------- ------- -------
Total restructuring charges $18,344 $(12,561) $5,783 $23,195 $(9,621) $19,357
======= ======== ====== ======= ======= =======
As of September 30, 2002, the Company had paid approximately $6.1
million of severance and other employee-related costs relating to the reduction
of approximately 460 employees. The remaining liabilities recorded at September
30, 2002 represent amounts not yet paid or settled relating to actions taken,
and will be adjusted in future periods as these matters are finalized.
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 $0.6 million was
utilized in nine months ended September 30, 2002. The remaining liabilities at
September 30, 2002 of $0.9 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 September 30, 2002 were $175.6 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 $130.6 million (including
the impact of advance purchasing of pharmaceuticals, or "prebuys") during the
nine months ended September 30, 2002. These funds, and borrowings of $90.0
million under the Company's line of credit facility, were used primarily for
acquisition-related payments (primarily the APS acquisition, as well as amounts
payable pursuant to acquisition agreements relating to pre-2002 acquisitions),
debt repayment, capital expenditures and dividends.
Net cash used in investing activities was $135.8 million and $39.3
million for the nine months ended September 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 September 30, 2002, other
than the Company's cash tender offer for all of the outstanding shares of NCS
and related redemption or repayment of
28
existing NCS debt, 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, payable in annual
increments of up to $6.0 million each as evaluated in the first quarter of
each of the next three years).
Net cash flows provided by financing activities totaled $4.0 million
for the nine months ended September 30, 2002 compared to a net use of $37.5
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
September 30, 2002, the Revolving Credit Facility bears an interest rate at the
London Inter-bank Offerer Rate ("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 $90.0 million on the Revolving
Credit Facility, of which $80.0 million was repaid during the nine month period
ended September 30, 2002.
The Company's current ratio of 3.3 to 1.0 at September 30, 2002 is
relatively consistent with the 3.4 to 1.0 in existence at December 31, 2001.
On August 7, 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 $6.4 million paid during the nine months
ended September 30, 2002 were relatively 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 $423 million, of which approximately
$100 million would be for the purchase of NCS's shares and the payment of
expenses and approximately $323 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 deemed appropriate. The Company believes that, if needed, these
additional external sources of financing are readily available.
29
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. This Statement will be effective for the Company
beginning January 1, 2003. Management does not expect the standard to have a
material impact on the Company's consolidated financial position, results of
operations and cash flows.
In June 2002, the FASB 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.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions," which is not applicable to the Company.
30
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 penetration of new drugs;
the impact of clinical and other service programs; the impact of lower
government reimbursement formulas in some states; the impact of the productivity
and consolidation programs; the operating environment for skilled nursing
facilities; the impact of reimbursement trends and expectations concerning
legislative action with respect thereto; 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
streamlining and cost reduction at the CRO organization; trends concerning CRO
backlog; purchasing leverage; the formulary compliance program; the leveraging
of costs; the impact of prebuys; 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 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 realize 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
31
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.
32
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 September 30,
2002 include $40.0 million outstanding under its March 2001 three-year, $500.0
million variable-rate Revolving Credit Facility at an interest rate of LIBOR
plus 1.375%, or 3.2% at September 30, 2002 (a one-hundred basis point change in
the interest rate would impact pretax interest expense by approximately $0.4
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
September 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 $310.9 million and approximately
$390.9 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Based on a recent evaluation, which was completed within 90 days of
the filing of this Quarterly Report on Form 10-Q, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14)
are effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
periodic reports filed under the Securities Exchange Act of 1934.
(b) There were no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their last evaluation.
33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 15, 2002, the Company entered into a settlement agreement
that resolved all matters relating to the Neighborcare Litigation, described
below, and resulted in a dismissal with prejudice of the Neighborcare
Litigation. Neighborcare Pharmacy Services, Inc. ("Neighborcare"), a subsidiary
of Genesis Health Ventures, Inc., filed suit in the Circuit Court for Baltimore
County, Maryland (Case No. 03-C-99-007379), against Omnicare and Heartland
Health Services ("HHS"), a joint venture in which an Omnicare subsidiary is a
partner (the "Neighborcare Litigation") and sought substantial damages and
injunctive relief. The Neighborcare Litigation related to certain service
agreements between Neighborcare and HCR/Manorcare on the one hand, and Omnicare
or HHS and HCR/Manorcare, on the other, under which pharmacy services are
provided to nursing homes and other long-term care facilities operated by
HCR/Manorcare. All parties to the settlement of the Neighborcare Litigation
entered into mutual releases. The settlement did not involve any payments by
Omnicare. The settlement had no adverse impact on Omnicare's results of
operations or financial position.
34
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
(I) During the quarter ended September 30, 2002, the
Company filed a Report on Form 8-K on July 29, 2002
reporting, under Items 5 and 7, the filing of a press
release announcing its offer to acquire NCS
Healthcare, Inc.
(II) During the quarter ended September 30, 2002, the
Company filed a Report on Form 8-K on August 14, 2002
reporting, under Items 7 and 9, the submission to the
Secretary of the Securities and Exchange Commission
of a "Statement Under Oath of Principal Executive
Officer of Omnicare, Inc. Regarding Facts and
Circumstances Relating to Exchange Act Filings" and a
"Statement Under Oath of Principal Financial Officer
of Omnicare, Inc. Regarding Facts and Circumstances
Relating to Exchange Act Filings".
(III) During the quarter ended September 30, 2002, the
Company filed a Report on Form 8-K on August 19, 2002
reporting, under Item 5, that the Company entered
into a settlement agreement on August 15, 2002,
relating to the Neighborcare Litigation.
35
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: November 14, 2002 By: /s/ David W. Froesel, Jr.
----------------- ----------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
36
SECTION 302 CEO CERTIFICATION
I, Joel F. Gemunder, President and Chief Executive Officer of Omnicare, Inc.
(the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this quarterly
report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
-----------------
/s/ Joel F. Gemunder
--------------------
Joel F. Gemunder
President and Chief Executive Officer
37
SECTION 302 CFO CERTIFICATION
I, David W. Froesel, Jr., Senior Vice President and Chief Financial Officer of
Omnicare, Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this quarterly
report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
-----------------
/s/ David W. Froesel, Jr.
------------------------
David W. Froesel, Jr.
Senior Vice President and Chief Financial Officer
38