-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NaCPxPcRxILtyjSoMfgxrhcqljC6th/g0ezlNxKh67YR+dLF0K2cXwf+kQCWZgB9 BsP2JvpMtDYBQMrItMg0rA== 0000950117-02-000674.txt : 20020415 0000950117-02-000674.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950117-02-000674 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OMNICARE INC CENTRAL INDEX KEY: 0000353230 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 311001351 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08269 FILM NUMBER: 02591537 BUSINESS ADDRESS: STREET 1: 100 E RIVERCENTER BLVD STREET 2: STE 1600 CITY: COVINGTON STATE: KY ZIP: 41101 BUSINESS PHONE: 6063923300 MAIL ADDRESS: STREET 1: 100 E RIVERCENTER BLVD STREET 2: STE 1600 CITY: COVINGTON STATE: KY ZIP: 41101 10-K405 1 a32317.txt OMNICARE, INC FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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 No. 1-8269 OMNICARE, INC. (Exact name of registrant as specified in its charter) Delaware 31-1001351 (State of Incorporation) (I.R.S. Employer Identification No.)
OMNICARE, INC. 1600 RIVERCENTER II 100 EAST RIVERCENTER BOULEVARD COVINGTON, KENTUCKY 41011 (Address of principal executive offices) Registrant's telephone number, including area code: 859-392-3300 Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class on which Registered -------------------- ------------------- Common Stock ($1.00 Par Value) New York Stock Exchange Preferred Share Purchase Rights (No Par Value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 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 requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the Registrant's voting stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange Composite Transaction Listing on February 28, 2002 ($21.15 per share): $1,931,684,321. As of February 28, 2002, the Registrant had 94,146,919 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of Omnicare, Inc.'s ("Omnicare", the "Company" or the "Registrant") definitive Proxy Statement for its 2002 Annual Meeting of Stockholders, to be held May 20, 2002, are incorporated by reference into Part III of this report. Definitive copies of its 2002 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year. OMNICARE, INC. 2001 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
PAGE ---- ITEM 1. BUSINESS......................................................... 3 ITEM 2. PROPERTIES....................................................... 19 ITEM 3. LEGAL PROCEEDINGS................................................ 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................. 24 EXECUTIVE OFFICERS OF THE COMPANY................................ 25 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................. 26 ITEM 6. SELECTED FINANCIAL DATA.......................................... 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................... 29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 47 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................. 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................................... 84 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 84 ITEM 11. EXECUTIVE COMPENSATION........................................... 84 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 84 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................... 84 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................................... 84
As used in this document, unless otherwise specified or the context otherwise requires, the terms "Omnicare," "Company," "its," "we," "our" and "us" refer to Omnicare, Inc. and its consolidated subsidiaries. PART I ITEM 1 - BUSINESS Background Omnicare, Inc. is a leading provider of pharmacy services to long-term care institutions such as skilled nursing facilities ("SNFs"), assisted living facilities ("ALFs") and other institutional health care facilities. We also provide comprehensive clinical research for the pharmaceutical and biotechnology industries. We operate in two business segments. The largest segment, Pharmacy Services, provides distribution of pharmaceuticals, related pharmacy consulting, data management services and medical supplies to long-term care facilities. Pharmacy Services purchases, repackages and dispenses pharmaceuticals, both prescription and non-prescription, and provides computerized medical record-keeping and third-party billing for residents in such facilities. We also provide consultant pharmacist services, including evaluating residents' drug therapy, monitoring the control, distribution and administration of drugs within the nursing facility and assisting in compliance with state and federal regulations. In addition, we provide ancillary services, such as infusion therapy and dialysis, distribute medical supplies and offer clinical and financial software information systems to our client long-term care facilities. At December 31, 2001, we provided pharmacy services to approximately 662,000 residents in approximately 8,600 long-term care facilities in 43 states. We also provide pharmaceutical case management services for those over 65 who have drug benefits under corporate-sponsored retirement programs. The Pharmacy Services segment provides no services outside of the United States. Our other business segment is contract research organization services ("CRO Services"). CRO Services is a leading international provider of comprehensive product development and research services to client companies in the pharmaceutical, biotechnology, medical device and diagnostics industries, operating in 27 countries around the world. Financial information regarding our business segments is presented at Note 15 (Segment Information) of the Notes to our 2001 Consolidated Financial Statements, included at Item 8 of this filing. Pharmacy Services We purchase, repackage and dispense prescription and non-prescription medication in accordance with physician orders and deliver such prescriptions to the nursing facility for administration to individual residents by the facility's nursing staff. We typically service nursing homes within a 150-mile radius of our pharmacy locations. We maintain a 24-hour, seven-day per week, on-call pharmacist service for emergency dispensing and delivery or for consultation with the facility's staff or the resident's attending physician. Upon receipt of a prescription, the relevant resident information is entered into our computerized dispensing and billing systems. At that time, the dispensing system checks the prescription for any 3 potentially adverse drug interactions or resident sensitivity. When required and/or specifically requested by the physician or patient, branded drugs are dispensed; generic drugs are substituted in accordance with applicable state and federal laws and as requested by the physician or resident. We also provide therapeutic interchange, with physician approval, in accordance with our pharmaceutical care guidelines. See "The Omnicare Guidelines'r'" below for further discussion. We provide a "unit dose" distribution system. Most of our prescriptions are filled utilizing specialized unit-of-use packaging and delivery systems. Maintenance medications are typically provided in 30-day supplies utilizing either a box unit dose system or unit dose punch card system. We believe the unit dose system, preferred over the bulk delivery systems employed by retail pharmacies, improves control over drugs in the nursing facility and improves resident compliance with drug therapy by increasing the accuracy and timeliness of drug administration. Integral to our drug distribution system is our computerized medical records and documentation system. We provide to the facility computerized medication administration records and physician's order sheets and treatment records for each resident. Data extracted from these computerized records is also formulated into monthly management reports on resident care and quality assurance. We believe the computerized documentation system, in combination with the unit dose drug delivery system, results in greater efficiency in nursing time, improved control, reduced drug waste in the facility and lower error rates in both dispensing and administration. We believe these benefits improve drug efficacy and result in fewer drug-related hospitalizations. Consultant Pharmacist Services Federal and state regulations mandate that long-term care facilities, in addition to providing a source of pharmaceuticals, retain consultant pharmacist services to monitor and report on prescription drug therapy in order to maintain and improve the quality of resident care. The Omnibus Budget Reconciliation Act ("OBRA") implemented in 1990 seeks to further upgrade and standardize care by setting forth more stringent standards relating to planning, monitoring and reporting on the progress of prescription drug therapy as well as facility-wide drug usage. We provide consultant pharmacist services which help clients comply with the federal and state regulations applicable to nursing homes. The services offered by our consultant pharmacists include: o comprehensive, monthly drug regimen reviews for each resident in the facility to assess the appropriateness and efficacy of drug therapies, including a review of the resident's medical records, monitoring drug reactions to other drugs or food, monitoring lab results and recommending alternate therapies or discontinuing unnecessary drugs; o participation on the pharmacy and therapeutics, quality assurance and other committees of client facilities as well as periodic involvement in staff meetings; o monitoring and monthly reporting on facility-wide drug usage; o development and maintenance of pharmaceutical policy and procedures manuals; and o assistance to the nursing facility in complying with state and federal regulations as they pertain to patient care. 4 We have also developed a proprietary software system for the use of our consultant pharmacists. The system, called OSC2OR'r' (Omnicare System of Clinical and Cost Outcomes Retrieval), enables our pharmacists not only to perform their above described functions efficiently but also provides the platform for consistent data retrieval for outcomes research and management. Additionally, we offer a specialized line of consulting services which help long-term care facilities to enhance care and reduce and contain costs as well as to comply with state and federal regulations. Under this service line, we provide: o data required for OBRA and other regulatory purposes, including reports on psychotropic drug usage (chemical restraints), antibiotic usage (infection control) and other drug usage; o plan of care programs which assess each patient's state of health upon admission and monitor progress and outcomes using data on drug usage as well as dietary, physical therapy and social service inputs; o counseling related to appropriate drug usage and implementation of drug protocols; o on-site educational seminars for the nursing facility staff on topics such as drug information relating to clinical indications, adverse drug reactions, drug protocols and special geriatric considerations in drug therapy, and information and training on intravenous drug therapy and updates on OBRA and other regulatory compliance issues; o mock regulatory reviews for nursing staffs; and o nurse consultant services and consulting for dietary, social services and medical records. The Omnicare Guidelines'r' In June 1994, to enhance the pharmaceutical care management services that we offer, we introduced to our client facilities and their attending physicians the Omnicare Guidelines'r' which we believe is the first clinically-based formulary for the elderly residing in long-term care institutions. The Omnicare Guidelines'r' presents an analysis ranking specific drugs in therapeutic classes as preferred, acceptable or unacceptable based solely on their disease-specific clinical effectiveness in treating the elderly. The formulary takes into account such factors as pharmacology, safety and toxicity, efficacy, drug administration, quality of life and other considerations specific to the frail elderly population residing in facilities and for those living independently. The clinical evaluations and rankings were developed exclusively for us by the University of the Sciences in Philadelphia (formerly the Philadelphia College of Pharmacy), an academic institution recognized for its expertise in geriatric long-term care. In addition, the Omnicare Guidelines'r' provides relative cost information comparing the prices of the drugs to patients, their insurers or other payors of the pharmacy bill. As the Omnicare Guidelines'r' focuses on health benefits, rather than solely on cost, in assigning rankings, we believe that use of the Omnicare Guidelines'r' assists physicians in making the best clinical choices of drug therapy for the patient at the lowest cost to the payor of the pharmacy bill. Accordingly, we believe that the development of and compliance with the Omnicare Guidelines'r' 5 is important in lowering costs for SNFs operating under the federal government's Prospective Payment System ("PPS") as well as state Medicaid programs, managed care and other payors, including residents or their families. Health and Outcomes Management We have expanded upon the data in the Omnicare Guidelines'r' to develop health and outcomes management programs targeted at major categories of disease commonly found in the elderly, such as congestive heart failure, osteoporosis and atrial fibrillation. Such programs seek to identify patients who may be candidates for more clinically efficacious drug therapy and to work with physicians to optimize pharmaceutical care for these geriatric patients. We believe these programs enhance the quality of care of elderly patients while reducing costs to the healthcare system which arise from the adverse outcomes of sub-optimal or inappropriate drug therapy. Outcomes-based Algorithm Technology Combining data provided by our proprietary systems, the Omnicare Guidelines'r' and health management programs, our pharmacists seek to determine the best clinical and most cost-effective drug therapies and make recommendations for the most appropriate pharmaceutical treatment. Since late 1997, we have augmented their efforts with the development of proprietary, outcomes-based algorithm technology which electronically screens and identifies patients at risk for certain diseases and assists in determining treatment protocols. This system combines pharmaceutical, clinical, care planning and research data, and screens such data through nearly 4,000 diseased-based algorithms, allowing our pharmacists to make recommendations to improve the effectiveness of drug therapy in seniors, including identifying potentially underdiagnosed and undertreated conditions. Pharmaceutical Case Management Combining our clinical resources, including the Omnicare Guidelines'r', health and outcomes management programs and our comprehensive database of medical and pharmacy data, we have begun to provide pharmaceutical case management services to seniors living independently who receive drug benefits under employer-sponsored retirement programs. Because seniors living independently are often under the care of multiple practitioners with no coordination of prescribing, this population is highly susceptible to drug-related problems. Omnicare Senior Health Outcomes addresses this need through programs designed to reduce unnecessary and inappropriate drug use, to optimize therapy for certain at-risk groups and to make therapeutic interventions in accordance with the Omnicare Guidelines'r' and health management programs. These services are provided on behalf of large corporate employers sponsoring post-retirement health care benefits that seek to protect the safety and quality of healthcare for their retirees while containing or reducing their costs. 6 Ancillary Services We provide the following ancillary products and services to long-term care facilities: Infusion Therapy Products and Services. With cost containment pressures in healthcare, SNFs and nursing facilities ("NFs") are called upon to treat moderately acute but stabilized patients that would otherwise be treated in the more costly hospital environment, provided that the nursing staff and pharmacy are capable of supporting higher degrees of acuity. We provide infusion therapy support services for such client facilities and, to a lesser extent, hospice and home care patients. Infusion therapy consists of the product (a nutrient, antibiotic, chemotherapy or other drugs in solution) and the intravenous administration of the product. We prepare the product to be administered using proper equipment in a sterile environment and then deliver the product to the nursing home for administration by the nursing staff. Proper administration of intravenous ("IV") drug therapy requires a highly trained nursing staff. Our consultant pharmacists and nurse consultants operate an education and certification program on IV therapy to assure proper staff training and compliance with regulatory requirements in client facilities offering an IV program. By providing an infusion therapy program, we enable our client SNFs and NFs to admit and retain patients who otherwise would need to be cared for in an acute-care facility. The most common infusion therapies we provide are total parenteral nutrition, antibiotic therapy, chemotherapy, pain management and hydration. Dialysis Services. We offer comprehensive dialysis services on-site in client long-term care facilities for those residents with kidney failure or end stage renal disease ("ESRD"). We offer both hemodialysis and peritoneal dialysis for residents who would otherwise be required to be transported to an off-site clinic for dialysis treatment multiple times per week. Our on-site service eliminates travel for the resident which can often be a disruptive and traumatic activity. For our facility clients our dialysis services significantly reduce transportation and staffing costs while providing added capability so that the available population of patients it can serve increases. Wholesale Medical Supplies/Medicare Part B Billing. We distribute disposable medical supplies, including urological, ostomy, nutritional support and wound care products and other disposables needed in the nursing home environment. In addition, we provide direct Medicare billing services for certain of these product lines for patients eligible under the Medicare Part B program. As part of this service, we determine patient eligibility, obtain certifications, order products and maintain inventory on behalf of the nursing facility. We also contract to act as billing agent for certain nursing homes that supply these products directly to the patient. Other Services. We also provide clinical care plan and financial information systems to our client facilities to assist them in determining appropriate care as well as in predicting and tracking costs. We also offer respiratory therapy products and durable medical equipment. We continue to review the expansion of these as well as other products and services that may further enhance the ability of our client SNFs and NFs to care for their patients in a cost-effective manner. 7 Contract Research Organization Services Our CRO Services segment provides comprehensive product development services globally to client companies in the pharmaceutical, biotechnology, medical devices and diagnostics industries. CRO Services provides support for the design of regulatory strategy and clinical development (phases I through IV) of pharmaceuticals by offering comprehensive and fully integrated clinical monitoring, quality assurance, data management, statistical analysis, medical writing and regulatory support for our clients' drug development programs. CRO Services also provides pharmaceutics services, in parallel with the stages described above. This process involves product dose form development, including the formulation of placebo and active drug, clinical manufacturing and process development for commercial manufacturing, the development of analytical methodology, execution of a high number of analytical tests, as well as stability testing and clinical packaging. CRO Services operates in 27 countries, including the United States. We believe that our involvement in the CRO business is a logical adjunct to our core institutional pharmacy business and will serve to leverage our assets and strengths, including our access to a large geriatric population and our ability to collect data for health and outcomes management. We believe such assets and strengths will be of significant value in developing new drugs targeted at diseases of the elderly and in meeting the Food and Drug Administration's geriatric dosing and labeling requirements for all prescription drugs provided to the elderly, as well as in documenting health outcomes to payors and plan sponsors in a managed care environment. Product and Market Development Our Pharmacy Services and CRO Services businesses engage in a continuing program for the development of new services and for marketing these services. While new service and new market development are important factors for the growth of these businesses, we do not expect that any new service or marketing efforts, including those in the developmental stage, will require the investment of a significant portion of our assets. Materials/Supply We purchase pharmaceuticals through a wholesale distributor with whom we have a prime vendor contract, at prices based primarily upon contracts negotiated by us directly with pharmaceutical manufacturers. We also are a member of industry buying groups which contract with manufacturers for discounted prices based on volume which are passed through to us by our wholesale distributor. We have numerous sources of supply available to us and have not experienced any difficulty in obtaining pharmaceuticals or other products and supplies used in the conduct of our business. Patents, Trademarks, and Licenses Our business operations are not dependent upon any material patents, trademarks or licenses. 8 Seasonality Our business operations are not significantly impacted by seasonality. Inventories We seek to maintain adequate on-site inventories of pharmaceuticals and supplies to ensure prompt delivery service to our customers. Our primary wholesale distributor also maintains local warehousing in most major geographic markets in which we operate. Competition By its nature, the long-term care pharmacy business is highly regionalized and, within a given geographic region of operations, highly competitive. We are the nation's largest provider of pharmaceuticals and related pharmacy services to long-term care institutions such as SNFs, ALFs, retirement centers and other institutional healthcare facilities. In the geographic regions we serve, we compete with numerous local retail pharmacies, local and regional institutional pharmacies and pharmacies owned by long-term care facilities. We compete in these markets on the basis of quality, cost-effectiveness and the increasingly comprehensive and specialized nature of our services, along with the clinical expertise, pharmaceutical technology and professional support we offer. Our CRO business competes against other full-service CROs and client internal resources. The CRO industry is highly fragmented with a number of full-service CROs and many small, limited-service providers, some of which serve only local markets. Clients choose a CRO based on, among other reasons, reputation, references from existing clients, the client's relationship with the CRO, the CRO's experience with the particular type of project and/or therapeutic area of clinical development, the CRO's ability to add value to the client's development plan, the CRO's financial stability and the CRO's ability to provide the full range of services on a global basis as required by the client. We believe that we compete favorably in these respects. Backlog Backlog is not a relevant factor in our Pharmacy Services segment since this segment's products and services are sold promptly on an as ordered basis. Our CRO Services segment reports backlog based on anticipated net revenue from uncompleted projects that have been authorized by the customer, through signed contracts, letter agreements and certain verbal commitments. Once work begins on a project, net revenue is recognized over the duration of the project. Using this method of reporting backlog, at December 31, 2001, backlog was approximately $195.5 million, as compared to approximately $187.7 million at December 31, 2000. We believe that backlog may not be a consistent indicator of future results of our CRO Services segment because it can be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years. Additionally, projects may be terminated by the customer or delayed by regulatory authorities. Moreover, the scope of work can be increased or decreased during the course of a project. 9 Customers At December 31, 2001, our Pharmacy Services segment served approximately 662,000 residents in approximately 8,600 long-term care facilities and other institutional healthcare settings. Our CRO Services segment serves a broad range of clients, including many of the major multi-national pharmaceutical and biotechnology companies as well as smaller companies in the pharmaceutical and biotechnology industries. No single client comprised more than 10% of consolidated revenues in 2001 or 2000. Our business would not be materially or adversely affected by the loss of any one customer or small group of customers. Government Regulation Institutional pharmacies, as well as the long-term care facilities they serve, are subject to extensive federal, state and local regulation. These regulations cover required qualifications, day-to-day operations, reimbursement and the documentation of activities. In addition, our CRO Services are subject to substantial regulation, both domestically and abroad. We continuously monitor the effects of regulatory activity on our operations. Licensure, Certification and Regulation. States generally require that companies operating a pharmacy within the state be licensed by the state board of pharmacy. At December 31, 2001, we had pharmacy licenses for each pharmacy we operate. In addition, at December 31, 2001, we delivered prescription products from our licensed pharmacies to five states in which we do not operate a pharmacy. These states regulate out-of-state pharmacies, however, as a condition to the delivery ofprescription products to patients in these states. Our pharmacies hold the requisite licenses applicable in these states. In addition, our pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances. Client long-term care facilities are also separately required to be licensed in the states in which they operate and, if serving Medicare or Medicaid patients, must be certified to be in compliance with applicable program participation requirements. Client facilities are also subject to the nursing home reforms of the OBRA of 1987, which imposed strict compliance standards relating to quality of care for nursing home operations, including vastly increased documentation and reporting requirements. In addition, pharmacists, nurses and other healthcare professionals who provide services on our behalf are in most cases required to obtain and maintain professional licenses and are subject to state regulation regarding professional standards of conduct. Federal and State Laws Affecting the Repackaging, Labeling and Interstate Shipping of Drugs. Federal and state laws impose certain repackaging, labeling and package insert requirements on pharmacies that repackage drugs for distribution beyond the regular practice of dispensing or selling drugs directly to patients at retail outlets. A drug repackager must register with the Food and Drug Administration ("FDA") as a manufacturing establishment, and is subject to FDA inspection for compliance with relevant good manufacturing practices ("GMPs"). We hold all required registrations and licenses, and we believe our repackaging operations are in compliance 10 with applicable state and federal GMP requirements. In addition, we believe we comply with all relevant requirements of the Prescription Drug Marketing Act for the transfer and shipment of pharmaceuticals. State Laws Affecting Access to Services. Some states have enacted "freedom of choice" or "any willing provider" requirements as part of their state Medicaid programs or in separate legislation. These laws and regulations may prohibit a third-party payor from restricting the pharmacies from which their participants may purchase pharmaceuticals. Similarly, these laws may preclude a nursing facility from requiring their patients to purchase pharmacy or other ancillary medical services or supplies from particular providers that deal with the nursing home. Such limitations may increase the competition which we face in providing services to nursing facility residents. Medicare and Medicaid. The nursing home pharmacy business has long operated under regulatory and cost containment pressures from state and federal legislation primarily affecting Medicaid and, to a lesser extent, Medicare. As is the case for nursing home services generally, we receive reimbursement from the Medicaid and Medicare programs, directly from individual residents (private pay), and from other payors such as third-party insurers. We believe that our reimbursement mix is in line with nursing home expenditures nationally. For the year ended December 31, 2001, our payor mix was approximately as follows: 44% private pay and long-term care facilities (including payments from SNFs on behalf of their Medicare-eligible residents), 44% Medicaid, 3% Medicare (including direct billing for medical supplies) and 9% other private sources (including the CRO business). For those patients who are not covered by government-sponsored programs or private insurance, we generally directly bill the patient or the patient's responsible party on a monthly basis. Depending upon local market practices, we may alternatively bill private patients through the nursing facility. Pricing for private pay patients is based on prevailing regional market rates or "usual and customary" charges. The Medicaid program is a cooperative federal-state program designed to enable states to provide medical assistance to aged, blind, or disabled individuals, or members of families with dependent children whose income and resources are insufficient to meet the costs of necessary medical services. State participation in the Medicaid program is voluntary. To become eligible to receive federal funds, a state must submit a Medicaid "state plan" to the Secretary of the Department of Health and Human Services ("HHS") for approval. The federal Medicaid statute specifies a variety of requirements which the state plan must meet, including requirements relating to eligibility, coverage of services, payment and administration. Federal law and regulations contain a variety of requirements relating to the furnishing of prescription drugs under Medicaid. First, states are given authority, subject to certain standards, to limit or specify conditions for the coverage of particular drugs. Second, federal Medicaid law establishes standards affecting pharmacy practice. These standards include general requirements relating to patient counseling and drug utilization review and more specific standards for SNFs and NFs relating to drug regimen reviews for Medicaid patients in such facilities. Regulations clarify that, under federal law, a pharmacy is not required to meet the general requirements for drugs 11 dispensed to nursing facility residents if the nursing facility complies with the drug regimen review standards. However, the regulations indicate that states may nevertheless require pharmacies to comply with the general requirements, regardless of whether the nursing facility satisfies the drug regimen review requirement, and the states in which we operate currently do require our pharmacies to comply with these general standards. Third, federal regulations impose certain requirements relating to reimbursement for prescription drugs furnished to Medicaid patients. Among other things, regulations establish "upper limits" on payment levels. In addition to requirements imposed by federal law, states have substantial discretion to determine administrative, coverage, eligibility and payment policies under their state Medicaid programs that may affect our operations. The Medicare program is a federally funded and administered health insurance program for individuals age 65 and over or who are disabled. The Medicare program consists of three parts: Part A, which covers, among other things, inpatient hospital, skilled nursing facility, home healthcare and certain other types of healthcare services; Medicare Part B, which covers physicians' services, outpatient services, items and services provided by medical suppliers, and a limited number of specifically designated prescription drugs; and Medicare Part C, established by The Balanced Budget Act of 1997 ("BBA"), which generally allows beneficiaries to enroll in additional types of managed care programs beyond the traditional Medicare fee for service program. Part C is generally referred to as "Medicare+Choice." Many Medicare beneficiaries are being served through such Medicare+Choice organizations. In addition to the limited Medicare coverage for specified products described above, some Medicare+Choice organizations providing healthcare benefits to Medicare beneficiaries offer expanded drug coverage. The Medicare program establishes certain requirements for participation of providers and suppliers in the Medicare program. Pharmacies are not subject to such certification requirements. SNFs and suppliers of medical equipment and supplies, however, are subject to specified standards. Failure to comply with these requirements and standards may adversely affect an entity's ability to participate in the Medicare program and receive reimbursement for services provided to Medicare beneficiaries. Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these government-sponsored programs. Such audits and inquiries, as well as our own internal compliance program, from time to time have identified overpayment and other billing errors resulting in repayment or self-reporting. We believe that our billing practices materially comply with applicable state and federal requirements. However, there can be no assurance that in the future such requirements will be interpreted in a manner consistent with our interpretation and application. The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, executive orders and freezes and funding reductions, all of which may adversely affect our business. There can be no assurance that payments for pharmaceutical supplies and services under the Medicare and Medicaid programs 12 will continue to be based on current methodologies or remain comparable to present levels. In this regard, we may be subject to rate reductions as a result of federal budgetary or other legislation related to the Medicare and Medicaid programs. In addition, various state Medicaid programs periodically experience budgetary shortfalls which may result in Medicaid payment reductions and delays in payment to us. In addition, the failure, even if inadvertent, of our and/or our client institutions to comply with applicable reimbursement regulations could adversely affect our business. Additionally, changes in such reimbursement programs or in regulations related thereto, such as reductions in the allowable reimbursement levels, modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicaid and Medicare expenditures, could adversely affect our business. Referral Restrictions. We are subject to federal and state laws which govern financial and other arrangements between healthcare providers. These laws include the federal anti-kickback statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing of any item or service for which payment may be made in whole or in part under federal healthcare programs. We are also subject to the federal physician self-referral statute, which prohibits physicians from referring Medicare and Medicaid patients for certain "designated health services," including outpatient prescription drugs, durable medical equipment, and enteral supplies and equipment to an entity if the referring physician (or a member of the physician's immediate family) has a "financial relationship," through ownership or compensation with the entity. Many states have enacted similar statutes which are not necessarily limited to items and services for which payment is made by federal healthcare programs. Violations of these laws may result in fines, imprisonment, denial of payment for services, and exclusion from the federal programs or other state-funded programs. Other provisions in the Social Security Act and in other federal and state laws authorize the imposition of penalties, including criminal and civil fines and exclusions from participation in Medicare and Medicaid, for false claims, improper billing and other offenses. In addition, a number of states have undertaken enforcement actions against pharmaceutical manufacturers involving pharmaceutical marketing programs, including programs containing incentives to pharmacists to dispense one particular product rather than another. These enforcement actions arose under state consumer protection laws which generally prohibit false advertising, deceptive trade practices, and the like. We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws. There can be no assurance that such laws will, however, be interpreted in the future in a manner consistent with our interpretation and application. Healthcare Reform and Federal Budget Legislation. In recent years, federal legislation has resulted in major changes in the healthcare system, and included other provisions which significantly affected healthcare providers, either nationally or at the state level. The BBA of 1997 sought to 13 achieve a balanced federal budget by, among other things, reducing federal spending on the Medicare and Medicaid programs. With respect to Medicare, the law mandated establishment of a PPS for SNFs under which facilities are paid a federal per diem rate for virtually all covered SNF services, including ancillary services such as pharmacy. Payment is determined by one of 44 resource utilization group ("RUG") categories. PPS was implemented for cost reporting periods beginning on or after July 1, 1998. In the Conference Report accompanying the BBA, the conferees specifically noted that, to ensure that the frail elderly residing in SNFs receive needed and appropriate medication therapy, the Secretary of HHS is to consider the results of studies conducted by independent organizations, including those which examine appropriate payment mechanism and payment rates for medication therapy, and develop case mix adjustments under the SNF PPS that reflect the needs of such patients. The BBA also imposed numerous other cost savings measures affecting Medicare SNF services. In 1999, Congress enacted the Medicare, Medicaid, SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") which was designed to mitigate the effects of the BBA. Effective April 1, 2000, the BBRA temporarily increased the PPS per diem rates by 20% for 15 patient acuity categories, including medically complex patients with generally higher pharmacy costs, pending appropriate revisions to the PPS. The increases will continue until the Centers for Medicare & Medicaid Services (formerly the Health Care Financing Administration) implements a refined RUG system that better accounts for medically-complex patients. The revised rates may be more or less than the temporary 20% increase under the BBRA. The BBRA also provides for a 4% increase in payments otherwise determined under the BBA for all patient acuity categories for fiscal years 2001 and 2002 (in addition to the 20% increase in the 15 high acuity categories). We believe these changes have improved the financial condition of SNFs and provide incentives to increase occupancy and Medicare admissions, particularly among the more acutely ill. The Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"), signed into law December 21, 2000, includes provisions designed to further mitigate the effects of reimbursement cuts contained in the BBA. Among other things, BIPA eliminated the scheduled reduction in the SNF market basket update in fiscal year 2001. This increase will not be included when determining payment rates for the subsequent period. In fiscal years 2002 and 2003, payment updates will equal the market basket index increase minus 0.5 percentage point. Temporary increases in the federal per diem rates under the BBRA will be in addition to these payment increases. BIPA also increased payment for the nursing component of each RUG category by 16.66% for services furnished after April 1, 2001 and before October 1, 2002. Moreover, BIPA further refined the consolidated billing requirements. Specifically, effective January 1, 2001, the law limits consolidated billing requirements to items and services furnished to SNF residents in a Medicare Part A covered stay and to therapy services covered under Part B. In other words, for residents not covered under a Part A stay, SNFs may choose to bill for non-therapy Part B services and supplies, or they may elect to have suppliers continue to bill Medicare directly for these services. BIPA also increased by 6.7% the federal per diem payments for 14 rehabilitation categories for services furnished on or after April 1, 2001 and before implementation of the refined RUG system. The 20% additional payment under the BBRA for three rehabilitation categories was removed to make this provision budget neutral. 14 Certain of the increases in Medicare reimbursement for SNFs provided under the BBRA and BIPA will expire in October 2002 unless Congress enacts additional legislation. If no additional legislation is enacted, the loss of revenues associated with this occurrence could have an adverse effect on the financial condition of the Company's SNF customers. While it is hoped that Congress will act in a timely fashion, no assurances can be given as to whether Congress will take action, the timing of any action or theform of any relief enacted. Moreover, for several years, the federal government has examined the appropriateness of the "average wholesale price" ("AWP") as a basis for reimbursement of outpatient prescription drugs under Part B of the Medicare program and certain state Medicaid programs. AWP is an industry term that typically is understood to represent a suggested resale price for wholesale sales to pharmacies. The Company's revenues for drugs dispensed under Medicare Part B are less than 0.5% of total revenues. Discounted AWP plus a dispensing fee is also the basis for many state Medicaid programs' reimbursement of drugs to pharmacy providers for Medicaid beneficiaries generally as well as under certain private reimbursement programs. If government or private health insurance programs discontinue or modify the use of AWP or otherwise implement payment methods that reduce the reimbursement for drugs and biologicals, it could adversely affect the Company's reimbursement. With respect to Medicaid, the BBA repealed the "Boren Amendment" federal payment standard for Medicaid payments to Medicaid NFs effective October 1, 1997, giving states greater latitude in setting payment rates for such facilities. The law also granted states greater flexibility to establish Medicaid managed care programs without the need to obtain a federal waiver. Although these waiver projects generally exempt institutional care, including NFs and institutional pharmacy services, no assurances can be given that these programs ultimately will not change the reimbursement system for long-term care, including pharmacy services, from fee-for-service to managed care negotiated or capitated rates. Our operations have not been adversely affected in states with managed care programs in effect. We are unable to predict what impact, if any, future changes in Medicaid payments to NFs or managed care systems might have on our operations. It is uncertain at this time what additional healthcare reform initiatives, including an expanded Medicare prescription drug benefit, if any, will be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretation of governmental policies or other changes affecting the healthcare system. There can be no assurance that future healthcare or budget legislation or other changes will not have an adverse effect on our business. Contract Research Organization Services. The preclinical, clinical, manufacturing, analytical and clinical trial supply services performed by our CRO Services are subject to various regulatory requirements designed to ensure the quality and integrity of the data or products of these services. The industry standard for conducting preclinical and laboratory testing is embodied in the good laboratory practice ("GLP") and Investigational New Drugs ("IND") regulations administered by the FDA. Research conducted at institutions supported by funds from the National Institutes of Health ("NIH") must also comply with multiple project assurance agreements and guidelines administered by NIH and the HHS Office of Research Protection. The requirements for facilities 15 engaging in pharmaceutical, analytical, manufacturing, clinical trial, supply preparation, labeling and distribution are set forth in the GMP regulations and in good clinical practice ("GCP") regulations and guidelines. GCP, IND and GMP regulations have been mandated by the FDA and the European Medicines Evaluation Agency (the "EMEA") and have been adopted by similar regulatory authorities in other countries. GCP, IND and GMP regulations stipulate requirements for facilities, equipment, supplies and personnel engaged in the conduct of studies to which these regulations apply. The regulations require that written, standard operating procedures ("SOPs") are followed during the conduct of studies and for the recording, reporting and retention of study data and records. To help assure compliance, our CRO Services has a worldwide staff of experienced quality assurance professionals which monitor ongoing compliance with GCP, IND and GMP regulations by auditing study data and conducting regular inspections of testing procedures and facilities. The FDA and many other regulatory authorities require that study results and data submitted to such authorities are based on studies conducted in accordance with GCP and IND provisions. These provisions include: o complying with specific regulations governing the selection of qualified investigators; o obtaining specific written commitments from the investigators; o disclosure of conflicts of interest; o verifying that patient informed consent is obtained; o instructing investigators to maintain records and reports; o verifying drug or device accountability; and o permitting appropriate governmental authorities access to data for their review. Records for clinical studies must be maintained for specific periods for inspection by the FDA, European Union ("EU") or other authorities during audits. Non-compliance with GCP or IND requirements can result in the disqualification of data collected during the clinical trial and may lead to debarment of an investigator or CRO if fraud is detected. CRO Services' SOPs related to clinical studies are written in accordance with regulations and guidelines appropriate to a global standard with regional variations in the regions where they will be used, thus helping to ensure compliance with GCP. CRO Services also complies with the International Congress of Harmonization, EU GCP regulations and U.S. GCP regulations for North America. Our United States manufacturing, analytical and other laboratories are subject to licensing and regulation under federal, state and local laws relating to maintenance of appropriate processes and procedures under the Clinical Laboratories Improvement Act ("CLIA"), hazard communication and employee right-to-know regulations, the handling and disposal of medical specimens and hazardous waste and radioactive materials, as well as the safety and health of laboratory employees. All of our laboratories are operated in material compliance with applicable federal and state laws and regulations relating to maintenance of trained personnel, proper equipment processes and procedures required by CLIA regulations of HHS, and the storage and disposal of all laboratory specimens including the regulations of the Environmental Protection Agency and the Occupational Safety and Health Administration. Certain of our facilities are engaged in drug development activities involving controlled substances. The use of, and accountability for, 16 controlled substances are regulated by the United States Drug Enforcement Administration. Our relevant employees receive initial and periodic training to ensure compliance with applicable hazardous material regulations and health and safety guidelines. Although we believe that we are currently in compliance in all material respects with such federal, state and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions. Health Information Practices. The Company and the healthcare industry generally also are impacted by the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), which mandates, among other things, the adoption of standards for the exchange of electronic health information in an effort to enhance the efficiency and simplify the administration of the healthcare system. In addition, HIPAA requires HHS to adopt standards for electronic transactions and code sets; unique identifiers for providers, employers, health plans and individuals; security and electronic signatures; privacy; and enforcement. While HIPAA ultimately is designed to reduce administrative expenses within the healthcare system, the law likely will initially require significant, and possibly costly, changes for the industry. HHS has promulgated regulations to implement certain of the standards, although these have not yet gone into effect, and other standards have not yet been finalized. Based on current information, we believe we will be able to fully comply with HIPAA requirements, however, we cannot at this time estimate the cost of compliance or if implementation of the HIPAA standards will result in an adverse effect on the Company's operations or profitability, or that of its customers. Compliance Program and Corporate Integrity Agreement. The Office of Inspector General ("OIG") has issued guidance to various sectors of the healthcare industry to help providers design effective voluntary compliance programs to prevent fraud, waste and abuse in healthcare programs, including Medicare and Medicaid. In 1998, Omnicare voluntarily adopted a compliance program to assist us in complying with applicable government regulations. In addition, in April 1998, Home Pharmacy Services, Inc. ("Home"), one of our wholly-owned subsidiaries, entered into a settlement agreement with the U.S. Department of Justice and the State of Illinois regarding certain practices involving refunds for returned drugs. Under the Settlement Agreement, Home paid $5.3 million in fines and restitution to the United States and Illinois, and Omnicare and Home agreed to a corporate integrity program for four years, which includes annual reporting obligations. If Omnicare fails to meet a material obligation under the agreement, the OIG may initiate proceedings to suspend or exclude Omnicare from participation in federal health programs, including Medicare and Medicaid. The terms of the corporate integrity agreement expire in April 2002. Neither Omnicare nor any of its other operating units were implicated in the government investigation. Environmental Matters In operating our facilities, historically we have not encountered any major difficulties in effecting compliance with applicable pollution control laws. No material capital expenditures for environmental control facilities are expected. While we cannot predict the effect which any future legislation, regulations, or interpretations may have upon our operations, we do not anticipate any changes that would have a material adverse impact on our operations. 17 Employees At December 31, 2001, we employed approximately 9,000 persons (including 3,200 part-time employees), approximately 8,600 and 400 of whom were located within and outside the United States, respectively. 18 ITEM 2 - PROPERTIES We have offices, distribution centers and other key operating facilities in various locations in and outside the United States. As of December 31, 2001, we operated a total of 135 facilities, four of which we owned. A list of the 69 more significant facilities (defined as having at least 10,000 square feet) we operated as of December 31, 2001 follows, grouped by segment and summarized by location. The owned properties are held in fee and are not subject to any material encumbrance. We consider all of these facilities to be in good operating condition and generally to be adequate for present and anticipated needs.
Leased Area Owned Area ---------------------------------- Location Type (sq. ft.) (sq. ft.) Expiration Date - ------------------------- --------------------------------- ----------- ---------- ------------------- Pharmacy Services: Livonia, Michigan Offices and Distribution Center - 50,438 May 31, 2007 Des Plaines, Illinois Offices and Distribution Center - 47,971 May 31, 2008 Kirkland, Washington Offices and Distribution Center - 45,344 April 14, 2003 Milwaukee, Wisconsin Offices and Distribution Center - 41,816 March 31, 2009 Perrysburg, Ohio Offices and Distribution Center 40,500 - - Cheshire, Connecticut Offices and Distribution Center - 38,400 June 30, 2010 Louisville, Kentucky Offices and Distribution Center - 38,275 December 31, 2002 Florissant, Missouri Offices and Distribution Center 38,014 - - Kansas City, Missouri Offices and Distribution Center - 36,048 October 21, 2009 Toledo, Ohio Distribution Center - 36,039 March 31, 2004 Hunt Valley, Maryland Offices and Distribution Center - 32,937 January 31, 2007 St. Louis, Missouri Offices and Distribution Center - 30,400 June 30, 2002 Rockford, Illinois Offices and Distribution Center - 29,100 November 30, 2009
19
Leased Area Owned Area ---------------------------------- Location Type (sq. ft.) (sq. ft.) Expiration Date - ------------------------- --------------------------------- ----------- ---------- ------------------- Salt Lake City, Utah Offices and Distribution Center - 28,400 January 31, 2009 Crystal, Minnesota Offices and Distribution Center - 28,255 January 31, 2008 Portland, Oregon Offices and Distribution Center - 28,150 April 30, 2008 Decatur, Illinois Offices and Distribution Center 21,070 6,600 Month-to-Month Plainview, New York Offices and Distribution Center - 25,500 June 30, 2005 Chestnut Ridge, New York Offices and Distribution Center - 24,429 May 31, 2009 Cincinnati, Ohio Offices and Distribution Center - 24,375 September 30, 2009 Des Plaines, Illinois Offices and Distribution Center - 24,047 May 31, 2008 Oklahoma City, Oklahoma Offices and Distribution Center - 24,000 Month-to-Month Indianapolis, Indiana Offices and Distribution Center - 23,740 June 30, 2010 Griffith, Indiana Offices and Distribution Center - 23,600 May 1, 2002 Wadsworth, Ohio Offices and Distribution Center - 22,960 June 30, 2006 Pittsburgh, Pennsylvania Offices and Distribution Center - 22,677 January 31, 2009 Mentor, Ohio Offices and Distribution Center - 22,364 December 31, 2006 Rochester, New York Offices and Distribution Center - 22,240 November 30, 2003 Malta, New York Offices and Distribution Center - 20,930 October 31, 2004 Maumee, Ohio Distribution Center - 20,692 October 11, 2002
20
Leased Area Owned Area ---------------------------------- Location Type (sq. ft.) (sq. ft.) Expiration Date - ------------------------- --------------------------------- ----------- ---------- ------------------- Greensburg, Pennsylvania Offices and Distribution Center - 20,000 February 3, 2006 Henderson, Kentucky Offices and Distribution Center - 20,000 January 31, 2007 Spartanburg, South Carolina Offices and Distribution Center 9,500 10,000 Month-to-Month Boca Raton, Florida Offices and Distribution Center - 18,661 December 31, 2002 Milford, Ohio Offices and Distribution Center - 18,000 December 31, 2002 Springfield, Ohio Offices and Distribution Center - 18,000 December 31, 2003 Peabody, Massachusetts Offices and Distribution Center - 17,500 April 30, 2002 Springfield, Missouri Offices and Distribution Center - 17,000 September 30, 2003 Pompton Plains, New Jersey Offices and Distribution Center - 16,041 August 1, 2002 Englewood, Ohio Offices and Distribution Center - 15,000 March 31, 2003 West Seneca, New York Offices and Distribution Center - 15,000 August 31, 2004 West Boylston, Massachusetts Offices and Distribution Center - 14,800 May 3, 2003 Ashland, Kentucky Offices and Distribution Center - 14,000 October 31, 2003 Sioux Falls, South Dakota Offices and Distribution Center - 13,921 May 31, 2002 Spokane, Washington Offices and Distribution Center - 13,750 October 31, 2006 Columbus, Ohio Offices and Distribution Center - 13,600 June 30, 2002
21
Leased Area Owned Area ---------------------------------- Location Type (sq. ft.) (sq. ft.) Expiration Date - ------------------------- --------------------------------- ----------- ---------- ------------------- St. Petersburg, Florida Offices and Distribution Center - 13,245 Month-to-Month Hallowell, Maine Offices and Distribution Center - 13,000 September 30, 2002 Van Nuys, California Offices and Distribution Center - 12,555 February 28, 2003 Alexandria, Louisiana Offices and Distribution Center - 12,000 May 7, 2004 Indianapolis, Indiana Distribution Center - 12,000 November 30, 2002 Yakima, Washington Offices and Distribution Center - 11,500 February 28, 2005 Omaha, Nebraska Offices and Distribution Center - 11,450 May 1, 2002 Thomasville, North Carolina Offices and Distribution Center - 11,325 January 15, 2003 South Elgin, Illinois Offices and Distribution Center - 11,175 August 1, 2002 Peoria, Illinois Offices and Distribution Center - 11,000 July 31, 2004 West Branch, Michigan Offices and Distribution Center - 10,950 May 31, 2011 Prattville, Alabama Offices and Distribution Center - 10,881 August 8, 2008 Wilson, North Carolina Offices and Distribution Center - 10,800 June 15, 2004 Cherry Hill, New Jersey Offices and Distribution Center - 10,000 July 31, 2010
22
Leased Area Owned Area ---------------------------------- Location Type (sq. ft.) (sq. ft.) Expiration Date - ------------------------- --------------------------------- ----------- ---------- ------------------- CRO Services: King of Prussia, Pennsylvania Offices - 150,000 June 30, 2010 Troy, New York Offices - 34,274 March 31, 2002 Cologne, Germany Offices - 27,028 March 31, 2003 Chippenham, United Kingdom Offices - 20,000 June 23, 2016 Schwalbach, Germany Offices - 16,533 August 31, 2003 Bad Soden, Germany Offices and Laboratories - 12,712 June 30, 2004 Deerfield, Illinois Offices - 10,000 September 30, 2007 Corporate: Covington, Kentucky Offices - 42,795 December 31, 2012 Fort Wright, Kentucky Offices - 14,237 March 31, 2008
23 ITEM 3 - LEGAL PROCEEDINGS There are no pending legal or governmental proceedings to which we are a party or to which any of our property is subject that we believe would have a material adverse effect on us. On July 26, 1999, Neighborcare Pharmacy Services, Inc. ("Neighborcare"), a subsidiary of Genesis Health Ventures, Inc., filed suit in the Circuit Court for Baltimore County, Maryland, against us and Heartland Health Services ("HHS"), a joint venture in which one of our subsidiaries is a partner (the "Action"). The Action relates to certain master service agreements ("MSAs") between Neighborcare and HCR/Manorcare ("Manorcare"), on the one hand, and us or HHS and Manorcare, on the other, under which pharmacy services are provided to nursing homes and other long-term care facilities operated by Manorcare. Neighborcare alleges that we and HHS tortiously interfered with Neighborcare's purported rights under its MSAs, and seeks compensatory damages allegedly of not less than $100 million annually, injunctive relief canceling our contracts and HHS's contracts with Manorcare and punitive damages. Neighborcare and Manorcare were involved in an arbitration (the "Arbitration") to determine the validity and enforceability of Neighborcare's MSAs and the extent to which either of those parties has breached the MSAs. We are advised by Manorcare that during the pendency of the Arbitration, Neighborcare continued to provide and be paid for pharmacy services under the MSAs. On November 4, 1999, we and HHS moved to dismiss or, in the alternative, to stay the Action in its entirety on the grounds that the Arbitration between Neighborcare and Manorcare should resolve many, if not all, of the issues raised in the Action. On November 12, 1999, the Baltimore County Circuit Court stayed the Action pending conclusion of the Arbitration, and we withdrew our motion to dismiss. The hearing in the Arbitration was conducted in the summer of 2001, and the award of the arbitrator was issued in February 2002. However, no further proceedings in the Action have yet taken place, and the impact of the Arbitration on the Action, if any, cannot be determined at the present time. Although the outcome of the Action cannot be ascertained at this time and the results of the legal proceedings cannot be predicted, we believe, based on our knowledge and understanding of the facts and the advice of our counsel, that there is no reasonable basis in law or in fact for concluding that we have any liability in the Action. Consequently, we believe that the resolution of the Action is not likely to have a material adverse effect on our financial condition or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 24 ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE COMPANY Our executive officers as of February 28, 2002 are as follows:
Name Age Office First Elected ---- --- ------ -------------- Edward L. Hutton 82 Chairman May 20, l98l Joel F. Gemunder 62 President and May 20, l98l Chief Executive Officer Patrick E. Keefe 56 Executive Vice April 11, 1993 President - Operations Timothy E. Bien 51 Senior Vice President - May 20, 1996 Professional Services and Purchasing David W. Froesel, Jr. 50 Senior Vice President March 4, 1996 and Chief Financial Officer Cheryl D. Hodges 49 Senior Vice President August 4, l982 and Secretary Peter Laterza 44 Vice President and August 5, 1998 General Counsel
All of the executive officers listed above have been actively engaged in our business for the past five years, with the exception of Mr. Laterza. Mr. Laterza was Assistant General Counsel of The Pittston Company from October 1993 to June 1998. Executive officers are elected for one-year terms at the annual organizational meeting of the Board of Directors which follows the annual meeting of stockholders each year. 25 PART II ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock; Holders of Record Our Common Stock is listed on the New York Stock Exchange, and the following table sets forth the ranges of high and low closing prices during each of the calendar quarters of 2001 and 2000.
2001 2000 -------------------------- -------------------------- High Low High Low ---- --- ---- --- First Quarter $22.99 $17.75 $13.75 $ 9.06 Second Quarter $22.65 $18.75 $18.75 $ 9.06 Third Quarter $26.00 $19.00 $16.50 $ 8.13 Fourth Quarter $25.01 $18.30 $21.94 $15.56
The number of holders of record of our Common Stock on February 28, 2002 was 2,468. This amount does not include stockholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage firms and banks. Dividends On February 7, 2001 and February 6, 2002, the Board of Directors approved a quarterly cash dividend rate of $.0225, for an indicated annual rate of $.09 per share in 2001 and 2002, respectively. It is presently intended that cash dividends will continue to be paid on a quarterly basis; however, future dividends are necessarily dependent upon our earnings and financial condition and other factors not currently determinable. Recent Sales of Unregistered Securities We, as part of our acquisition program, have historically issued our common shares and warrants ("Securities") from time to time in private transactions not registered under the Securities Act of 1933 in connection with the purchase of the assets or stock of businesses acquired. During the quarter and year ended December 31, 2001, no transactions were completed involving unregistered Securities. When such Securities are issued, they are issued in reliance on the exemption from registration contained at Section 4(2) of the Securities Act. ITEM 6 - SELECTED FINANCIAL DATA The following table summarizes certain selected financial data, which should be read in conjunction with our Consolidated Financial Statements and related Notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included at Items 8 and 7, respectively, of this Filing. 26 Omnicare, Inc. and Subsidiary Companies Five-Year Summary of Selected Financial Data (in thousands, except per share data)
For the years ended and at December 31, 2001 2000 1999 1998 1997 ----------- ---------- ---------- ----------- ---------- INCOME STATEMENT DATA: (a)(b) Sales $ 2,159,131 $1,971,348 $1,861,921 $1,517,370 $1,034,384 =========== ========== ========== ========== =========== Income from continuing operations $ 74,271 $ 48,817 $ 57,721 $ 80,379 $ 54,105 Loss from discontinued operations - - - - (2,154)(c) ----------- ---------- ---------- ---------- ----------- Net income $ 74,271 $ 48,817 $ 57,721 $ 80,379 $ 51,951 (c) =========== ========== ========== ========== =========== Earnings per share data: Basic: Income from continuing operations $ 0.80 $ 0.53 $ 0.63 $ 0.90 $ 0.63 Loss from discontinued operations - - - - (0.02)(c) ----------- ---------- ---------- ---------- ----------- Net income $ 0.80 $ 0.53 $ 0.63 $ 0.90 $ 0.61 (c) =========== ========== ========== ========== =========== Diluted: Income from continuing operations $ 0.79 $ 0.53 $ 0.63 $ 0.90 $ 0.62 Loss from discontinued operations - - - - (0.02)(c) ----------- ---------- ---------- ---------- ----------- Net income $ 0.79 $ 0.53 $ 0.63 $ 0.90 $ 0.60 (c) =========== ========== ========== ========== =========== Dividends per share $ 0.09 $ 0.09 $ 0.09 $ 0.08 $ 0.07 =========== ========== ========== ========== =========== Weighted average number of common shares outstanding: Basic 93,124 92,012 90,999 89,081 85,692 =========== ========== ========== ========== =========== Diluted 93,758 92,012 91,238 89,786 86,710 =========== ========== ========== ========== =========== BALANCE SHEET DATA: (a) Cash and cash equivalents (including restricted cash) $ 171,318 $ 113,907 $ 97,267 $ 54,312 $ 138,062 Working capital 658,321 560,729 430,102 369,749 354,825 Total assets 2,290,276 2,210,218 2,167,973 1,903,829 1,412,146 Long-term debt (excluding current portion) (d) 750,669 780,706 736,944 651,556 359,148 Stockholders' equity 1,149,783 1,068,423 1,028,380 963,471 829,753 OTHER FINANCIAL DATA: (a) EBITDA (adjusted; unaudited) (e) $ 270,725 $ 231,859 $ 241,008 $ 222,825 $ 140,516 Net cash flows from operating activities 153,087 132,701 101,114 89,507 10,235 Net cash flows from investing activities (46,802) (76,116) (203,517) (449,718) (450,787) Capital expenditures (f) 26,222 32,423 58,749 53,179 41,278 Net cash flows from financing activities (49,555) (41,777) 145,502 276,652 345,653
27 (a) Omnicare, Inc. ("Omnicare" or the "Company") has had an active acquisition program in effect since 1989. See Note 2 of the Notes to Consolidated Financial Statements for information concerning these acquisitions. (b) Included in the 2001, 2000, 1999 and 1998 net income amounts, and the 1997 income from continuing operations amounts, are the following aftertax charges (credits) (in thousands):
2001 2000 1999 1998 1997 ----------- ------------ ---------- ---------- ----------- Restructuring and other related charges $11,374(1) $17,135(1) $22,698 (1) $2,689 $ 1,208 Other expense 2,987(2) - - - 6,457(3) Acquisition expenses, pooling-of- interests - - (376)(4) 13,869 3,935 ------- ------- ------- ------- ------- Total $14,361 $17,135 $22,322 $16,558 $11,600 ======= ======= ======= ======= =======
(1) See Note 12 of the Notes to Consolidated Financial Statements. (2) See Note 13 of the Notes to Consolidated Financial Statements. (3) Omnicare settled with the U.S. Attorney's office in the Southern District of Illinois regarding the government's investigation of the Company's Belleville, Illinois subsidiary, Home Pharmacy Services, Inc. In accordance with the terms of the settlement, in 1997 Omnicare recorded an unusual charge of $6,313 ($5,958 after taxes) for the estimated costs, and legal and other expenses, associated with resolving the investigation. In 1997, CompScript, Inc. ("CompScript") recorded an $800 charge ($499 after taxes) relating to the write-down of a note receivable from a former affiliate of CompScript. (4) See Note 2 of the Notes to Consolidated Financial Statements. (c) Represents the closure of the software commercialization unit of Resource Biometrics, Inc. All operating results of this business have been reclassified from continuing operations to discontinued operations. (d) In 2001, the Company issued $375.0 million of Senior Subordinated Notes due 2011. In 1997, the Company issued $345.0 million of Convertible Subordinated Debentures due 2007. See Note 6 of the Notes to Consolidated Financial Statements. (e) "EBITDA" represents earnings before interest, income taxes, depreciation and amortization, excluding special items. Special items include restructuring and other related charges, other expense, pooling-of-interests expenses, and losses from discontinued operations, and represent charges/expenses or credits which management believes are either infrequent occurrences or otherwise not related to ongoing operations. Omnicare believes that certain investors find EBITDA to be a useful tool for measuring a company's ability to service its debt; however, EBITDA does not represent cash flow from operations, as defined by generally accepted accounting principles, and should not be considered as a substitute for net earnings as an indicator of Omnicare's operating performance or cash flow as a measure of liquidity. Omnicare's calculation of EBITDA may differ from the calculation of EBITDA by others. (f) Primarily represents the purchase of computer equipment/software, machinery and equipment, and furniture, fixtures and leasehold improvements. 28 ITEM 7 - 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, see "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information." Results of Operations - -------------------------------------------------------------------------------- The following table presents sales and results of operations for Omnicare, Inc. ("Omnicare" or the "Company"), excluding certain "special items" such as restructuring and other related charges, other expense and pooling-of-interests expenses (in thousands, except per share amounts). Special items represent charges/expenses or credits which management believes are either infrequent occurrences or otherwise not related to ongoing operations. Such items are described further below and in the Company's Notes to Consolidated Financial Statements, and have been shown separately in order to facilitate analysis of the Company's operating trends.
For the years ended December 31, 2001 2000 1999 -------------------------------------------------------- Sales $2,159,131 $1,971,348 $1,861,921 ================= ================= ================= Net income, as reported $ 74,271 $ 48,817 $ 57,721 Special items: Restructuring and other related charges (net of taxes) 11,374 17,135 22,698 Other expense (net of taxes) 2,987 - - Acquisition expenses, pooling-of-interests (net of taxes) - - (376) ----------------- ----------------- ----------------- Net income (excluding special items) $ 88,632 $ 65,952 $ 80,043 ================= ================= ================= Earnings per share: Basic, as reported $0.80 $0.53 $0.63 Diluted, as reported $0.79 $0.53 $0.63 Special items: Restructuring and other related charges (net of taxes) 0.12 0.19 0.25 Other expense (net of taxes) 0.03 - - Acquisition expenses, pooling-of-interests (net of taxes) - - - ----------------- ----------------- ----------------- Basic (excluding special items) $0.95 $0.72 $0.88 ================= ================= ================= Diluted (excluding special items) $0.95 $0.72 $0.88 ================= ================= =================
29 Earnings per share (as reported, and excluding special items) is calculated independently for each amount presented. Accordingly, the sum of the individual earnings per share, as reported, and special items disclosures may not necessarily equal the earnings per share (excluding special items) amount for the corresponding period. The pretax impact of the special items is as follows:
For the years ended December 31, 2001 2000 1999 -------------------------------------------------------- Restructuring and other related charges $18,344 $27,199 $35,394 Other expense 4,817 - - Acquisition expenses, pooling-of-interests - - (55)
2001 vs. 2000 - -------------------------------------------------------------------------------- Consolidated Diluted earnings per share were $0.79 for the year ended December 31, 2001 versus $0.53 in 2000, including restructuring and other related charges associated with the Company's productivity and consolidation initiatives in both periods, as well as other expense in 2001. Net income for 2001 was $74.3 million versus $48.8 million in 2000. Earnings before interest, taxes, depreciation and amortization ("EBITDA") for 2001 was $247.6 million in comparison to $204.7 million for 2000. Sales for 2001 increased to $2,159.1 million from $1,971.3 million in 2000. As presented in the table above, excluding the impact of special items (discussed below) classified as other expense from the 2001 period and restructuring and other related charges from both periods, diluted earnings per share for the year ended December 31, 2001 were $0.95, compared with $0.72 earned in the prior year. Net income for 2001, on that basis, was $88.6 million versus $66.0 million in 2000. EBITDA, on the same basis, totaled $270.7 million for the year ended December 31, 2001 as compared with $231.9 million in 2000. Included in the 2001 results are other expense items totaling $4.8 million pretax ($3.0 million aftertax). In the first quarter of 2001, Omnicare recorded a $1.8 million pretax ($1.1 million aftertax, or $0.01 per diluted share) special charge representing 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. Further, the Company recorded a $3.0 million pretax ($1.9 million aftertax, or $0.02 per diluted share) special charge in the second quarter of 2001, representing a settlement in June 2001 of certain contractual issues with a customer, which issues and amount relate to prior year periods. Included in 2001 and 2000 were aggregate charges of $18.3 million and $27.2 million pretax ($11.4 million and $17.1 million aftertax, or $0.12 and $0.19 per diluted share, respectively) 30 relating to certain productivity and consolidation programs described hereafter under "Restructuring and Other Related Charges." Pharmacy Services Segment Omnicare's Pharmacy Services segment recorded sales of $2,033.8 million for the year ended December 31, 2001, ahead of the 2000 amount of $1,858.7 million by $175.1 million, or 9%. The increase represents the continued internal growth of the Pharmacy Services business, due primarily to net growth in the number of nursing facility residents serviced, the expansion of clinical programs, and a favorable shift in the mix toward new, higher-priced branded pharmaceuticals. The growth in the number of residents serviced was generated through the efforts of the Company's National Sales & Marketing Group and pharmacy staff in developing new pharmacy contracts with long-term care facilities, net of the elimination of certain high credit risk or uneconomic accounts. The number of nursing facility residents served at December 31, 2001 was 662,000 as compared to 636,500 served at December 31, 2000, a net increase during 2001 of 25,500, which was nearly five times greater than the net increase experienced during 2000. The increasing market penetration of newer drugs, which often carry higher prices but are more effective in reducing overall healthcare costs than those they replace, also served to increase Pharmacy Services sales. The Company estimates that drug price inflation for its highest dollar volume products in 2001 was 5%. The factors favorably impacting sales growth in 2001 were offset in part by a decrease of $6.2 million in infusion therapy sales as compared to 2000, a result of the decrease in the number of higher acuity patients serviced. Operating profit of the Pharmacy Services segment, including restructuring and other related charges associated with the Company's productivity and consolidation initiatives in both periods, as well as other expense in the 2001 period, was $200.8 million in 2001, a $44.2 million improvement as compared to 2000. Excluding the aforementioned special items, this segment's 2001 operating profit of $214.1 million was $35.9 million, or 20%, higher than the prior year amount of $178.2 million. As a percentage of the segment's sales, operating profit on this basis was 10.5% in 2001, compared to 9.6% in 2000. The improved operating profit was primarily the result of increased sales, as discussed above, and a lower operating cost structure reflecting principally the full period impact of the productivity and consolidation initiative completed in 2000 (the "Phase I Program"). Improvement in operating performance in 2001 was also attributable to a more stable and gradually improving operating environment in the skilled nursing facility market, a result of enactment of the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"). During 2001, many of the customers of the Company's Pharmacy Services segment realized the benefits of higher statutory reimbursement rates in conjunction with the implementation of the BBRA and BIPA. On January 8, 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, to be accounted for as a purchase business combination, included cash consideration at closing of $93.1 million (which is subject to adjustment based on the closing balance sheet review). Up to an additional $18.0 million in deferred payments may become payable, contingent upon future performance. The Company is 31 in the process of completing the purchase price allocation, including the identification of goodwill and other intangible assets. At the time of the acquisition, APS provided professional pharmacy and related consulting services to approximately 60,000 residents of skilled nursing and assisted living facilities through its network of 32 pharmacies in 15 states, as well as respiratory and Medicare Part B services for residents of long-term care facilities. From the acquisition, Omnicare expects to achieve certain economies of scale and cost synergies. The net assets and operating results of APS will be 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. CRO Services Segment Omnicare's Contract Research Organization ("CRO") Services segment recorded revenues of $125.4 million for the year ended December 31, 2001, which were $12.7 million, or 11%, greater than the $112.7 million recorded in 2000. The increase in CRO Services revenue was due to a recovery of the drug research market, as well as the efforts of the Company's integrated global selling efforts. Higher levels of demand were recognized from both major pharmaceutical manufacturers and biotechnology companies, and the Company's growing presence in the Pacific Rim countries contributed to the revenue increase. Operating profit of the CRO Services segment, including restructuring and other related charges associated with the Company's productivity and consolidation initiatives in both periods, was $2.5 million in 2001 compared to $1.7 million in 2000. Excluding these special items, operating profit in this segment for 2001 was $12.4 million, an increase of $5.2 million, or 72%, in comparison to the prior year operating profit of $7.2 million. As a percentage of the segment's revenue, operating profit, on this basis, was 9.9% in 2001 compared to 6.4% in 2000. The improvement in operating performance was attributable to the favorable impact of the aforementioned increase in revenues, the overall stabilization of the drug research market following several large pharmaceutical company mergers in 2000, as well as the realization of benefits from the Company's initiatives to integrate and streamline the organization. Consolidated The Company's consolidated gross profit as a percentage of sales of 26.8% in the year ended December 31, 2001 improved from the rate of 26.7% experienced during 2000, and represented a year-over-year increase in gross profit of approximately $54.0 million to $579.4 million. Positively impacting overall gross profit was the Company's purchasing leverage associated with the procurement of pharmaceuticals and benefits realized from the Company's formulary compliance program, as well as the leveraging of fixed and variable overhead costs at the Company's pharmacies and the full period impact of the reduced cost structure brought about by the Phase I Program completed in 2000. These favorable factors were offset in part by the previously mentioned shift in mix towards newer, branded drugs which typically produce higher gross profit, but lower gross profit margins. 32 Sales mix for the Company also impacts gross profit and includes primarily sales of pharmaceuticals and, to a lesser extent, contract research services, infusion therapy products and services, medical supplies, and other miscellaneous products and services. Sales of pharmaceuticals account for the majority of the Company's sales and gross profit. Contract research services and infusion therapy gross profits are typically higher than gross profits associated with sales of pharmaceuticals. Increased leverage in purchasing favorably impacts gross profit and is primarily derived through discounts from suppliers. Leveraging of fixed and variable overhead costs primarily relates to generating higher sales volumes from pharmacy facilities with no increase in fixed costs (e.g., rent) and minimal increases in variable costs (e.g., utilities), as well as the elimination of pharmacies through the Company's productivity and consolidation initiatives, further discussed below. The Company believes it will be able to continue to leverage fixed and variable overhead costs through internal and acquired growth. The Company is generally able to obtain price increases to cover drug price inflation. In order to enhance its gross profit margins, the Company strategically allocates its resources to those activities that will increase internal sales growth and favorably impact sales mix or will lower costs. In addition, through the ongoing development of its pharmaceutical purchasing programs, the Company is able to obtain discounts and thereby manage its pharmaceutical costs. Omnicare's selling, general and administrative ("operating") expenses for the year ended December 31, 2001 of $382.7 million were higher than the 2000 amount of $367.5 million, by $15.2 million, due to the overall growth of the business. Operating expenses as a percentage of sales, however, totaled 17.7% in 2001, representing a decline from the 18.6% experienced in 2000. This decline is primarily due to the full period favorable impact of the Phase I Program, which was successfully completed in late 2000, the leveraging of fixed and variable overhead costs over a larger sales base in 2001 than that which existed in 2000, and the integration and streamlining of the CRO business. Investment income for the year ended December 31, 2001 was $2.6 million, an improvement of $0.7 million over the same period of 2000. Larger average invested cash balances during 2001 as compared to 2000 was the primary driver of the increase in investment income. Interest expense during 2001 was $56.3 million, an increase of $1.2 million versus the comparable prior year period. This increase was largely due to the impact of an increase in amortization of debt issuance costs classified as interest expense, relating to the first quarter 2001 debt transactions, partially offset by the reduction in outstanding debt, as discussed at the "Financial Condition, Liquidity and Capital Resources" section below. Also unfavorably impacting 2001 interest expense was a marginal increase in the weighted average interest rates paid on outstanding debt brought about by the aforementioned debt transactions. These transactions converted a substantial portion of the Company's outstanding debt under revolving credit facilities, which are subject to variable rates of interest, to senior subordinated notes, which are subject to a higher, fixed rate of interest, but which also have a longer term. 33 The increase in the effective income tax rate to 38% in 2001 from 37% in the prior year is primarily attributable to the full utilization in 2000 of certain benefits derived from the Company's state tax planning program. While other state tax planning benefits will continue, they will be realized at a different magnitude than was the case in 2000. The effective tax rates in 2001 and 2000 are higher than the federal statutory rate largely as a result of the combined impact of various nondeductible expenses (primarily intangible asset amortization and acquisition costs), state and local income taxes and tax-accrual adjustments. Restructuring and Other Related Charges Phase I Program In 2000, the Company completed the Phase I Program, its previously disclosed productivity and consolidation program. The Phase I Program was implemented to allow the Company to gain maximum benefit from its acquisition program and to respond to changes in the healthcare industry. As part of the Phase I Program, the roster of pharmacies and other operating locations was reconfigured through the consolidation, relocation, closure and opening of sites, resulting in a net reduction of 59 locations. The Phase I Program also resulted in the reduction of the Company's work force by 16%, or approximately 1,800 full- and part-time employees, and annualized pretax savings in excess of $46 million upon completion. Details of the restructuring and other related charges relating to the productivity and consolidation program follow (in thousands):
Utilized Balance at 1999 during December 31, 2000 Provision 1999 1999 Provision ----------------------------------------------- Restructuring charges: Employee severance $12,178 $ (3,717) $ 8,461 $ 3,296 Employment agreement buy-outs 6,740 (3,377) 3,363 1,048 Lease terminations 5,612 (1,089) 4,523 1,881 Other assets and facility exit costs 8,310 (6,662) 1,648 10,627 -------- --------- -------- -------- Total restructuring charges 32,840 $(14,845) $17,995 16,852 ========= ======== Other related charges 2,554 10,347 -------- -------- Total restructuring and other related charges $35,394 $27,199 ======== ======== Utilized Balance at Utilized Balance at during December 31, during December 31, 2000 2000 2001 2001 ----------------------------------------------- Restructuring charges: Employee severance $ (8,367) $3,390 $(2,997) $ 393 Employment agreement buy-outs (3,735) 676 (676) - Lease terminations (3,811) 2,593 (1,775) 818 Other assets and facility exit costs (9,737) 2,538 (2,299) 239 -------- -------- ------- ------- Total restructuring charges $(25,650) $9,197 $(7,747) $1,450 ======== ======== ======= =======
In connection with this program, over the 1999 and 2000 periods, Omnicare recorded a total of $62.6 million pretax ($39.8 million after taxes) for restructuring and other related charges. The restructuring charges included severance pay, the buy-out of employment agreements, the buy-out of lease obligations, the write-off of other assets (representing a project-to-date cumulative amount of $11.0 million of pretax non-cash items, through December 31, 2000) and facility exit costs. The other related charges were primarily comprised of consulting fees and duplicate costs associated with the program, as well as the write-off of certain non-core healthcare investments. As of December 31, 2001, the Company had incurred approximately $22.9 million of severance and other employee-related costs relating to the reduction of approximately 1,800 employees. The remaining liabilities at December 31, 2001 represent amounts not yet paid relating to actions 34 taken in connection with the program (primarily lease payments), and will be adjusted as these matters are settled. Phase II Program In the third quarter of 2001, the Company announced the implementation of a second phase of the productivity and consolidation initiative (the "Phase II Program"). The Phase II Program is intended to further streamline operations, increase efficiency and enhance the Company's position as a high quality, cost-effective provider of pharmaceutical services. Building on the previous efforts, the Phase II Program includes the merging or closing of seven pharmacy locations and the reconfiguration in size and function of an additional ten locations. The Phase II Program also includes a reduction in occupied building space in certain locations and the rationalization or reduction of staffing levels in the CRO business in order to better garner the efficiencies of the integration and functional reorganization of that business. The Company expects the Phase II Program measures to lead to a net reduction of approximately 460 employees, or about 5% of its total work force, across both the Pharmacy Services and CRO Services segments. The Phase II Program is expected to generate approximately $17.0 million in annual savings on a pretax basis ($10.5 million aftertax) upon full implementation. In connection with the Phase II Program, the Company expensed $18.3 million ($11.4 million after taxes) for restructuring charges during the year ended December 31, 2001. The restructuring charges include severance pay, the buy-out of employment agreements, the buy-out of lease obligations, the write-off of other assets (representing $2.8 million of pretax non-cash items through December 31, 2001) and facility exit costs. Details of the restructuring charges relating to the Phase II Program follow (in thousands):
2001 Provision Utilized during 2001 Balance at December 31, 2001 ------------------------------------------------------------- Restructuring charges: Employee severance $ 4,256 $ (2,614) $1,642 Employment agreement buy-outs 2,086 (1,578) 508 Lease terminations 2,711 (2,105) 606 Other assets and facility exit costs 9,291 (6,264) 3,027 --------------- -------------------- ------------------ Total restructuring charges $18,344 $(12,561) $5,783 =============== ==================== ==================
As of December 31, 2001, the Company had incurred approximately $4.2 million of severance and other employee-related costs relating to the reduction of approximately 181 employees. All remaining liabilities recorded at December 31, 2001 were classified as current liabilities since the Company anticipates that these activities will be finalized within the next year. 35 2000 vs. 1999 - -------------------------------------------------------------------------------- Consolidated Net income, and basic and diluted earnings per share, declined 15% and 16%, respectively, in 2000 compared to 1999. Sales increased 6% in 2000 compared to 1999. EBITDA for the year ended December 31, 2000 was $204.7 million in comparison to $205.7 million during the 1999 period. As presented in the table above, excluding the impact of special items such as restructuring and other related charges from both periods and acquisition-related items in 1999, net income for the year ended December 31, 2000 decreased 18% in comparison to net income earned in 1999. Basic and diluted earnings per share in 2000, on this basis, decreased 18% in comparison to 1999. EBITDA for the year ended December 31, 2000, on this basis, was $231.9 million, compared to $241.0 million for 1999. Pharmacy Services Segment Omnicare's Pharmacy Services segment recorded sales of $1,858.7 million for the year ended December 31, 2000, an increase of $130.6 million, or 8%, over the comparable prior year period. The increase in this segment's sales represents the continued internal growth of the pharmacy services business and the cumulative effect of prior year acquisitions of long-term care pharmacy providers. The Company estimates that internal growth contributed approximately $105 million of this segment's increased sales in 2000 as compared to 1999. Furthermore, the Company estimates that approximately $26 million of its Pharmacy Services sales growth in 2000 was attributable to the full-year impact of acquisitions made in the prior year. The number of nursing facility residents served at December 31, 2000 was 636,500 as compared to 631,200 served one year earlier. The factors favorably impacting sales growth in 2000 were offset in part by a decrease of $3.1 million in infusion therapy sales during the year, resulting primarily from the reduction in servicing of higher acuity patients, utilization and pricing. Operating profit of the Pharmacy Services segment, including restructuring and other related charges associated with the Company's productivity and consolidation initiatives in both periods, as well as acquisition-related items in 1999, was $156.6 million in the year ended December 31, 2000, compared to $149.2 million in 1999. Excluding these special items, this segment's 2000 operating profit was $178.2 million as compared to $181.1 million for 1999. The operating results of the Pharmacy Services segment were unfavorably impacted by the reduction in earnings brought about by the difficulty of the operating environment in the long-term care industry throughout 2000. In particular, the full-year impact in 2000 of the implementation of the federal government's Prospective Payment System ("PPS") for Medicare residents of skilled nursing facilities ("SNFs"), including lower reimbursement which led to lower occupancy and acuity levels, continued to weaken the financial condition of many SNFs during 2000. While the enactment of the BBRA and the BIPA was expected to result in higher reimbursement rates, there were delays in implementing these programs during 2000, and as a result, the Company applied more stringent standards in accepting new business and aggressively withdrew from uneconomic accounts. 36 CRO Services Segment Omnicare's CRO Services segment recorded revenues of $112.7 million for the year ended December 31, 2000, as compared to $133.9 million in the comparable prior year period. This decline of approximately $21.2 million was primarily the result of delays in decision making by pharmaceutical manufacturers, as well as the cancellation of planned projects prior to commencement, owing in part to merger activities in that industry. As reported, operating profit of this segment during 2000 was $1.7 million, compared to $13.1 million in 1999. Excluding the impact of restructuring and other related charges and acquisition expenses, operating profit for the full year 2000 was $7.2 million, a decrease of $9.3 million when compared to the same period of 1999. The decline in operating performance in 2000 as compared to 1999 was primarily attributable to the volatility in sales arising from the aforementioned factors, resulting in a lower base over which to spread the segment's fixed cost components. Consolidated The Company's consolidated gross profit as a percentage of sales decreased to 26.7% in 2000 from 28.1% in 1999. The positive impact on gross profit relating to several factors, including the Company's purchasing leverage associated with purchases of pharmaceuticals, the leveraging of fixed and variable overhead costs at the Company's pharmacies, benefits realized from the Company's formulary compliance program and cost reductions associated with the productivity and consolidation initiative, were more than offset by several negative factors. Among the factors negatively affecting gross profit were the aforementioned unfavorable impact of PPS on the Pharmacy Services segment, in particular such factors as PPS-related pricing pressure, a reduction in Medicare census at some SNFs, a decline in the average length of stay for Medicare residents and a shift in the mix of patients served to lower acuity patients. These factors, coupled with the less favorable performance of the CRO Services segment, contributed to reduced gross profit margin for the Company in 2000. Operating expenses for the year ended December 31, 2000 totaled $367.5 million, an increase of 4.5% compared to 1999, due primarily to the overall growth of the Company. Operating expenses as a percentage of sales of 18.6% in 2000 were less than the 18.9% experienced in the comparable prior year period. Favorably impacting the year-to-year comparison was the impact of initiatives implemented through the Phase I Program. This favorable impact, however, was offset, in part, by an increase in the Company's provision for doubtful accounts (approximately 0.2 percentage points of sales) brought about by a deterioration in the financial condition of certain SNF clients throughout 2000, partially as a result of the impact of PPS on their business. On June 2, 1999, Omnicare announced the completion of the acquisition of the institutional pharmacy operations of Life Care Pharmacy Services, Inc. ("Life Care"), an affiliate of Life Care Centers of America, for $63 million in cash and 0.3 million warrants to purchase Omnicare common stock at $29.70 per share. The warrants have a seven-year term and are first exercisable in June 2002. Life Care had, at the time of the acquisition, contracts to provide dispensing services to approximately 17,000 residents in twelve states. 37 Acquisition expenses for 1999 of $0.8 million represent expenses related to a pooling-of-interests transaction. Furthermore, during 1999, the Company recorded income of $0.9 million relating to the net reversal of estimated CompScript, Inc. and IBAH, Inc. acquisition-related expenses resulting from the finalization of those costs during the year. Investment income for the year ended December 31, 2000 was $1.9 million, an increase of $0.4 million in comparison to the same period of 1999 due to a higher average invested cash balance during 2000 as compared to 1999, as well as an increase in interest rates during 2000 versus 1999. Interest expense during 2000 was $55.1 million, an increase of $8.9 million versus the comparable prior year period. The increase is primarily attributable to the full-year impact of interest expense associated with a $170 million increase in borrowings under the Company's line of credit facilities during the first half of 1999 (offset in part by subsequent repayments aggregating $40 million through year end 2000), as well as an increase in interest rates throughout 2000 as compared to the prior year. The increase in the Company's line of credit borrowings in 1999 was primarily attributable to the Company's acquisition program. The effective income tax rate of 37% during 2000 is consistent with that in 1999. The Company realized benefits from its state tax planning programs in 2000 and 1999. The effective income tax rates in 2000 and 1999 are higher than the federal statutory rate largely as a result of the combined impact of various nondeductible expenses (primarily intangible asset amortization and acquisition costs), state and local income taxes and tax-accrual adjustments. Impact of Inflation - -------------------------------------------------------------------------------- Inflation has not materially affected Omnicare's profitability inasmuch as price increases have generally been obtained to cover inflationary drug cost increases. Financial Condition, Liquidity and Capital Resources - -------------------------------------------------------------------------------- Cash and cash equivalents (including restricted cash) at December 31, 2001 were $171.3 million compared to $113.9 million at December 31, 2000. The Company generated positive cash flows from operating activities of $153.1 million during the year ended December 31, 2001 (including the impact of purchasing pharmaceuticals in advance of price increases, or "prebuys," of $30.0 million in the fourth quarter of 2001), compared to cash flows from operating activities of $132.7 million and $101.1 million during the years ended December 31, 2000 and 1999, respectively. These operating cash flows were used primarily for acquisition-related payments (further discussed below), capital expenditures, debt repayment and dividends. Excluding the $30.0 million of prebuys in the fourth quarter of 2001, the cash generated from operations for all of 2001 was approximately $183.1 million. The increase in cash generated from operations during 2001 was driven primarily by operating results, as previously discussed in the "Results of Operations" section. Net cash used in investing activities was $46.8 million, $76.1 million and $203.5 million in 2001, 2000 and 1999, respectively. Acquisitions of businesses required cash payments of $20.3 38 million (including amounts payable pursuant to acquisition agreements relating to pre-2001 acquisitions) in 2001, which were funded by operating cash flows. Acquisitions of businesses during 2000 and 1999 required $41.7 million and $144.1 million, respectively, of cash payments (including amounts payable pursuant to acquisition agreements relating to pre-2000 and pre-1999 acquisitions, respectively) which were primarily funded by operating cash flows and borrowings under the Company's revolving credit facilities. Acquisitions in 1999 were also funded, in part, with shares of the Company's common stock having a market value of approximately $11 million (0.5 million shares). Additional amounts contingently payable, totaling approximately $15 million at December 31, 2001, may become payable through 2002 pursuant to the terms of various acquisition agreements (primarily earnout payments). In 2001, net cash used in financing activities was $49.6 million, compared to a use of $41.8 million in 2000 and net proceeds of $145.5 million in 1999. During 2001, the Company used cash generated from its operations to reduce obligations under its revolving credit facilities by $40.0 million. The Company's capital requirements are primarily comprised of capital expenditures, largely relating to investments in the Company's information technology systems, and ongoing payments originating from its acquisition program. There are no material commitments and contingencies outstanding at December 31, 2001, other than certain acquisition-related payments potentially due in the future, including deferred payments, indemnification payments and payments originating from earnout provisions. In the normal course of business, the Company enters into various contractual and other commercial commitments that impact or could impact the liquidity of its operations. As of December 31, 2001, the Company had commitments outstanding related to its long-term debt and revolving credit facility arrangements, as further discussed below. At December 31, 2001, the Company also had $1.1 million of capital lease obligations, with ratable payments due at various times over the next four years, and minimum payment obligations related to noncancellable operating leases of $17.4 million, $17.6 million, $15.7 million, $13.2 million, $11.6 million and $42.6 million for the years ending December 31, 2002, 2003, 2004, 2005, 2006 and later years, respectively. In addition, as of December 31, 2001, the Company had approximately $5.8 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals. In March 2001, the Company completed the issuance, at par value, of $375.0 million of 8.125% senior subordinated notes (the "Senior Notes"), due 2011. The Senior Notes were subsequently exchanged for replacement notes with identical terms, which were registered with the Securities and Exchange Commission. Concurrent with the issuance of the Senior Notes, the Company entered into a new three-year syndicated $495.0 million revolving line of credit facility (the "Revolving Credit Facility"). Subsequent to the closing of the Revolving Credit Facility, the Company received commitments from additional financial institutions that allowed the Company to increase the size of the Revolving Credit Facility to $500.0 million. Net proceeds from the Senior Notes of approximately $365.0 million and borrowings under the new Revolving Credit Facility of approximately $70.0 million were used to repay outstanding indebtedness under the Company's former revolving credit facilities, which totaled $435.0 million at December 31, 39 2000, and such former facilities were terminated. The outstanding balance and the amount of unused, available funds under the Revolving Credit Facility at December 31, 2001 was $30.0 million and $468.2 million, respectively. In December 1997, the Company issued $345.0 million of 5.0% convertible subordinated debentures (the "Debentures"), due 2007. The Debentures are convertible into common stock at any time after March 4, 1998 at the option of the holder at a price of $39.60 per share. The Revolving Credit Facility, the Debentures and the Senior Notes contain representations and warranties, covenants and events of default customary for such facilities. Interest rates charged on borrowings outstanding under the Revolving Credit Facility are based on prevailing market rates as discussed in the following section. The Company's current ratio of 3.4 to 1.0 at December 31, 2001 compares to 3.2 to 1.0 at December 31, 2000. This improvement is due primarily to the combined effect of higher cash balances and inventory levels (due to prebuys), at December 31, 2001 than existed at December 31, 2000, funded largely from the aforementioned favorable operating cash flows experienced during the year ended December 31, 2001. On February 6, 2002, the Company's Board of Directors declared a quarterly cash dividend of 2.25 cents per share for an indicated annual rate of 9 cents per share for 2002, which is consistent with 2001. Dividends of $8.5 million paid during the year ended December 31, 2001 were comparable with the $8.3 million and $8.2 million paid for the years ended December 31, 2000 and 1999, respectively. The Company believes that cash flows from operations, credit facilities and other short- and long-term debt financings, if any, will be sufficient to satisfy its future working capital, acquisition contingency commitments, capital expenditures, debt servicing and other financing requirements for the foreseeable future. However, the Company may in the future incur additional indebtedness or issue additional equity as deemed appropriate. The Company believes that, if needed, these additional external sources of financing are readily available. 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 December 31, 2001 include $30.0 million outstanding under its three-year, $500.0 million variable-rate Revolving Credit Facility at an interest rate of LIBOR plus 1.375%, or 3.3% at December 31, 2001 (a one-hundred basis point change in the interest rate would impact pretax interest expense by approximately $0.3 million per year); $345.0 million outstanding under 5.0% fixed rate Debentures, due 2007; and $375.0 million outstanding under its 8.125% fixed rate Senior Notes, due 2011. At December 31, 2001, the fair value of Omnicare's Revolving Credit Facility approximates its carrying value, and the fair value of the Debentures and Senior Notes is approximately $319.6 million and approximately $388.1 million, respectively. 40 The Company has operations and revenue that occur outside of the United States 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. Key Accounting Policies - -------------------------------------------------------------------------------- Revenue Recognition Pharmacy Services Revenue is recognized when products or services are delivered or provided to the customer. A significant portion of the Company's revenues from sales of pharmaceutical and medical products is reimbursable from Medicaid and Medicare programs. The Company monitors its receivables from these reimbursement sources under policies established by management and reports such revenues at the net realizable amount expected to be received from these third-party payors. Contract Research Services A portion of the Company's revenues are earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and diagnostics companies, based on contract terms. Most of the contracts provide for services to be performed on a units of service basis. These contracts specifically identify the units of service and unit pricing. Under these contracts, revenue is generally recognized upon completion of the units of service, unless the units of service are performed over an extended period of time. For extended units of service, revenue is recognized based on labor hours expended as a percentage of total labor hours expected to be expended. For time-and-materials contracts, revenue is recognized at contractual hourly rates, and for fixed-price contracts revenue is recognized using a method similar to that used for extended units of service. The Company's contracts provide for price renegotiations upon scope of work changes. The Company recognizes revenue related to these scope changes when underlying services are performed and realization is assured. In a number of cases, clients are required to make termination payments in addition to payments for services already rendered. Any anticipated losses resulting from contract performance are charged to earnings in the period identified. Billings and payments are specified in each contract. Revenue recognized in excess of billings is classified as unbilled receivables, while billings in excess of revenue are classified as deferred revenue on the accompanying balance sheets. Use of Estimates As a result of the Company's business operations, global scope and size, management is required to make significant estimates in preparing the Company's financial statements. As described in 41 the Notes to Consolidated Financial Statements, actual results could differ from the amounts estimated and recorded in such statements. A description of each of the more significant estimates follows: Allowance for Doubtful Accounts. The Company establishes the allowance for doubtful accounts based on historical credit losses and specifically identified credit risks. Management reviews this allowance on an ongoing basis for appropriateness. Inventories. The Company maintains inventory at lower of cost or net realizable value, with cost determined on the basis of the first-in, first-out method. If inventory expires prior to usage or becomes obsolete, the Company could be exposed to potential losses. The Company records reserves for slow-moving, unusable, or obsolete inventories based upon anticipated usage, inventory aging and obsolescence. Management reviews the recorded reserves on an ongoing basis for appropriateness. Restructuring. The Company has recorded accruals in connection with its restructuring plans, primarily for facility exit costs and involuntary termination benefits. Management reviews these accruals on an ongoing basis for appropriateness. Employee Benefit Plans. For certain of its employee benefit plans, the Company estimates the expected return on plan assets, discount rate, rate of compensation increase and future healthcare costs, among other items, and relies on actuarial estimates, to assess the future potential liability and funding requirements. These estimates, if assessed differently, could have an impact on the Company's consolidated financial position, results of operations or cash flows. Income Taxes. The Company estimates its tax liabilities based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as well as about the realization of deferred tax assets. If the provisions for current or deferred taxes are not adequate, if the Company is unable to realize certain deferred tax assets or if the tax laws change unfavorably, the Company could experience potential losses. Likewise, if provisions for current and deferred taxes are in excess of those eventually needed, if the Company is able to realize additional deferred tax assets or if tax laws change favorably, the Company could experience potential gains. Recently Issued Accounting Standards - -------------------------------------------------------------------------------- The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133" ("SFAS 138"), on January 1, 2001. SFAS 133 and SFAS 138 require that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge 42 transaction and, if it is, the type of hedge transaction. In conjunction with the adoption of SFAS 133 and SFAS 138, the Company determined that it does not have any derivative hedging contracts. Therefore, the adoption of SFAS 133 and SFAS 138 on January 1, 2001 did not have a material effect on the Company's consolidated financial statements. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141, which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises", requires that all business combinations entered into after July 1, 2001 be accounted for by the purchase method, defines criteria for recognition of intangible assets apart from goodwill, and further defines disclosure requirements for business combinations. The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142, which supersedes APB Opinion No. 17, "Intangible Assets", defines new accounting treatment for goodwill and other intangible assets. This standard eliminates the amortization of goodwill and other intangible assets that have indefinite lives, establishes a requirement that goodwill and intangible assets with indefinite lives be tested annually for impairment, provides specific guidance on such testing, and requires disclosures of information about goodwill and other intangible assets in the years subsequent to their acquisition that was not previously required. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, consistent with the requirements of the standard, goodwill and intangible assets acquired after June 30, 2001 will be immediately subject to the new provisions. The Company anticipates that this new standard will serve to increase the Company's 2002 pretax earnings by approximately $32.0 million to $33.0 million (representing an estimated $20 million after tax, or approximately $0.21 per diluted share). The Company has evaluated its goodwill assets under the SFAS 142 transitional impairment test and does not anticipate that there will be an impairment loss in connection with adoption of this standard. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is not applicable to the Company. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") and amends APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business" ("APB 30"). This statement develops one accounting model (based on the model in SFAS 121) for long-lived assets that are disposed of by sale, as well as addresses the principal implementation issues. SFAS 144 also expands the scope of discontinued operations and changes the disclosure requirement for discontinued operations. This statement is effective for fiscal years beginning after December 15, 2001. Management does not expect this standard to have any material impact on the Company's consolidated financial position, results of operations and cash flows. 43 The FASB recently issued FASB Staff Announcement Topic No. D-103, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred" ("Topic D-103"). Topic D-103 requires reimbursements received for "out-of-pocket" expenses to be classified in the income statement as revenue, with the actual expenses classified in the appropriate cost caption. The Company's CRO segment currently classifies the net amount of reimbursed "out-of-pocket" expenses for its clinical study activities as a component of net revenues. Topic D-103 is effective for periods beginning after December 15, 2001 and requires comparative financial statements to be reclassified. The adoption will have no significant impact on the Company's consolidated financial position, results of operations and cash flows. However, the Company is currently evaluating the extent to which the adoption of Topic D-103 may impact the CRO segment's revenues, expenses and operating profit as a percentage of revenues. Outlook - -------------------------------------------------------------------------------- The Company derives approximately one-half of its revenues directly from government sources, principally Medicaid and to a lesser extent Medicare, and one-half from the private sector (including individual residents, third-party insurers and SNFs). In recent years, Congress has passed a number of federal laws that have effected major changes in the healthcare system. The Balanced Budget Act of 1997 (the "BBA") sought to achieve a balanced federal budget by, among other things, changing the reimbursement policies applicable to various healthcare providers through the introduction in 1998 of the PPS for Medicare-eligible residents of SNFs. Prior to PPS, SNFs under Medicare received cost-based reimbursement. Under PPS, Medicare pays SNFs a fixed fee per patient per day based upon the acuity level of the resident, covering substantially all items and services furnished during a Medicare-covered stay, including pharmacy services. PPS resulted in a significant reduction of reimbursement to SNFs. Admissions of Medicare residents, particularly those requiring complex care, declined in many SNFs due to concerns relating to the adequacy of reimbursement under PPS. This caused a weakness in Medicare census leading to a significant reduction of overall occupancy in the SNFs the Company serves. This decline in occupancy and acuity levels adversely impacted Omnicare's results beginning in 1999, as the Company experienced lower utilization of Omnicare services, coupled with PPS-related pricing pressure from Omnicare's SNF customers. In 1999, Congress enacted the BBRA which gave SNFs a temporary 20% rate increase for high-acuity patients effective April 1, 2000, and an overall 4% across the board increase in payments otherwise determined under the BBA for all patients for federal fiscal years 2001 and 2002. These rate increases have partially restored the reduction of reimbursement caused by PPS. In December 2000, BIPA was signed into law. BIPA, effective April 2001, further increased reimbursement by means of a temporary 6.7% rate increase for certain high-acuity rehabilitation patients, a 16.66% across the board increase in the nursing component of the federal rate for all patients for services furnished before October 1, 2002, and for fiscal year 2001, a 3.16% rate increase for all patients. As a result, it appears that the unfavorable operating trends attributable to PPS have stabilized and that the BBRA and BIPA have helped to improve the financial condition of SNFs and motivate them to increase admissions, particularly of higher acuity residents. Certain of the increases in Medicare reimbursement for SNFs provided for under the BBRA and the BIPA will expire in 44 October 2002 unless Congress enacts additional legislation. If no additional legislation is enacted, the loss of revenues associated with this occurrence could have an adverse effect on the financial condition of the Company's SNF customers. While it is hoped that Congress will act in a timely fashion, no assurances can be given as to whether Congress will take action, the timing of any action, or the form of any relief enacted. Looking beyond the stabilization of Medicare funding for skilled nursing facilities, other key healthcare funding issues remain, including the implementation of a Medicare drug benefit for seniors; the pressures on federal and state Medicaid budgets arising from the economic downturn coupled with growth in enrollees as eligibility is expanded; the escalation in drug costs owing to higher drug utilization among seniors and the introduction of new, more efficacious but also more expensive medications; and the long-term financing of the entire Medicare program. Given competing national priorities, it remains difficult to predict the outcome and impact on the Company of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs. Demographic trends indicate that demand for long-term care will increase well into the middle of this century as the elderly population grows significantly. Moreover, those over 65 consume a disproportionately high level of healthcare services when compared with the under 65 population. There is widespread consensus that appropriate pharmaceutical care is generally considered the most cost-effective form of treatment for the chronic ailments afflicting the elderly and also one which is able to improve the quality of life. Further, the pace and quality of new drug development is yielding many promising new drugs targeted at the diseases of the elderly. These new drugs may be more expensive than older, less effective drug therapies due to rising research costs. However, they are significantly more effective in curing or ameliorating illness and in lowering overall healthcare costs by reducing among other things, hospitalizations, physician visits, nursing time and lab tests. These trends not only support long-term growth for the geriatric pharmaceutical industry but also containment of healthcare costs and the well being of the nation's growing elderly population. In order to fund this growing demand, the Company anticipates that the government and the private sector will continue to review, assess and possibly alter healthcare delivery systems and payment methodologies. While it is not possible to predict the effect of any further initiatives on Omnicare's business, management believes that the Company's expertise in geriatric pharmaceutical care and pharmaceutical cost management position Omnicare to help meet the challenges of today's healthcare environment. Further, the rate of new drug discovery continues to accelerate fueled, in part, by the recently completed mapping of the human genome and the science and discoveries that will likely emanate from this project. Pharmaceutical manufacturers, in order to keep pace, will continue to turn to contract research organizations to assist them in accelerating drug research development and commercialization, providing a foundation for growth in the Company's CRO business. 45 Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information - -------------------------------------------------------------------------------- In addition to historical information, this report contains certain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements regarding the intent, belief or current expectations regarding the matters discussed or incorporated by reference in this document (including statements as to "beliefs," "expectations," "anticipations," "intentions" or similar words) and all statements which are not statements of historical fact. These forward-looking statements involve known and unknown risks, uncertainties, contingencies and other factors that could cause results, performance or achievements to differ materially from those stated. These forward-looking statements and trends include those relating to expectations concerning Omnicare's financial performance; internal growth trends; growth in residents serviced; expansion of clinical programs; the shift in mix towards new, higher-priced branded pharmaceuticals; trends concerning the acuity of patients serviced; the impact of Omnicare's productivity, consolidation and integration programs; the operating environment in the skilled nursing facility and drug research markets; the impact of legislation, including legislation related to reimbursement rates; the expected benefits of the APS acquisition; the impact of the CRO's global selling efforts; the impact of higher demand for CRO services from pharmaceutical manufacturers and biotechnology companies; the impact of expansion in the Pacific Rim; purchasing leverage; the impact of Omnicare's formulary compliance program; the leveraging of costs; the ability to obtain price increases; the impact of pharmaceutical purchasing programs; benefits from the Company's state tax planning programs; improvement in the financial condition of Omnicare; the adequacy and availability of Omnicare's sources of liquidity and capital; the impact of PPS on SNFs and Omnicare; the impact of healthcare funding issues; the impact of demographic trends; and the impact of new drug development. Such risks, uncertainties, contingencies, assumptions and other factors, many of which are beyond Omnicare's control, include without limitation: overall economic, financial and business conditions; trends for the continued growth of Omnicare's business; the ability to implement productivity, consolidation, integration and cost reduction efforts and to realize related anticipated benefits; delays or reductions in reimbursement by the government and other payors to Omnicare and its customers; the overall financial condition of Omnicare's customers; the ability to assess and react to the financial condition of customers; the impact of seasonality on Omnicare's business; 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; pricing and other competitive factors in Omnicare's industry; the effect of new government regulations, executive orders and/or legislative initiatives, including those relating to reimbursement and drug pricing policies, and in the interpretation and application of these policies; government budgetary pressures and shifting priorities; the outcome of litigation; Omnicare's failure to obtain or maintain required regulatory approvals or licenses; the failure of the long-term care facilities Omnicare serves to maintain required regulatory approvals; 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 46 industries; volatility in Omnicare's stock price; access to capital and financing; the demand for Omnicare's products and services; variations in costs or expenses; the ability to continue to leverage costs through growth; the continued availability of suitable acquisition candidates; changes in tax law and regulation; and changes in accounting rules and standards. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, Omnicare's actual results, performance or achievements could differ materially from those expressed in, or implied by, such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. Except as otherwise required by law, Omnicare does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required under this Item is set forth in the "Quantitative and Qualitative Disclosures about Market Risk" caption at Part II, Item 7, of this Filing. 47 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Financial Statement Schedule
Page ---- Financial Statements: Report of Independent Accountants 49 Consolidated Statements of Income 50 Consolidated Balance Sheets 51 Consolidated Statements of Cash Flows 52 Consolidated Statements of Stockholders' Equity 53 Notes to Consolidated Financial Statements 54 Financial Statement Schedule: II - Valuation and Qualifying Accounts S-1
All other financial statement schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or Notes thereto. 48 Report of Independent Accountants To the Stockholders and Board of Directors of Omnicare, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Omnicare, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP - ----------------------------------- PricewaterhouseCoopers LLP Chicago, Illinois February 1, 2002 49 CONSOLIDATED STATEMENTS OF INCOME Omnicare, Inc. and Subsidiary Companies (In thousands, except per share data)
For the years ended December 31, --------------------------------------------- 2001 2000 1999 -------------- --------------- -------------- Sales $2,159,131 $1,971,348 $1,861,921 Cost of sales 1,579,732 1,445,955 1,338,638 -------------- --------------- -------------- Gross profit 579,399 525,393 523,283 Selling, general and administrative expenses 382,744 367,507 351,639 Restructuring and other related charges (Note 12) 18,344 27,199 35,394 Other expense (Note 13) 4,817 - - Acquisition expenses, pooling-of-interests (Note 2) - - (55) -------------- --------------- -------------- Operating income 173,494 130,687 136,305 Investment income 2,615 1,910 1,532 Interest expense (56,324) (55,074) (46,166) -------------- --------------- -------------- Income before income taxes 119,785 77,523 91,671 Income taxes 45,514 28,706 33,950 -------------- --------------- -------------- Net income $ 74,271 $ 48,817 $ 57,721 ============== =============== ============== Earnings per share: Basic $ 0.80 $ 0.53 $ 0.63 ============== =============== ============== Diluted $ 0.79 $ 0.53 $ 0.63 ============== =============== ============== Weighted average number of common shares outstanding: Basic 93,124 92,012 90,999 ============== =============== ============== Diluted 93,758 92,012 91,238 ============== =============== ==============
The Notes to Consolidated Financial Statements are an integral part of these statements. 50 CONSOLIDATED BALANCE SHEETS Omnicare, Inc. and Subsidiary Companies (In thousands, except share data)
December 31, 2001 2000 ------------------------------- ASSETS Current assets: Cash and cash equivalents $ 168,396 $ 111,607 Restricted cash 2,922 2,300 Accounts receivable, less allowances of $45,573 (2000-$40,497) 478,077 440,785 Unbilled receivables 23,621 18,933 Inventories 149,134 129,404 Deferred income tax benefits 28,147 26,338 Other current assets 77,297 88,371 -------------- --------------- Total current assets 927,594 817,738 Properties and equipment, at cost less accumulated depreciation of $160,164 (2000-$132,308) 155,073 158,535 Goodwill, less accumulated amortization of $148,524 (2000-$115,832) 1,123,800 1,168,151 Other noncurrent assets 83,809 65,794 -------------- --------------- Total assets $2,290,276 $2,210,218 ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 140,327 $ 118,941 Amounts payable pursuant to acquisition agreements 5,440 4,372 Current debt 393 1,619 Accrued employee compensation 25,015 30,113 Deferred revenue 39,338 28,333 Income taxes payable 9,256 14,238 Other current liabilities 49,504 59,393 -------------- --------------- Total current liabilities 269,273 257,009 Long-term debt 30,669 435,706 5.0% convertible subordinated debentures, due 2007 345,000 345,000 8.125% senior subordinated notes, due 2011 375,000 - Deferred income taxes 81,495 63,579 Amounts payable pursuant to acquisition agreements 4,966 12,675 Other noncurrent liabilities 34,090 27,826 -------------- --------------- Total liabilities 1,140,493 1,141,795 -------------- --------------- 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, 94,671,800 shares issued and outstanding (2000-92,730,600 shares issued and outstanding) 94,672 92,731 Paid-in capital 722,701 692,695 Retained earnings 381,441 315,638 -------------- --------------- 1,198,814 1,101,064 Treasury stock, at cost-986,600 shares (2000-574,200 shares) (19,824) (10,808) Deferred compensation (24,273) (18,915) Accumulated other comprehensive income (4,934) (2,918) -------------- --------------- Total stockholders' equity 1,149,783 1,068,423 -------------- --------------- Total liabilities and stockholders' equity $2,290,276 $2,210,218 ============== ===============
The Notes to Consolidated Financial Statements are an integral part of these statements. 51 CONSOLIDATED STATEMENTS OF CASH FLOWS Omnicare, Inc. and Subsidiary Companies (In thousands)
For the years ended December 31, ----------------------------------------- 2001 2000 1999 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 74,271 $ 48,817 $ 57,721 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 32,164 32,211 32,682 Amortization 41,906 41,762 36,682 Provision for doubtful accounts 25,490 26,729 22,056 Deferred tax provision 17,305 19,767 23,073 Non-cash portion of restructuring charges 2,811 6,804 4,198 Changes in assets and liabilities, net of effects from acquisition of businesses: Accounts receivable and unbilled receivables (50,774) (44,314) (83,959) Inventories (12,949) (8,988) 1,146 Current and noncurrent assets 6,292 (10,710) (43,837) Accounts payable 15,130 11,115 29,072 Accrued employee compensation (1,993) (14,436) 15,202 Deferred revenue 11,005 4,012 5,278 Current and noncurrent liabilities (7,571) 19,932 1,800 ------------- ------------- ------------- Net cash flows from operating activities 153,087 132,701 101,114 ------------- ------------- ------------- Cash flows from investing activities: Acquisition of businesses (20,263) (41,664) (144,079) Capital expenditures (26,222) (32,423) (58,749) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust (622) (2,300) - Other 305 271 (689) ------------- ------------- ------------- Net cash flows from investing activities (46,802) (76,116) (203,517) ------------- ------------- ------------- Cash flows from financing activities: Borrowings on line of credit facilities 70,000 - 170,000 Proceeds from long-term borrowings 375,000 - - Payments on line of credit facilities (475,000) (30,000) (10,000) Principal payments on long-term obligations (2,898) (1,838) (3,502) Fees paid for financing arrangements (16,254) (635) (641) Proceeds from (payments for) stock awards, exercise of stock options and warrants, net of stock tendered in payment 8,065 (1,011) (2,152) Dividends paid (8,468) (8,293) (8,203) ------------- ------------- ------------- Net cash flows from financing activities (49,555) (41,777) 145,502 ------------- ------------- ------------- Effect of exchange rate changes on cash 59 (468) (144) ------------- ------------- ------------- Net increase in cash and cash equivalents 56,789 14,340 42,955 Cash and cash equivalents at beginning of year - unrestricted 111,607 97,267 54,312 ------------- ------------- ------------- Cash and cash equivalents at end of year - unrestricted $ 168,396 $111,607 $ 97,267 ============= ============= =============
The Notes to Consolidated Financial Statements are an integral part of these statements. 52 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Omnicare, Inc. and Subsidiary Companies (In thousands, except per share data)
Accumulated Other Total Common Paid-in Retained Treasury Deferred Comprehensive Stockholders' Stock Capital Earnings Stock Compensation Income Equity - ------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1999 $90,460 $664,225 $225,937 $ (4,166) $(12,932) $ (53) $ 963,471 Pooling-of-interests (Note 2) 333 326 (297) - - - 362 Dividends paid ($0.09 per share) - - (8,203) - - - (8,203) Stock and warrants issued in connection with acquisitions 151 3,799 - (3) - - 3,947 Stock acquired for benefit plans - - - (1,092) - - (1,092) Exercise of warrants 52 697 - - - - 749 Exercise of stock options 14 (437) - 806 - - 383 Stock awards, net of amortization 602 15,809 - (2,495) (1,166) - 12,750 Other - - (44) - - - (44) - ---------------------------------------------------------------------------------------------------------------------------- Subtotal 91,612 684,419 217,393 (6,950) (14,098) (53) 972,323 - ---------------------------------------------------------------------------------------------------------------------------- Net income - - 57,721 - - - 57,721 Other comprehensive income (loss), net of tax: Cumulative translation adjustment - - - - - (1,664) (1,664) - ---------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) - - 57,721 - - (1,664) 56,057 - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 91,612 684,419 275,114 (6,950) (14,098) (1,717) 1,028,380 Dividends paid ($0.09 per share) - - (8,293) - - - (8,293) Stock acquired for benefit plans - - - (88) - - (88) Exercise of stock options 173 1,559 - (1,882) - - (150) Stock awards, net of amortization 946 7,161 - (1,840) (4,817) - 1,450 Other - (444) - (48) - - (492) - ---------------------------------------------------------------------------------------------------------------------------- Subtotal 92,731 692,695 266,821 (10,808) (18,915) (1,717) 1,020,807 - ---------------------------------------------------------------------------------------------------------------------------- Net income - - 48,817 - - - 48,817 Other comprehensive income (loss), net of tax: Cumulative translation adjustment - - - - - (1,694) (1,694) Unrealized appreciation in fair value of investments - - - - - 493 493 - ---------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) - - 48,817 - - (1,201) 47,616 - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 92,731 692,695 315,638 (10,808) (18,915) (2,918) 1,068,423 Dividends paid ($0.09 per share) - - (8,468) - - - (8,468) Stock acquired for benefit plans - - - (83) - - (83) Exercise of stock options 1,430 20,691 - (6,614) - - 15,507 Stock awards, net of amortization 511 9,747 - (2,319) (5,358) - 2,581 Other - (432) - - - - (432) - ---------------------------------------------------------------------------------------------------------------------------- Subtotal 94,672 722,701 307,170 (19,824) (24,273) (2,918) 1,077,528 - ---------------------------------------------------------------------------------------------------------------------------- Net income - - 74,271 - - - 74,271 Other comprehensive income (loss), net of tax: Cumulative translation adjustment - - - - - 59 59 Unrealized appreciation in fair value of investments - - - - - 208 208 Equity adjustment for minimum pension liability - - - - - (2,283) (2,283) - ---------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) - - 74,271 - - (2,016) 72,255 - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $94,672 $722,701 $381,441 $(19,824) $(24,273) $(4,934) $1,149,783 ============================================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. 53 Notes to Consolidated Financial Statements Note 1 - Description of Business and Summary of Significant Accounting Policies Description of Business Omnicare, Inc. and its subsidiaries ("Omnicare" or the "Company") provide geriatric pharmaceutical care and clinical research services. Serving, at December 31, 2001, a total of approximately 662,000 residents in 8,600 long-term care facilities in 43 states, Omnicare is the nation's largest provider of professional pharmacy, related consulting and data management services for skilled nursing, assisted living and other institutional healthcare providers. The Company also provides clinical research services to the pharmaceutical and biotechnology industries in 27 countries worldwide. Principles of Consolidation The consolidated financial statements of the Company include the accounts of all wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Translation of Foreign Financial Statements Assets and liabilities of the Company's foreign operations are translated at the year-end rate of exchange, and the income statements are translated at the average rate of exchange for the year. Gains or losses from translating foreign currency financial statements are accumulated in a separate component of stockholders' equity. Cash Equivalents Cash equivalents include all investments in highly liquid instruments with original maturities of three months or less. Inventories Inventories consist primarily of purchased pharmaceuticals and medical supplies held for sale to customers and are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. Properties and Equipment Properties and equipment are stated at cost. Expenditures for maintenance, repairs, renewals and betterments that do not materially prolong the useful lives of the assets are charged to expense as incurred. Depreciation of properties and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from five to ten years for computer equipment and software, machinery and equipment, and furniture and fixtures. Buildings and building improvements are depreciated over forty years, and leasehold improvements are 54 amortized over the lesser of the lease terms, including renewal options, or their useful lives. The Company capitalizes certain costs that are directly associated with the development of internally developed software, representing the historical cost of these assets. Once the software is completed and placed into service, such costs are amortized over the estimated useful lives, ranging from five to ten years. Leases Leases that substantially transfer all of the benefits and risks of ownership of property to Omnicare or otherwise meet the criteria for capitalizing a lease under generally accepted accounting principles are accounted for as capital leases. An asset is recorded at the time a capital lease is entered into together with its related long-term obligation to reflect its purchase and financing. Property and equipment recorded under capital leases are depreciated on the same basis as previously described. Rental payments under operating leases are expensed as incurred. Goodwill, Intangibles and Other Assets Intangible assets, comprised primarily of goodwill arising from business combinations accounted for as purchase transactions, are amortized using the straight-line method over their useful lives, not exceeding forty years. Goodwill arising from acquisitions completed subsequent to June 30, 2001 is not amortized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). As discussed in "Recently Issued Accounting Standards" below, all other goodwill amortization will cease, beginning January 1, 2002, in connection with the adoption of SFAS 142. Debt issuance costs are included in other assets and are amortized using the straight-line method (which approximates the effective interest method) over the life of the related debt. Valuation of Long-Lived Assets Long-lived assets such as property and equipment, goodwill, software (acquired and internally-developed) and investments are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. In accordance with SFAS 142, and beginning in 2002, the Company will conduct annual goodwill impairment tests using an impairment test described in SFAS 142. Fair Value of Financial Instruments For cash and cash equivalents, restricted cash, accounts receivable and unbilled receivables, the carrying value of these items approximates their fair value. The fair value of restricted funds held in trust for settlement of the Company's pension obligations is based on quoted market prices of the investments held by the trustee. For accounts payable, the carrying value 55 approximates fair value. The fair value of the Company's line of credit facilities approximates their carrying value, as the effective interest rate fluctuates with changes in market rates. The fair value of the convertible subordinated debentures and the senior subordinated notes, respectively, was $319.6 million and $388.1 million at December 31, 2001, as determined by quoted market rates on that date. Revenue Recognition Pharmacy Services - ----------------- Revenue is recognized when products or services are delivered or provided to the customer. A significant portion of the Company's revenues from sales of pharmaceutical and medical products is reimbursable from Medicaid and Medicare programs. The Company monitors its receivables from these reimbursement sources under policies established by management and reports such revenues at the net realizable amount expected to be received from these third-party payors. Contract Research Services - -------------------------- A portion of the Company's revenues are earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and diagnostics companies, based on contract terms. Most of the contracts provide for services to be performed on a units of service basis. These contracts specifically identify the units of service and unit pricing. Under these contracts, revenue is generally recognized upon completion of the units of service, unless the units of service are performed over an extended period of time. For extended units of service, revenue is recognized based on labor hours expended as a percentage of total labor hours expected to be expended. For time-and-materials contracts, revenue is recognized at contractual hourly rates, and for fixed-price contracts revenue is recognized using a method similar to that used for extended units of service. The Company's contracts provide for price renegotiations upon scope of work changes. The Company recognizes revenue related to these scope changes when underlying services are performed and realization is assured. In a number of cases, clients are required to make termination payments in addition to payments for services already rendered. Any anticipated losses resulting from contract performance are charged to earnings in the period identified. Billings and payments are specified in each contract. Revenue recognized in excess of billings is classified as unbilled receivables, while billings in excess of revenue are classified as deferred revenue on the accompanying consolidated balance sheets. Income Taxes The Company accounts for income taxes using the asset and liability method under which deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates to differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Comprehensive Income Comprehensive income of the Company differs from net income due to foreign currency translation adjustments, unrealized appreciation in the fair value of investments and an equity adjustment for the minimum pension liability, each of which have an accumulated aftertax 56 income/(loss) effect at December 31, 2001 of $(3.3) million, $0.7 million and $(2.3) million, respectively. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and amounts reported in the accompanying notes. Significant estimates underlying the accompanying consolidated financial statements include the allowance for doubtful accounts; the net carrying value of inventories; accruals pursuant to the Company's restructuring initiatives; employee benefit plan assumptions and reserves; current and deferred income tax assets, liabilities and provisions; and various other operating allowances and accruals. Actual results could differ from those estimates depending upon certain risks and uncertainties. Potential risks and uncertainties, many of which are beyond the control of Omnicare include, but are not necessarily limited to, such factors as overall economic, financial and business conditions; delays in reimbursement by the government and other payors to customers and Omnicare; the overall financial condition of Omnicare's customers; the effect of new government regulations, executive orders and/or legislative initiatives, including those relating to reimbursement and drug pricing policies and in the interpretation and application of such policies; the outcome of litigation; other contingent liabilities; loss or delay of contracts pertaining to the Company's Contract Research Organization ("CRO" or "CRO Services") segment for regulatory or other reasons; changes in tax law and regulation; access to capital and financing; the demand for Omnicare's products and services; pricing and other competitive factors in the industry; variations in costs or expenses; and changes in accounting rules and standards. Recently Issued Accounting Standards The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133" ("SFAS 138"), on January 1, 2001. SFAS 133 and SFAS 138 require that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. In conjunction with the adoption of SFAS 133 and SFAS 138, the Company determined that it does not have any derivative hedging contracts. Therefore, the adoption of SFAS 133 and SFAS 138 on January 1, 2001 did not have a material effect on the Company's consolidated financial statements. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141, which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises", requires that all business combinations entered into after July 1, 2001 be accounted for by the purchase method, defines criteria for 57 recognition of intangible assets apart from goodwill, and further defines disclosure requirements for business combinations. The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In July 2001, the FASB issued SFAS 142, which supersedes APB Opinion No. 17, "Intangible Assets", and defines new accounting treatment for goodwill and other intangible assets. This standard eliminates the amortization of goodwill and other intangible assets that have indefinite lives, establishes a requirement that goodwill and intangible assets with indefinite lives be tested annually for impairment, provides specific guidance on such testing, and requires disclosures of information about goodwill and other intangible assets in the years subsequent to their acquisition that was not previously required. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, consistent with the requirements of the standard, goodwill and intangible assets acquired after June 30, 2001 will be immediately subject to the new provisions. The Company anticipates that this new standard will serve to increase the Company's 2002 pretax earnings by approximately $32 million to $33 million (representing an estimated $20 million after tax, or approximately $0.21 per diluted share). The Company has evaluated its goodwill assets under the SFAS 142 transitional impairment test and does not anticipate that there will be an impairment loss in connection with the adoption of this standard. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is not applicable to the Company. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") and amends APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business" ("APB 30"). This statement develops one accounting model (based on the model in SFAS 121) for long-lived assets that are disposed of by sale, as well as addresses the principal implementation issues. SFAS 144 also expands the scope of discontinued operations and changes the disclosure requirements for discontinued operations. This statement is effective for fiscal years beginning after December 15, 2001. Management does not expect this standard to have any material impact on the Company's consolidated financial position, results of operations and cash flows. The FASB recently issued FASB Staff Announcement Topic No. D-103, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred" ("Topic D-103"). Topic D-103 requires reimbursements received for "out-of-pocket" expenses to be classified in the income statement as revenue, with the actual expenses classified in the appropriate cost caption. The Company's CRO segment currently classifies the net amount of reimbursed "out-of-pocket" expenses for its clinical study activities as a component of net revenues. Topic D-103 is effective for periods beginning after December 15, 2001 and requires comparative financial statements to be reclassified. The adoption will have no significant impact on the Company's consolidated financial position, results of operations and cash flows. However, the Company is currently evaluating the extent to which the adoption of Topic D-103 may impact the CRO segment's revenues, expenses and operating profit as a percentage of revenues. 58 Reclassifications Certain reclassifications of prior year amounts have been made to conform with the current year presentation. Note 2 - Acquisitions Since 1989, the Company has been involved in a program to acquire providers of pharmaceutical products and related pharmacy management services and medical supplies to long-term care facilities and their residents. The Company's strategy has included the acquisition of freestanding institutional pharmacy businesses as well as other assets, generally insignificant in size, which have been combined with existing pharmacy operations to augment their internal growth. From time to time, the Company may acquire other businesses such as long-term care software companies, contract research organizations, pharmacy consulting companies and medical supply companies, which complement the Company's core business. No acquisitions of businesses were completed during the years ended December 31, 2001 and 2000. During the year ended December 31, 1999, the Company completed five acquisitions (excluding insignificant acquisitions), all of which were institutional pharmacy businesses. Four of the acquisitions were accounted for as purchases and one as a pooling-of-interests. The impact of the pooling-of-interests transaction on the Company's historical consolidated financial statements was not material. Consequently, prior period and current year financial statements were not restated for this transaction. The results of operations of the companies acquired in purchase transactions have been included in the consolidated results of operations of the Company from the dates of acquisition. Purchases For all acquisitions accounted for as purchases, including insignificant acquisitions, the purchase price paid for each has been allocated to the fair value of the assets acquired and liabilities assumed. Purchase price allocations are subject to final determination within one year after the acquisition date. The aggregate purchase price of all businesses acquired in 1999, which were accounted for as purchase business combinations, was $108.0 million, of which $95.1 million was cash, $8.8 million was deferred to future periods and $2.5 million and $1.6 million was in the form of common stock and warrants, respectively. The most significant purchase business combination in 1999 was the acquisition of the institutional pharmacy operations of Life Care Pharmacy Services, Inc. ("Life Care"), an affiliate of Life Care Centers of America, for approximately $63 million in cash and 300,000 warrants to purchase Omnicare common stock at $29.70 per share. The warrants have a seven-year term and are first exercisable in June 2002. Life Care had, at the time of the acquisition, contracts to provide comprehensive pharmacy and related consulting services to approximately 17,000 residents in twelve states. Warrants outstanding as of December 31, 2001, issued in prior years in connection with acquisitions, represent the right to purchase 1.9 million shares of Omnicare common stock. 59 These warrants can be exercised at any time through 2006 at prices ranging from $29.18 to $48.00 per share. There were no warrants to purchase shares of common stock exercised in 2001. The purchase agreements for acquisitions generally include clauses whereby the seller will or may be paid additional consideration at a future date depending on the passage of time and/or whether certain future events occur. The agreements also include provisions containing a number of representations and covenants by the seller and provide that if those representations or covenants are violated or found not to have been true, Omnicare may offset any payments required to be made at a future date against any claims it may have under indemnity provisions in the agreement. There are no significant anticipated future offsets against acquisition-related payables and/or contingencies under indemnity provisions as of December 31, 2001 and 2000. Amounts contingently payable (primarily earnout payments) through 2002 total approximately $15 million as of December 31, 2001 and, if paid, will be recorded as additional purchase price, serving to increase goodwill in the period in which the contingencies are resolved and payment is made. The amount of cash paid for acquisitions of businesses in the Consolidated Statements of Cash Flows represents purchase price payments made in each of the years of acquisition, as well as purchase price payments made during each of the years pursuant to acquisition agreements entered into in prior years. Pooling-of-Interests In accordance with accounting rules for pooling-of-interests transactions, charges to operating income for acquisition-related expenses were recorded upon completion of the pooling acquisitions. There were no acquisition-related expenses in 2001 and 2000. Acquisition-related expenses totaled $0.8 million ($0.6 million aftertax) for the 1999 pooling-of-interests transaction. During 1999, the Company recorded income of $0.9 million ($1.0 million aftertax) relating to the net reversal of estimated CompScript, Inc. and IBAH, Inc. acquisition-related expenses resulting from the finalization of those costs. Note 3 - Cash and Cash Equivalents A summary of cash and cash equivalents follows (in thousands):
December 31, 2001 2000 ----------------------- Cash (including restricted cash) $ 48,226 $ 64,899 Money market funds 9,206 6,668 U.S. government-backed repurchase agreements 113,886 42,340 -------- -------- $171,318 $113,907 ======== ========
Repurchase agreements represent investments in U.S. government-backed securities (treasury issues and government agency issues at December 31, 2001 and 2000, respectively), under agreements to resell the securities to the counterparty. The term of the agreement usually spans 60 overnight, but in no case is longer than 30 days. The Company has a collateralized interest in the underlying securities of repurchase agreements, which are segregated in the accounts of the bank counterparty. Note 4 - Properties and Equipment A summary of properties and equipment follows (in thousands):
December 31, 2001 2000 ------------------------- Land $ 1,553 $ 1,553 Buildings and building improvements 5,044 6,347 Computer equipment and software 154,532 129,817 Machinery and equipment 89,855 85,633 Furniture, fixtures and leasehold improvements 64,253 67,493 --------- -------- 315,237 290,843 Accumulated depreciation (160,164) (132,308) --------- --------- $ 155,073 $ 158,535 ========= =========
Note 5 - Leasing Arrangements The Company has operating leases that cover various real and personal property. In most cases, the Company expects that these leases will be renewed or replaced by other leases in the normal course of business. There are no significant contingent rentals in the Company's operating leases. The following is a schedule of future minimum rental payments required under operating leases that have initial or remaining noncancellable terms in excess of one year as of December 31, 2001 (in thousands):
2002 $ 17,382 2003 17,642 2004 15,735 2005 13,215 2006 11,646 Later years 42,559 -------- Total minimum payments required $118,179 ========
Total rent expense under operating leases for the years ended December 31, 2001, 2000 and 1999 were $27.1 million, $27.9 million and $25.3 million, respectively. 61 Note 6 - Long-Term Debt A summary of long-term debt follows (in thousands):
December 31, 2001 2000 ------------------------- Revolving line of credit facilities $ 30,000 $435,000 Convertible subordinated debentures 345,000 345,000 Senior subordinated notes 375,000 - Capitalized lease obligations 1,062 2,325 -------- -------- 751,062 782,325 Less current portion (393) (1,619) -------- -------- $750,669 $780,706 ======== ========
The following is a schedule of required long-term debt payments due during each of the next five years and thereafter, as of December 31, 2001 (in thousands):
2002 $ 393 2003 506 2004 30,132 2005 31 2006 - Later years 720,000 -------- $751,062 ========
Total interest payments made for the years ended December 31, 2001, 2000 and 1999 were $44.1 million, $54.0 million and $46.2 million, respectively. As of December 31, 2001, the Company had approximately $5.8 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals. Revolving Credit Facilities - --------------------------- In March 2001, the Company entered into a new three-year syndicated $495.0 million revolving line of credit facility (the "Revolving Credit Facility"), including a $25.0 million letter of credit subfacility, with various lenders. Subsequent to the closing of the Revolving Credit Facility, the Company received commitments from additional financial institutions that allowed the Company to increase the size of the Revolving Credit Facility to $500.0 million. Borrowings under the Revolving Credit Facility bear interest, at the Company's option, at a rate equal to either: (i) LIBOR plus a margin that varies depending on certain ratings on the Company's long-term debt; or (ii) the higher of (a) the prime rate or (b) the sum of the federal funds rate plus 0.50%. Additionally, the Company is charged a commitment fee on the unused portion of the Revolving Credit Facility, which also varies depending on such ratings. At December 31, 2001, the interest rate was LIBOR plus 1.375%, or 3.3%, and the commitment fee was 0.375%. The Revolving Credit Facility agreement contains financial covenants, which 62 include a fixed charge coverage ratio and minimum consolidated net worth levels as well as certain representations and warranties, affirmative and negative covenants, and events of default customary for such a facility. The Company is in compliance with these covenants as of December 31, 2001. The total amount outstanding under the three-year Revolving Credit Facility as of December 31, 2001 was $30 million. Net proceeds from the senior subordinated notes (further described below) of approximately $365.0 million and borrowings under the new Revolving Credit Facility of approximately $70.0 million were used to repay outstanding indebtedness under the Company's former revolving credit facilities, which totaled $435.0 million at December 31, 2000, and such former facilities were terminated. Upon the issuance of the Revolving Credit Facility, the Company had deferred debt issuance costs of $6.3 million. During 2001, 2000 and 1999, respectively, the Company amortized approximately $1.9 million, $1.2 million and $0.9 million of deferred debt issuance costs related to its revolving credit facilities. Convertible Subordinated Debentures - ----------------------------------- In December 1997, the Company issued $345.0 million of 5.0% convertible subordinated debentures ("Debentures"), due 2007. The Debentures are convertible into common stock at any time after March 4, 1998 at the option of the holder at a price of $39.60 per share. In connection with the issuance of the Debentures, the Company deferred $8.5 million in debt issuance costs, of which approximately $0.9 million was amortized in each of the three years ended December 31, 2001. The Debentures contain certain covenants and events of default customary for such instruments. Senior Subordinated Notes - ------------------------- Concurrent with the issuance of the Revolving Credit Facility, the Company completed the issuance, at par value, of $375.0 million of 8.125% senior subordinated notes (the "Senior Notes"), due 2011. In connection with the issuance of the Senior Notes, the Company deferred $11.1 million in debt issuance costs, of which approximately $0.8 million was amortized during 2001. The Senior Notes contain certain affirmative and negative covenants and events of default customary for such instruments. The Senior Notes were subsequently exchanged for replacement notes with identical terms, which were registered with the Securities and Exchange Commission. Note 7 - Stock Incentive Plans The Company has three stock incentive plans under which it may grant stock-based incentives to key employees. Under the 1992 Long-Term Stock Incentive Plan, the Company may grant stock awards, stock appreciation rights and stock options at not less than the fair market value of the Company's common stock on the date of grant. Under this plan, stock options generally become exercisable beginning one year following the date of grant and vest in four equal annual installments. As of December 31, 2001, approximately 0.8 million shares were available for grant under this plan. 63 During 1995, the Company's Board of Directors and stockholders approved the 1995 Premium-Priced Stock Option Plan, providing options to purchase 2.5 million shares of Company common stock available for grant at an exercise price of 125% of the stock's fair market value at the date of grant. As of December 31, 2001, an insignificant amount of shares were available for grant under this plan. During 1998, the Company's Board of Directors approved the 1998 Long-Term Employee Incentive Plan (the "1998 Plan"), under which the Company was authorized to grant stock-based incentives to employees (excluding executive officers and directors of the Company) in an amount initially aggregating up to 1.0 million shares of Company common stock for non-qualified options, stock awards and stock appreciation rights. In March 2000, the Company's Board of Directors amended the 1998 Plan to increase the shares available for granting to 3.5 million. As of December 31, 2001, approximately 1.4 million shares were available for grant under this plan. The Company also has a Director Stock Plan, which allows for stock options and stock awards to be granted to certain non-employee directors. As of December 31, 2001, approximately 0.1 million shares were available for grant under this plan. Summary information for stock options is presented below (in thousands, except exercise price data):
2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------------------------------------------ Options outstanding, beginning of year 7,796 $18.06 6,692 $18.42 3,137 $23.03 Options granted 1,760 19.98 1,675 16.34 3,793 14.59 Options exercised (1,429) 11.79 (172) 6.30 (114) 11.74 Options forfeited (214) 22.35 (399) 21.41 (124) 32.72 - ------------------------------------------------------------------------------------------------------------------ Options outstanding, end of year 7,913 $19.31 7,796 $18.06 6,692 $18.42 - ------------------------------------------------------------------------------------------------------------------ Options exercisable, end of year 3,082 $21.80 3,035 $19.48 2,721 $17.16 - ------------------------------------------------------------------------------------------------------------------
64 The following summarizes information about stock options outstanding and exercisable as of December 31, 2001 (in thousands, except exercise price and remaining life data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------------- ------------------------- Weighted Number Average Weighted Number Weighted Outstanding at Remaining Average Exercisable at Average Range of December 31, Contractual Exercise December 31, Exercise Exercise Prices 2001 Life (in years) Price 2001 Price - ------------------------------------------------------------------------------------- $4.11 - $12.34 1,215 6.0 $11.66 664 $11.36 12.35 - 15.42 2,059 7.5 15.42 816 15.42 15.43 - 18.32 1,361 8.3 16.58 262 16.65 18.33 - 24.86 1,837 9.6 20.05 74 21.64 24.87 - 55.08 1,441 5.5 32.94 1,266 32.46 - -------------------------------------------------------------------------------------- $4.11 - $55.08 7,913 7.5 $19.31 3,082 $21.80 - --------------------------------------------------------------------------------------
Nonvested stock awards that are granted to key employees at the discretion of the Compensation and Incentive Committee of the Board of Directors are restricted as to the transfer of ownership and generally vest over a seven-year period, with a greater proportion vesting in the latter years. Unrestricted stock awards are granted annually to all members of the Board of Directors, and non-employee directors also receive nonvested stock awards that generally vest on the third anniversary of the date of grant. The fair value of a stock award is equal to the fair market value of a share of Company stock at the grant date. Summary information relating to stock award grants is presented below:
For the years ended December 31, 2001 2000 1999 ------------------------------------------- Nonvested shares 512,364 947,438 596,630 Unrestricted shares 4,800 5,200 5,308 Weighted average grant date fair value $ 20.35 $ 9.85 $ 26.63
When granted, the cost of nonvested stock awards is deferred and amortized over the vesting period. Unrestricted stock awards are expensed during the year granted. During 2001, 2000 and 1999, the amount of compensation expense related to stock awards was $3.8 million, $3.9 million and $3.8 million, respectively. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company accounts for stock-based incentives granted under these plans according to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." As a result, no compensation cost has been recognized for the stock options granted under the incentive plans. The fair value of each option at grant date is estimated using the Black-Scholes option-pricing model, with the following weighted average assumptions used for grants in 2001, 2000 and 1999: risk-free interest rate of 3.75% in 2001 (5.0% in 2000 and 6.75% in 1999), volatility of 64% in 2001 (61% in 2000 and 41% in 1999), dividend yield of 0.4% in 2001 (0.4% in 2000 and 0.8% in 1999) and expected life of 4.9 years in 2001 (4.0 years in 2000 and 1999, 65 respectively). Based on these assumptions, the weighted average fair value of employee stock options granted during 2001, 2000 and 1999 was $10.97, $8.36 and $4.06, respectively. Pro forma data (including restructuring and other related charges, other expense and pooling-of-interests expenses) as though the Company had accounted for stock-based compensation cost in accordance with SFAS 123 are as follows (in thousands, except per share data):
For the years ended December 31, 2001 2000 1999 -------------------------------- Pro Forma --------- Net income $70,743 $43,182 $53,604 Earnings per share: Basic $ 0.76 $ 0.47 $ 0.59 Diluted $ 0.75 $ 0.47 $ 0.59
The above pro forma information includes only stock options granted in 1995 and thereafter, and does not purport to be representative of the effect of SFAS 123 on net income or earnings per share in future years. Note 8 - Related Party Transactions The Company subleases offices from Chemed Corporation ("Chemed"), a stockholder, and is charged for consulting services pertaining to information systems development, the occasional use of Chemed's corporate aviation department, rent and other incidental expenses based on Chemed's cost. The Company believes that the method by which such charges are determined is reasonable and that the charges are essentially equal to that which would have been incurred if the Company had operated as an unaffiliated entity. Charges to the Company for these services for the years ended December 31, 2001, 2000 and 1999 were $1.0 million, $1.4 million and $1.9 million, respectively. Net amounts owed by the Company to Chemed were $0.1 million as of December 31, 2001 and 2000. Note 9 - Employee Benefit Plans The Company has various defined contribution savings plans under which eligible employees can participate by contributing a portion of their salary for investment, at the direction of each employee, in one or more investment funds. Several of the plans were adopted in connection with certain of the Company's acquisitions. The plans are tax-deferred arrangements pursuant to Internal Revenue Code ("IRC") Section 401(k) and are subject to the provisions of the Employee Retirement Income Security Act ("ERISA"). The Company matches employee contributions in varying degrees (either in shares of the Company's common stock or cash, in accordance with the applicable plan provisions) based on the contribution levels of the employees, as specified in the respective plan documents. The Company has a non-contributory, defined benefit pension plan covering certain corporate headquarters employees and the employees of several companies sold by the Company in 1992, for which benefits ceased accruing upon the sale (the "Qualified Plan"). Benefits accruing under this plan to corporate headquarters employees were fully vested and frozen as of January 1, 66 1994. The Company also has an excess benefits plan which provides retirement payments to participants in amounts consistent with what they would have received under the Qualified Plan if payments to them under the Qualified Plan were not limited by the IRC and other restrictions. Retirement benefits are based primarily on an employee's years of service and compensation near retirement. Plan assets are invested primarily in a mutual fund holding U.S. Treasury obligations. The Company's policy is to fund pension costs in accordance with the funding provisions of ERISA. In addition, the Company also has supplemental pension plans ("SPPs") in which certain of its officers participate. Retirement benefits under the SPPs are calculated on the basis of a specified percentage of the officers' covered compensation, years of credited service and a vesting schedule, as specified in the plan documents. One of the SPPs terminated in 2000, resulting in benefit payments of $2.4 million. In November 1999, the Company's Board of Directors adopted the Omnicare StockPlus Program, a non-compensatory employee stock purchase plan (the "ESPP"). Under the ESPP, employees and non-employee directors of the Company who elect to participate may contribute up to 6% of eligible compensation (or an amount not to exceed $20,000 for non-employee directors) to purchase shares of the Company's common stock. For each share of stock purchased, the participant also receives two options to purchase additional shares of the Company's stock. The options are subject to a four-year vesting period and are generally subject to forfeiture in the event the related shares are not held by the participant for a minimum of two years. The options have a ten-year life from the date of issuance. Amounts contributed to the ESPP are used by the plan administrator to purchase the Company's stock on the open market. Options awarded under the ESPP are issued out of the 1992 Long-Term Stock Incentive Plan and the 1998 Long-Term Employee Incentive Plan, and are included in the option activity presented in Note 7 to the Consolidated Financial Statements. Actuarial assumptions used to calculate the benefit obligations and expenses include a 7.25% interest rate as of December 31, 2001 (7.75% at December 31, 2000 and 1999, respectively), an expected long-term rate of return on assets of 8% and a 6% rate of increase in compensation levels. The aggregate assets invested for settlement of the Company's pension obligations ("plan assets") as of December 31, 2001 and 2000 are greater than the aggregate Accumulated Benefit Obligation by $3.1 million and $2.9 million, respectively. The plan assets as of December 31, 2001 and 2000 are greater than the aggregate Projected Benefit Obligation ("PBO") by $0.2 million and $2.2 million, respectively (collectively referred to as "net PBO"). The decrease in the net PBO from the prior year of $2.0 million primarily relates to an increase in plan assets of $3.2 million, more than offset by an actuarial loss of $2.3 million, interest expense (including the change in the discount rate) of $2.3 million and service costs of $0.6 million. Plan assets amounted to $20.2 million and $17.0 million at December 31, 2001 and 2000, respectively. Expense relating to the Company's defined benefit plans totaled $4.0 million for each of the years ended December 31, 2001 and 2000, and $3.4 million for the year ended December 31, 1999. Expense relating to the Company's defined contribution plans for the years ended 67 December 31, 2001, 2000 and 1999 was $3.9 million, $4.0 million and $2.5 million, respectively. Note 10 - Income Taxes The provision for income taxes is comprised of the following (in thousands):
For the years ended December 31, 2001 2000 1999 ------------------------------- Current provision: Federal $26,440 $ 8,304 $ 8,161 State and local 1,709 575 2,615 Foreign 60 60 101 ------- ------- ------- 28,209 8,939 10,877 ------- ------- ------- Deferred provision: Federal 16,314 17,967 23,134 State 991 1,800 (61) ------- ------- ------- 17,305 19,767 23,073 ------- ------- ------- Total income tax provision $45,514 $28,706 $33,950 ======= ======= =======
Tax benefits related to the exercise of stock options, stock awards and stock warrants have been credited to paid-in capital in amounts of $5.3 million and $0.9 million for 2001 and 1999, respectively. These amounts were not significant during 2000. The difference between the Company's reported income tax expense and the federal income tax expense computed at the statutory rate of 35% is explained in the following table (in thousands):
For the years ended December 31, 2001 2000 1999 -------------------------------------------------------------- Federal income tax at the statutory rate $41,925 35.0% $27,133 35.0% $32,085 35.0% State and local income taxes, net of federal income tax benefit 1,712 1.4 1,123 1.5 1,660 1.8 Amortization of nondeductible intangible assets 3,177 2.7 3,037 3.9 1,998 2.2 Nondeductible pooling-of-interests/merger and acquisition costs (401) (0.3) (622) (0.8) (1,197) (1.3) Impact of net operating loss - - (373) (0.5) - - Other, net (including tax accrual adjustments) (899) (0.8) (1,592) (2.1) (596) (0.7) ------- ---- ------- ---- ------- ---- Total income tax provision $45,514 38.0% $28,706 37.0% $33,950 37.0% ======= ==== ======= ==== ======= ====
Income tax payments (refunds), net, amounted to $16.0 million, $(6.8) million and $18.6 million in 2001, 2000 and 1999, respectively. 68 A summary of deferred tax assets and liabilities follows (in thousands):
December 31, 2001 2000 ------------------------ Accounts receivable reserves $ 12,517 $ 9,474 Accrued liabilities 33,738 34,628 Other 7,012 2,793 -------- ------- Gross deferred tax assets $ 53,267 $46,895 ======== ======= Fixed assets and depreciation methods $ 10,121 $11,348 Amortization of intangibles 87,829 65,469 Current and noncurrent assets 6,892 5,863 Other 1,773 1,456 -------- ------- Gross deferred tax liabilities $106,615 $84,136 ======== =======
69 Note 11 - Earnings Per Share Data Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share include the dilutive effect of stock options and warrants. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share ("EPS") computations (in thousands, except per share data):
For the year ended December 31, 2001 ------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amounts ----------- ------------- --------- Basic EPS Net income $74,271 93,124 $0.80 ===== Effect of Dilutive Securities Stock options and stock warrants - 634 ------- ------ Diluted EPS Net income plus assumed conversions $74,271 93,758 $0.79 ======= ====== =====
For the year ended December 31, 2000 ------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amounts ----------- ------------- --------- Basic EPS Net income $48,817 92,012 $0.53 ===== Effect of Dilutive Securities Stock options and stock warrants - - ------- ------ Diluted EPS Net income plus assumed conversions $48,817 92,012 $0.53 ======= ====== =====
For the year ended December 31, 1999 ------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amounts ----------- ------------- --------- Basic EPS Net income $57,721 90,999 $0.63 ===== Effect of Dilutive Securities Stock options and stock warrants - 239 ------- ------ Diluted EPS Net income plus assumed conversions $57,721 91,238 $0.63 ======= ====== =====
During the years ended December 31, 2001, 2000 and 1999, the anti-dilutive effect associated with options and warrants was excluded from the computation of diluted earnings per share, since the exercise price of these options and warrants was greater than the average market price of the Company's common stock during these periods. The total anti-dilutive options and warrants excluded for those years were 3,793, 7,608 and 4,458, respectively. The $345.0 million of Debentures that are convertible into approximately 8.7 million shares at $39.60 per share were outstanding during 2001, 2000 and 1999, but were not included in the computation of diluted EPS because the impact during these periods was anti-dilutive. 70 Note 12 - Restructuring and Other Related Charges Phase I Program In 2000, the Company completed its previously disclosed productivity and consolidation program (the "Phase I Program"). The Phase I Program was implemented to allow the Company to gain maximum benefit from its acquisition program and to respond to changes in the healthcare industry. As part of the Phase I Program, the roster of pharmacies and other operating locations was reconfigured through the consolidation, relocation, closure and opening of sites, resulting in a net reduction of 59 locations. The Phase I Program also resulted in the reduction of the Company's work force by 16%, or approximately 1,800 full- and part-time employees, and annualized pretax savings in excess of $46 million upon completion. Details of the restructuring and other related charges relating to the productivity and consolidation program follow (in thousands):
Utilized Balance at Utilized Balance at 1999 during December 31, 2000 during December 31, Provision 1999 1999 Provision 2000 2000 --------------------------------- --------------------------------- Restructuring charges: Employee severance $12,178 $ (3,717) $ 8,461 $ 3,296 $ (8,367) $3,390 Employment agreement buy-outs 6,740 (3,377) 3,363 1,048 (3,735) 676 Lease terminations 5,612 (1,089) 4,523 1,881 (3,811) 2,593 Other assets and facility exit costs 8,310 (6,662) 1,648 10,627 (9,737) 2,538 ------- -------- ------- ------- -------- ------ Total restructuring charges 32,840 $(14,845) $17,995 16,852 $(25,650) $9,197 ======== ======= ======== ====== Other related charges 2,554 10,347 ------- ------- Total restructuring and other related charges $35,394 $27,199 ======= =======
Utilized Balance at during December 31, 2001 2001 ---------------------- Restructuring charges: Employee severance $(2,997) $ 393 Employment agreement buy-outs (676) - Lease terminations (1,775) 818 Other assets and facility exit costs (2,299) 239 -------- ------ Total restructuring charges $(7,747) $1,450 ======== ====== Other related charges Total restructuring and other related charges
In connection with this program, over the 1999 and 2000 periods, Omnicare recorded a total of $62.6 million pretax ($39.8 million after taxes) for restructuring and other related charges. The restructuring charges included severance pay, the buy-out of employment agreements, the buy-out of lease obligations, the write-off of other assets (representing a project-to-date cumulative amount of $11.0 million of pretax non-cash items, through December 31, 2000) and facility exit costs. The other related charges were primarily comprised of consulting fees and duplicate costs associated with the program, as well as the write-off of certain non-core healthcare investments. As of December 31, 2001, the Company had incurred approximately $22.9 million of severance and other employee-related costs relating to the reduction of approximately 1,800 employees. The remaining liabilities at December 31, 2001 represent amounts not yet paid relating to actions taken in connection with the program (primarily lease payments) and will be adjusted as these matters are settled. Phase II Program - ---------------- In the third quarter of 2001, the Company announced the implementation of a second phase of the productivity and consolidation initiative (the "Phase II Program"). The Phase II Program is intended to further streamline operations, increase efficiency and enhance the Company's 71 position as a high quality, cost-effective provider of pharmaceutical services. Building on the previous efforts, the Phase II Program includes the merging or closing of seven pharmacy locations and the reconfiguration in size and function of an additional ten locations. The Phase II Program also includes a reduction in occupied building space in certain locations and the rationalization or reduction of staffing levels in the CRO business in order to better garner the efficiencies of the integration and functional reorganization of that business. The Company expects the Phase II Program measures to lead to a net reduction of approximately 460 employees, or about 5% of its total work force, across both the Pharmacy Services and CRO Services segments. In connection with the Phase II Program, the Company expensed $18.3 million ($11.4 million after taxes) for restructuring charges during the year ended December 31, 2001. The restructuring charges include severance pay, the buy-out of employment agreements, the buy-out of lease obligations, the write-off of other assets (representing $2.8 million of pretax non-cash items through December 31, 2001) and facility exit costs. Details of the restructuring charges relating to the Phase II Program follow (in thousands):
Utilized Balance at during December 31, 2001 Provision 2001 2001 -------------------------------------------- Restructuring charges: Employee severance $ 4,256 $ (2,614) $1,642 Employment agreement buy-outs 2,086 (1,578) 508 Lease terminations 2,711 (2,105) 606 Other assets and facility exit costs 9,291 (6,264) 3,027 ------- -------- ------ Total restructuring charges $18,344 $(12,561) $5,783 ======= ======== ======
As of December 31, 2001, the Company had incurred approximately $4.2 million of severance and other employee-related costs relating to the reduction of approximately 181 employees. All remaining liabilities recorded at December 31, 2001 were classified as current liabilities since the Company anticipates that these activities will be finalized within the next year. Note 13 - Other Expense Included in the 2001 results are other expense items totaling $1.8 million pretax ($1.1 million aftertax) and $3.0 million pretax ($1.9 million aftertax). 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. 72 Note 14 - Shareholders' Rights Plan In May 1999, the Company's Board of Directors declared a dividend, payable on June 2, 1999, of one preferred share purchase right (a "Right") for each outstanding share of the Company's $1.00 per share par value common stock, that, when exercisable, entitles the registered holder to purchase from the Company one ten-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, without par value (the "Preferred Shares"), at a price of $135 per one ten-thousandth of a share, subject to adjustment. Upon certain events relating to the acquisition of, commencement or announcement of, or announcement of an intention to make a tender offer or exchange offer that would result in the beneficial ownership of 15% or more of the Company's outstanding common stock by an individual or group of individuals (the "Distribution Date"), the Rights not owned by the 15% stockholder will entitle its holder to purchase, at the Right's then current exercise price, common shares having a market value of twice such exercise price. Additionally, if after any person has become a 15% stockholder, the Company is involved in a merger or other business combination with any other person, each Right will entitle its holder (other than the 15% stockholder) to purchase, at the Right's then current exercise price, common shares of the acquiring company having a value of twice the Right's then current exercise price. The Rights will expire on May 17, 2009, unless redeemed earlier by the Company at $0.01 per Right until the Distribution Date. Note 15 - Segment Information Based on the "management approach" as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," Omnicare has two business segments. The Company's largest segment is Pharmacy Services. Pharmacy Services provides distribution of pharmaceuticals, related pharmacy consulting, data management services and medical supplies to long-term care facilities in 43 states in the United States of America ("USA"). The Company's other reportable segment is CRO Services, which provides comprehensive product development services to client companies in pharmaceutical, biotechnology, medical devices and diagnostics industries in 27 countries around the world, including the USA. 73 The table below presents information about the reportable segments as of and for the years ended December 31, 2001, 2000 and 1999 (in thousands):
Corporate Pharmacy CRO and Consolidated 2001: Services Services Consolidating Totals - --------------------------------------------------------------------------------------------------------------- Sales $2,033,752 $125,379 $ - $2,159,131 Depreciation and amortization 68,390 3,881 1,799 74,070 Operating income (expense), excluding restructuring charges, and other (expense) 214,101 12,380 (29,826) 196,655 Restructuring charges (8,504) (9,840) - (18,344) Other (expense) (4,817) - - (4,817) Operating income (expense) 200,780 2,540 (29,826) 173,494 Total assets 1,953,243 133,371 203,662 2,290,276 Expenditures for additions to long-lived assets 23,571 1,504 1,147 26,222 =============================================================================================================== 2000: - --------------------------------------------------------------------------------------------------------------- Sales $1,858,697 $112,651 $ - $1,971,348 Depreciation and amortization 69,346 3,458 1,169 73,973 Operating income (expense), excluding restructuring and other related charges 178,204 7,248 (27,566) 157,886 Restructuring and other related charges (21,615) (5,584) - (27,199) Operating income (expense) 156,589 1,664 (27,566) 130,687 Total assets 1,960,870 117,212 132,136 2,210,218 Expenditures for additions to long-lived assets 26,866 3,119 2,438 32,423 =============================================================================================================== 1999: - --------------------------------------------------------------------------------------------------------------- Sales $1,728,055 $133,866 $ - $1,861,921 Depreciation and amortization 62,589 5,734 1,041 69,364 Operating income (expense), excluding restructuring and other related charges, and acquisition expenses 181,087 16,550 (25,993) 171,644 Restructuring and other related charges (32,216) (3,178) - (35,394) Acquisition (expenses)/income 352 (297) - 55 Operating income (expense) 149,223 13,075 (25,993) 136,305 Total assets 1,889,763 125,122 153,088 2,167,973 Expenditures for additions to long-lived assets 52,560 3,113 3,076 58,749 ===============================================================================================================
The following summarizes sales and long-lived assets by geographic area as of and for the years ended December 31, 2001, 2000 and 1999 (in thousands):
Sales Long-Lived Assets - ------------------------------------------------------------------- ---------------------------------------- 2001 2000 1999 2001 2000 1999 - ------------------------------------------------------------------- ---------------------------------------- United States $2,130,355 $1,941,220 $1,821,083 $153,562 $156,610 $159,530 Foreign 28,776 30,128 40,838 1,511 1,925 2,603 - ------------------------------------------------------------------- ---------------------------------------- Total $2,159,131 $1,971,348 $1,861,921 $155,073 $158,535 $162,133 =============================================================================================================
Foreign sales are based on the country in which the sales originate. No individual foreign country's sales were material to the consolidated sales of Omnicare. 74 Note 16 - Summary of Quarterly Results (Unaudited) The following table presents the Company's quarterly financial information for 2001 and 2000 (in thousands, except per share data):
First Second Third Fourth Full Quarter Quarter Quarter Quarter Year -------- -------- -------- -------- ---------- 2001 (a) Sales $523,645 $530,065 $541,193 $564,228 $2,159,131 Cost of sales 383,381 388,002 395,662 412,687 1,579,732 -------- -------- -------- -------- ---------- Gross profit 140,264 142,063 145,531 151,541 579,399 Selling, general and administrative expenses 95,916 94,090 94,752 97,986 382,744 Restructuring charges (Note 12) - - 15,409 2,935 18,344 Other expense (Note 13) 1,817 3,000 - - 4,817 -------- -------- -------- -------- ---------- Operating income 42,531 44,973 35,370 50,620 173,494 Investment income 474 748 701 692 2,615 Interest expense (13,909) (14,415) (14,201) (13,799) (56,324) -------- -------- -------- -------- ---------- Income before income taxes 29,096 31,306 21,870 37,513 119,785 Income taxes 11,052 11,910 8,310 14,242 45,514 -------- -------- -------- -------- ---------- Net income $ 18,044 $ 19,396 $ 13,560 $ 23,271 $ 74,271 ======== ======== ======== ======== ========== Earnings per share: (b) Basic $ 0.20 $ 0.21 $ 0.15 $ 0.25 $ 0.80 ======== ======== ======== ======== ========== Diluted $ 0.19 $ 0.21 $ 0.14 $ 0.25 $ 0.79 ======== ======== ======== ======== ========== Weighted average number of common shares outstanding: Basic 92,422 93,198 93,345 93,515 93,124 ======== ======== ======== ======== ========== Diluted 93,170 94,042 94,117 94,049 93,758 ======== ======== ======== ======== ==========
75 Note 16 - Summary of Quarterly Results (Unaudited) - Continued
First Second Third Fourth Full Quarter Quarter Quarter Quarter Year -------- -------- -------- -------- ---------- 2000 (a) Sales $493,026 $480,510 $491,262 $506,550 $1,971,348 Cost of sales 360,409 353,716 361,141 370,689 1,445,955 -------- -------- -------- -------- ---------- Gross profit 132,617 126,794 130,121 135,861 525,393 Selling, general and administrative expenses 92,768 90,424 90,687 93,628 367,507 Restructuring and other related charges (Note 12) 4,278 6,150 4,263 12,508 27,199 -------- -------- -------- -------- ---------- Operating income 35,571 30,220 35,171 29,725 130,687 Investment income 459 357 472 622 1,910 Interest expense (13,165) (13,634) (14,204) (14,071) (55,074) -------- -------- -------- -------- ---------- Income before income taxes 22,865 16,943 21,439 16,276 77,523 Income taxes 8,472 6,267 7,930 6,037 28,706 -------- -------- -------- -------- ---------- Net income $ 14,393 $ 10,676 $ 13,509 $ 10,239 $ 48,817 ======== ======== ======== ======== ========== Earnings per share: (b) Basic $ 0.16 $ 0.12 $ 0.15 $ 0.11 $ 0.53 ======== ======== ======== ======== ========== Diluted $ 0.16 $ 0.12 $ 0.15 $ 0.11 $ 0.53 ======== ======== ======== ======== ========== Weighted average number of common shares outstanding: Basic 91,599 92,155 92,160 92,132 92,012 ======== ======== ======== ======== ========== Diluted 91,599 92,155 92,160 92,587 92,012 ======== ======== ======== ======== ==========
76 Notes to Summary of Quarterly Results (a) Included in the 2001 and 2000 net income amounts are the following aftertax restructuring and other related charges, and other expense (in thousands):
First Second Third Fourth Full Quarter Quarter Quarter Quarter Year -------- -------- -------- -------- ---------- 2001 Restructuring charges (Note 12) $ - $ - $9,554 $1,820 $11,374 Other expense (Note 13) 1,127 1,860 - - 2,987 ------ ------ ------ ------ ------- Total $1,127 $1,860 $9,554 $1,820 $14,361 ====== ====== ====== ====== ======= 2000 Restructuring and other related charges (Note 12) $2,695 $3,874 $2,686 $7,880 $17,135 ====== ====== ====== ====== =======
(b) Earnings per share is calculated independently for each separately reported quarter and full year period. Accordingly, the sum of the separatley reported quarters may not necessarily be equal to the corresponding full year per share amount as independently calculated. 77 Note 17 - Guarantor Subsidiaries The Company's Senior Notes 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 December 31, 2001 and 2000 for the balance sheets, as well as the statements of income and cash flows for each of the three year periods ended December 31, 2001, 2000 and 1999. 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 statements of cash flows since there were no significant eliminating amounts during the periods presented. Summary Consolidating Statements of Income
Year ended December 31, ------------------------------------------------ (in thousands) Guarantor Non-Guarantor 2001: Parent Subsidiaries Subsidiaries - ---------------------------------------------------------------------------------------------------- Sales $ -- $2,067,662 $141,766 Cost of sales -- 1,507,807 122,222 ----------- ----------- ----------- Gross profit -- 559,855 19,544 Selling, general and administrative expenses 17,026 343,389 22,329 Restructuring charges -- 18,344 -- Other expense -- 4,817 -- ----------- ----------- ----------- Operating income (loss) (17,026) 193,305 (2,785) Investment income 1,767 613 235 Interest expense (53,956) (798) (1,570) ----------- ----------- ----------- Income (loss) before income taxes (69,215) 193,120 (4,120) Income tax (benefit) expense (26,302) 73,509 (1,693) Equity in net income of subsidiaries 117,184 -- -- ----------- ----------- ----------- Net income (loss) $ 74,271 $ 119,611 $ (2,427) ================================================================================================== 2000: - ---------------------------------------------------------------------------------------------------- Sales $ -- $1,875,791 $155,611 Cost of sales -- 1,373,297 132,712 ----------- ----------- ----------- Gross profit -- 502,494 22,899 Selling, general and administrative expenses 13,383 326,415 27,709 Restructuring and other related charges -- 25,052 2,147 ----------- ----------- ----------- Operating income (loss) (13,383) 151,027 (6,957) Investment income 1,774 (274) 410 Interest expense (54,126) (767) (181) ----------- ----------- ----------- Income (loss) before income taxes (65,735) 149,986 (6,728) Income tax (benefit) expense (24,322) 53,990 (962) Equity in net income of subsidiaries 90,230 -- -- ----------- ----------- ----------- Net income (loss) $ 48,817 $ 95,996 $ (5,766) ================================================================================================== Year ended December 31, ------------------------------------- (in thousands) Omnicare, Inc. and 2001: Eliminations Subsidiaries - -------------------------------------------------------------------------------------- Sales $ (50,297) $2,159,131 Cost of sales (50,297) 1,579,732 ----------- ----------- Gross profit -- 579,399 Selling, general and administrative expenses -- 382,744 Restructuring charges -- 18,344 Other expense -- 4,817 ----------- ----------- Operating income (loss) -- 173,494 Investment income -- 2,615 Interest expense -- (56,324) ----------- ----------- Income (loss) before income taxes -- 119,785 Income tax (benefit) expense -- 45,514 Equity in net income of subsidiaries (117,184) -- ----------- ----------- Net income (loss) $(117,184) $ 74,271 ================================================================================= 2000: - -------------------------------------------------------------------------------------- Sales $ (60,054) $1,971,348 Cost of sales (60,054) 1,445,955 ----------- ----------- Gross profit -- 525,393 Selling, general and administrative expenses -- 367,507 Restructuring and other related charges -- 27,199 ----------- ----------- Operating income (loss) -- 130,687 Investment income -- 1,910 Interest expense -- (55,074) ----------- ----------- Income (loss) before income taxes -- 77,523 Income tax (benefit) expense -- 28,706 Equity in net income of subsidiaries (90,230) -- ----------- ----------- Net income (loss) $ (90,230) $ 48,817 =================================================================================
78 Note 17 - Guarantor Subsidiaries - Continued Summary Consolidating Statements of Income-Continued
Year ended December 31, ----------------------------------------------- (in thousands) Guarantor Non-Guarantor 1999: Parent Subsidiaries Subsidiaries - --------------------------------------------------------------------------------------------------- Sales $ -- $1,746,239 $181,845 Cost of sales -- 1,254,627 150,174 -------- ---------- -------- Gross profit -- 491,612 31,671 Selling, general and administrative expenses 9,903 309,041 32,695 Restructuring and other related charges -- 35,394 -- Acquisition expenses, pooling-of-interests -- (55) -- -------- ---------- -------- Operating income (loss) (9,903) 147,232 (1,024) Investment income 1,432 (185) 285 Interest expense (44,605) (1,487) (74) -------- ---------- -------- Income (loss) before income taxes (53,076) 145,560 (813) Income tax (benefit) expense (19,638) 53,771 (183) Equity in net income of subsidiaries 91,159 -- -- -------- ---------- -------- Net income (loss) $ 57,721 $ 91,789 $ (630) =================================================================================================== Year ended December 31, ----------------------------------- (in thousands) Omnicare, Inc. and 1999: Eliminations Subsidiaries - ----------------------------------------------------------------------------------- Sales $(66,163) $1,861,921 Cost of sales (66,163) 1,338,638 -------- ---------- Gross profit -- 523,283 Selling, general and administrative expenses -- 351,639 Restructuring and other related charges -- 35,394 Acquisition expenses, pooling-of-interests -- (55) -------- ---------- Operating income (loss) -- 136,305 Investment income -- 1,532 Interest expense -- (46,166) -------- ---------- Income (loss) before income taxes -- 91,671 Income tax (benefit) expense -- 33,950 Equity in net income of subsidiaries (91,159) -- -------- ---------- Net income (loss) $(91,159) $ 57,721 ================================================================================
79 Note 17 - Guarantor Subsidiaries - Continued Condensed Consolidating Balance Sheets
December 31, --------------------------------------------- (in thousands) Guarantor Non-Guarantor 2001: Parent Subsidiaries Subsidiaries - -------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 127,110 $ 37,304 $ 3,982 Restricted cash -- 2,922 -- Accounts receivable, net (including intercompany) -- 462,882 24,648 Inventories -- 144,833 4,301 Other current assets 944 126,049 2,072 ---------- ---------- -------- Total current assets 128,054 773,990 35,003 ---------- ---------- -------- Properties and equipment, net 3,192 139,130 12,751 Goodwill, net -- 1,060,523 63,277 Other noncurrent assets 30,023 53,317 469 Investment in subsidiaries 1,754,149 -- -- ---------- ---------- -------- Total assets $1,915,418 $2,026,960 $111,500 ---------- ---------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) $ 14,797 $ 246,338 $ 17,591 Long-term debt 30,000 609 60 5.0% convertible subordinated debentures, due 2007 345,000 -- -- 8.125% senior subordinated notes, due 2011 375,000 -- -- Other noncurrent liabilities 838 119,227 486 Stockholders' equity 1,149,783 1,660,786 93,363 ---------- ---------- -------- Total liabilities and stockholders' equity $1,915,418 $2,026,960 $111,500 ======================================================================================================== (in thousands) Guarantor Non-Guarantor 2000: Parent Subsidiaries Subsidiaries - -------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 48,663 $ 59,274 $ 3,670 Restricted cash -- 2,300 -- Accounts receivable, net (including intercompany) -- 433,061 30,150 Inventories -- 120,519 8,885 Other current assets 580 127,341 5,721 ---------- ---------- -------- Total current assets 49,243 742,495 48,426 ---------- ---------- -------- Properties and equipment, net 4,277 141,429 12,829 Goodwill, net 1,101,120 67,031 Other noncurrent assets 29,640 35,251 903 Investment in subsidiaries 1,778,655 -- -- ---------- ---------- -------- Total assets $1,861,815 $2,020,295 $129,189 ---------- ---------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) $ 12,716 $ 230,415 $ 36,304 Long-term debt 435,000 633 73 5.0% convertible subordinated debentures, due 2007 345,000 -- -- Other noncurrent liabilities 676 102,405 999 Stockholders' equity 1,068,423 1,686,842 91,813 ---------- ---------- -------- Total liabilities and stockholders' equity $1,861,815 $2,020,295 $129,189 ======================================================================================================== December 31, --------------------------------- (in thousands) Omnicare, Inc. and 2001: Eliminations Subsidiaries - --------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ -- $ 168,396 Restricted cash -- 2,922 Accounts receivable, net (including intercompany) (9,453) 478,077 Inventories -- 149,134 Other current assets -- 129,065 ----------- ---------- Total current assets (9,453) 927,594 ----------- ---------- Properties and equipment, net -- 155,073 Goodwill, net -- 1,123,800 Other noncurrent assets -- 83,809 Investment in subsidiaries (1,754,149) -- ----------- ---------- Total assets $(1,763,602) $2,290,276 ----------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) $ (9,453) $ 269,273 Long-term debt -- 30,669 5.0% convertible subordinated debentures, due 2007 -- 345,000 8.125% senior subordinated notes, due 2011 -- 375,000 Other noncurrent liabilities -- 120,551 Stockholders' equity (1,754,149) 1,149,783 ----------- ---------- Total liabilities and stockholders' equity $(1,763,602) $2,290,276 ========================================================================================== December 31, --------------------------------- (in thousands) Omnicare, Inc. and 2000: Eliminations Subsidiaries - --------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ -- $ 111,607 Restricted cash -- 2,300 Accounts receivable, net (including intercompany) (22,426) 440,785 Inventories -- 129,404 Other current assets -- 133,642 ----------- ---------- Total current assets (22,426) 817,738 ----------- ---------- Properties and equipment, net -- 158,535 Goodwill, net -- 1,168,151 Other noncurrent assets -- 65,794 Investment in subsidiaries (1,778,655) -- ----------- ---------- Total assets $(1,801,081) $2,210,218 ----------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) $ (22,426) $ 257,009 Long-term debt -- 435,706 5.0% convertible subordinated debentures, due 2007 -- 345,000 Other noncurrent liabilities -- 104,080 Stockholders' equity (1,778,655) 1,068,423 ----------- ---------- Total liabilities and stockholders' equity $(1,801,081) $2,210,218 ==========================================================================================
80 Note 17 - Guarantor Subsidiaries - Continued Condensed Consolidating Statements of Cash Flows
Year ended December 31, ----------------------------------------------------------- (in thousands) Guarantor Non-Guarantor Omnicare, Inc. 2001: Parent Subsidiaries Subsidiaries and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Provision for doubtful accounts $ -- $ 24,201 $ 1,289 $ 25,490 Other (65,203) 190,247 2,553 127,597 --------- --------- --------- --------- Net cash flows from operating activities (65,203) 214,448 3,842 153,087 --------- --------- --------- --------- Cash flows from investing activities: Acquisition of businesses -- (20,263) -- (20,263) Capital expenditures (703) (21,546) (3,973) (26,222) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust -- (622) -- (622) Other -- 135 170 305 --------- --------- --------- --------- Net cash flows from investing activities (703) (42,296) (3,803) (46,802) --------- --------- --------- --------- 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 (475,000) -- -- (475,000) Fees paid for financing arrangements (16,254) -- -- (16,254) Other 190,607 (194,122) 214 (3,301) --------- --------- --------- --------- Net cash flows from financing activities 144,353 (194,122) 214 (49,555) --------- --------- --------- --------- Effect of exchange rate changes on cash -- -- 59 59 --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 78,447 (21,970) 312 56,789 Cash and cash equivalents at beginning of year - unrestricted 48,663 59,274 3,670 111,607 --------- --------- --------- --------- Cash and cash equivalents at end of year - unrestricted $ 127,110 $ 37,304 $ 3,982 $ 168,396 ======================================================================================================================== (in thousands) 2000: - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Provision for doubtful accounts $ -- $ 22,604 $ 4,125 $ 26,729 Other (57,558) 158,883 4,647 105,972 --------- --------- --------- --------- Net cash flows from operating activities (57,558) 181,487 8,772 132,701 --------- --------- --------- --------- Cash flows from investing activities: Acquisition of businesses -- (36,018) (5,646) (41,664) Capital expenditures (1,859) (26,423) (4,141) (32,423) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust -- (2,300) -- (2,300) Other -- 1,044 (773) 271 --------- --------- --------- --------- Net cash flows from investing activities (1,859) (63,697) (10,560) (76,116) --------- --------- --------- --------- Cash flows from financing activities: Payments on line of credit facilities (30,000) -- -- (30,000) Other 86,071 (97,790) (58) (11,777) --------- --------- --------- --------- Net cash flows from financing activities 56,071 (97,790) (58) (41,777) --------- --------- --------- --------- Effect of exchange rate changes on cash -- -- (468) (468) --------- --------- --------- --------- Net (decrease) increase in cash and cash equivalents (3,346) 20,000 (2,314) 14,340 Cash and cash equivalents at beginning of year - unrestricted 52,009 39,274 5,984 97,267 --------- --------- --------- --------- Cash and cash equivalents at end of year - unrestricted $ 48,663 $ 59,274 $ 3,670 $ 111,607 ========================================================================================================================
81 Note 17 - Guarantor Subsidiaries - Continued Condensed Consolidating Statements of Cash Flows - Continued
Year ended December 31, ---------------------------------------------------------- (in thousands) Guarantor Non-Guarantor Omnicare, Inc. 1999: Parent Subsidiaries Subsidiaries and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Provision for doubtful accounts $ -- $ 20,194 $ 1,862 $ 22,056 Other (39,127) 110,540 7,645 79,058 -------- --------- ------- --------- Net cash flows from operating activities (39,127) 130,734 9,507 101,114 -------- --------- ------- --------- Cash flows from investing activities: Acquisition of businesses -- (140,351) (3,728) (144,079) Capital expenditures (1,107) (53,602) (4,040) (58,749) Other -- (565) (124) (689) -------- --------- ------- --------- Net cash flows from investing activities (1,107) (194,518) (7,892) (203,517) -------- --------- ------- --------- Cash flows from financing activities: Borrowings on line of credit facilities 170,000 -- -- 170,000 Payments on line of credit facilities (10,000) -- -- (10,000) Other (83,374) 68,876 -- (14,498) -------- --------- ------- --------- Net cash flows from financing activities 76,626 68,876 -- 145,502 -------- --------- ------- --------- Effect of exchange rate changes on cash -- -- (144) (144) -------- --------- ------- --------- Net increase in cash and cash equivalents 36,392 5,092 1,471 42,955 Cash and cash equivalents at beginning of year - unrestricted 15,617 34,182 4,513 54,312 -------- --------- ------- --------- Cash and cash equivalents at end of year - unrestricted $ 52,009 $ 39,274 $ 5,984 $ 97,267 ========================================================================================================================
82 Note 18 - Subsequent Event On January 8, 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, to be accounted for as a purchase business combination, included cash consideration at closing of $93.1 million (which is subject to adjustment based on the closing balance sheet review). Up to an additional $18.0 million in deferred payments may become payable, contingent upon future performance. The Company is in the process of completing the purchase price allocation, including the identification of goodwill and other intangible assets. At the time of the acquisition, APS provided professional pharmacy and related consulting services to approximately 60,000 residents of skilled nursing and assisted living facilities through its network of 32 pharmacies in 15 states, as well as respiratory and Medicare Part B services for residents of long-term care facilities. From the acquisition, Omnicare expects to achieve certain economies of scale and cost synergies. The net assets and operating results of APS will be included in the Company's financial statements beginning in the first quarter of 2002. 83 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except for information regarding our executive officers included in Part I of this Form 10-K, the information required under this Item is set forth in our 2002 Proxy Statement which is incorporated herein by reference. ITEM 11 - EXECUTIVE COMPENSATION Information required under this Item is set forth in our 2002 Proxy Statement which is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required under this Item is set forth in our 2002 Proxy Statement which is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required under this Item is set forth in our 2002 Proxy Statement which is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements Our 2001 Consolidated Financial Statements are included in Part II, Item 8, of this Filing. (a)(2) Financial Statement Schedule See Index to Financial Statements and Financial Statement Schedule at Part II, Item 8, of this Filing. 84 (a)(3) Exhibits See Index of Exhibits. (b) Reports on Form 8-K Omnicare did not file any Reports on Form 8-K during the quarter ended December 31, 2001. 85 SIGNATURES Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on this 26th day of March 2002. OMNICARE, INC. /s/ David W. Froesel, Jr. ------------------------- David W. Froesel, Jr. Senior Vice President and Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of l934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Edward L. Hutton Chairman and Director - --------------------------- Edward L. Hutton /s/ Joel F. Gemunder President, Chief Executive Officer and Director - --------------------------- (Principal Executive Officer) Joel F. Gemunder /s/ David W. Froesel, Jr. Senior Vice President and - --------------------------- Chief Financial Officer and Director David W. Froesel, Jr. (Principal Financial and Accounting Officer) Timothy E. Bien, Director* Charles H. Erhart, Jr., Director* March 26, 2002 Patrick E. Keefe, Director* Sandra E. Laney, Director* Andrea R. Lindell, DNSc, RN, Director* Sheldon Margen, M.D., Director* Kevin J. McNamara, Director* John H. Timoney, Director*
* Cheryl D. Hodges, by signing her name hereto, signs this document on behalf of herself as a director and on behalf of each person indicated above pursuant to a power of attorney duly executed by such person and filed with the Securities and Exchange Commission. /s/ Cheryl D. Hodges -------------------- Cheryl D. Hodges (Attorney-in-Fact) 86 Schedule II OMNICARE, INC. AND SUBSIDIARY COMPANIES Valuation and Qualifying Accounts (in thousands)
Additions Balance at charged Write-offs, Balance Year ended beginning of to cost net of at end December 31, period and expenses Acquisitions recoveries of period - ------------ ------------ ------------ ------------ ---------- --------- Allowance for uncollectible accounts receivable: 2001 $40,497 $25,490 $ - $(20,414) $45,573 2000 36,883 26,729 - (23,115) 40,497 1999 31,417 22,056 2,686 (19,276) 36,883
S-1 INDEX OF EXHIBITS
Document Incorporated by Reference from a Number and Description of Exhibit Previous Filing or Filed Herewith, as (Numbers Coincide with Item 601 of Regulation S-K) Indicated Below - -------------------------------------------------- ----------------------------------------- (3.1) Restated Certificate of Incorporation of Form 10-K Omnicare, Inc. March 31, 1997 (3.2) By-Laws of Omnicare, Inc., as amended Form S-3 September 28, 1998 (4.1) Indenture dated as of December 10, 1997 between Form S-3 the Company and The First National Bank of February 6, 1998 Chicago, as Trustee (4.2) Indenture dated as of March 20, 2001, by and Form 8-K among Omnicare, Inc., the Guarantors named March 23, 2001 therein and SunTrust Bank, as trustee, relating to the Company's $375.0 million 8.125% Senior Subordinated Notes due 2011 (4.3) Three-year, $495.0 million Credit Agreement Form 8-K dated as of March 20, 2001, among Omnicare, March 23, 2001 Inc., as the Borrower, the Guarantors named therein and the lenders named therein, as the Lenders, Lehman Commercial Paper Inc., as a Syndication Agent, SunTrust Bank, as a Documentation Agent, Deutsche Banc Alex. Brown, as a Documentation Agent, and Bank One, NA, with its main office in Chicago, Illinois, as the Administrative Agent (4.4) Rights Agreement, and related Exhibits, dated as Form 8-K of May 17, 1999 between Omnicare, Inc. and First May 18, 1999 Chicago Trust Company of New York, as Rights Agent
E-1 INDEX OF EXHIBITS
Document Incorporated by Reference from a Number and Description of Exhibit Previous Filing or Filed Herewith, as (Numbers Coincide with Item 601 of Regulation S-K) Indicated Below - -------------------------------------------------- ----------------------------------------- (10.1) Executive Salary Protection Plan, as amended, Form 10-K May 22, 1981 March 25, 1996 (10.2) Annual Incentive Plan for Senior Executive Proxy Statement for 1996 Annual Meeting of Officers Shareholders dated May 20, 1996 (10.3) 1992 Long-Term Stock Incentive Plan Proxy Statement for 1997 Annual Meeting of Stockholders dated March 31, 1997 (10.4) 1995 Premium-Priced Stock Option Plan Proxy Statement for 1995 Annual Meeting of Stockholders dated April 10, 1995 (10.5) 1998 Long-Term Employee Form 10-K Incentive Plan March 30, 1999 (10.6) Amendment to 1998 Long-Term Employee Incentive Form 10-K Plan effective March 30, 2000 March 1, 2000 (10.7) Excess Benefits Plan Form 10-K March 25, 1988 (10.8) Form of Indemnification Agreement with Directors Form 10-K and Officers March 30, 1999 (10.9) Employment Agreements with J.F. Gemunder and Form 10-K C.D. Hodges dated March 29, 1989 August 4, 1988 (10.10) Employment Agreement with Form 10-K P.E. Keefe dated March 4, 1993 March 25, 1994
E-2 INDEX OF EXHIBITS
Document Incorporated by Reference from a Number and Description of Exhibit Previous Filing or Filed Herewith, as (Numbers Coincide with Item 601 of Regulation S-K) Indicated Below - -------------------------------------------------- ----------------------------------------- (10.11) Split Dollar Agreement with Form 10-K E.L. Hutton dated June 1, 1995 (Agreement in the March 25, 1996 same form exists with J.F. Gemunder) (10.12) Split Dollar Agreement Form 10-K dated June 1, 1995 (Agreements in the same form March 25, 1996 exist with the following Executive Officers: T.E. Bien, C.D. Hodges and P.E. Keefe) (10.13) Retirement Plan for E.L. Hutton Form 10-K March 30, 2001 (10.14) Employment Agreement with T.E. Bien dated Form 10-K January 1, 1994 March 31, 1997 (10.15) Employment Agreement with D.W. Froesel, Jr. Form 10-K dated February 17, 1996 March 31, 1997 (10.16) Employment Agreement with P. Laterza dated Form 10-K August 5, 1998 March 30, 2000 (10.17) Form of Amendment to Employment Agreements with Form 10-K J.F. Gemunder, P.E. Keefe and C.D. Hodges dated March 30, 2000 as of February 25, 2000 (10.18) Form of Amendment to Employment Agreement with Filed Herewith J.F. Gemunder dated as of February 6, 2002 (Amendments in the same form exist with the following Executive Officers: P.E. Keefe and C.D. Hodges)
E-3 INDEX OF EXHIBITS
Document Incorporated by Reference from a Number and Description of Exhibit Previous Filing or Filed Herewith, as (Numbers Coincide with Item 601 of Regulation S-K) Indicated Below - -------------------------------------------------- ----------------------------------------- (10.19) Form of Amendment to Employment Agreements with Form 10-K T.E. Bien, D.W. Froesel, Jr. and P. Laterza March 30, 2000 dated as of February 25, 2000 (10.20) Amendment to Employment Agreement with P. Form 10-K Laterza dated as of March 30, 2001 August 2, 2000 (12) Statement of Computation of Ratio of Earnings to Filed Herewith Fixed Charges (21) Subsidiaries of Omnicare, Inc. Filed Herewith (23.1) Consent of PricewaterhouseCoopers LLP Filed Herewith (24) Powers of Attorney Filed Herewith
E-4 STATEMENT OF DIFFERENCES The registered trademark symbol shall be expressed as........................'r' EX-10 3 ex10-18.txt EXHIBIT 10.18 EXHIBIT 10.18 SIXTEENTH AMENDMENT TO EMPLOYMENT AGREEMENT JOEL F. GEMUNDER ("Employee"), and OMNICARE MANAGEMENT COMPANY, a Delaware corporation with its principal place of business in Covington, Kentucky (the "Company"), hereby agree as follows: 1. Recitals (a) The Company is an indirect subsidiary of Omnicare, Inc. as a result of a corporate restructuring of Omnicare, Inc. and its affiliates. (b) In connection with such restructuring certain assets and liabilities of Omnicare, Inc. were transferred to the Company effective December 31, 1988, including an Employment Agreement between Omnicare, Inc. and Employee dated August 4, 1988 (the "Employment Agreement"). (c) The Company, as assignee, and Employee amended the Employment Agreement by mutual written agreement on December 31, 1988, May 23, 1989, May 22, 1990, May 21, 1991, May 19, 1992, May 17, 1993, May 16, 1994, May 15, 1995, May 20, 1996, May 19, 1997, May 18, 1998, March 3, 1999, February 25, 2000, March 1, 2000 and March 1, 2001 (the "Prior Amendments"). 2. Amendments (a) Section 1.2 of the Employment Agreement is amended by deleting the year "2006" from the third line of Section 1.2 and substituting the year "2007" therefor. (b) Section 2.1 of the Employment Agreement is amended by deleting "$950,000" from the second line thereof and substituting "$1,150,000" therefor. (c) The amount of unrestricted stock award recognized in lieu of incentive compensation in 2001 is $3,630,000. 3. General Except as previously changed by the Prior Amendments and as specifically amended herein, the Employment Agreement will remain in full force and effect in accordance with its original terms, conditions and provisions. IN WITNESS WHEREOF, the parties have duly executed this amendatory agreement as of February 6, 2002. OMNICARE MANAGEMENT COMPANY By: - ----------------- ------------------------- JOEL F. GEMUNDER Cheryl D. Hodges EX-12 4 ex12.txt EXHIBIT 12 EXHIBIT 12 Omnicare, Inc. Computation of Ratio of Earnings to Fixed Charges (in thousands)
For the years ended December 31, 2001 2000 1999 1998 1997 ----------------------------------------------------------- Income before Income Taxes (1) $119,785 $ 77,523 $ 91,671 $135,866 $ 95,933 Add: Interest Expense 52,724 52,974 44,439 22,727 6,505 Amortization of Debt Expense 3,600 2,100 1,727 884 51 Interest Portion of Rent Expense 9,033 9,300 8,436 6,838 4,448 --------- --------- --------- --------- --------- Income, as Adjusted $185,142 $141,897 $146,273 $166,315 $106,937 ========= ========= ========= ========= ========= Fixed Charges Interest Expense $ 52,724 $ 52,974 $ 44,439 $ 22,727 $ 6,505 Amortization of Debt Expense 3,600 2,100 1,727 884 51 Capitalized Interest - - 1,688 976 744 Interest Portion of Rent Expense 9,033 9,300 8,436 6,838 4,448 --------- --------- --------- --------- --------- Fixed Charges $ 65,357 $ 64,374 $ 56,290 $ 31,425 $ 11,748 ========= ========= ========= ========= ========= Ratio of Earnings to Fixed Charges (2) 2.8x 2.2x 2.6x 5.3x 9.1x ========= ========= ========= ========= =========
(1) Includes certain special items such as restructuring and other related charges, other expenses and pooling-of-interests acquisition expenses. See the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for a further description of these special items. (2) The ratio of earnings to fixed charges has been computed by dividing earnings before income taxes plus fixed charges (excluding capitalized interest expense) by fixed charges. Fixed charges consist of interest expense on debt (including the amortization of debt expense and capitalized interest) and one-third (the proportion deemed representative of the interest portion) of rent expense. EX-21 5 ex21.txt EXHIBIT 21 EXHIBIT 21 Subsidiaries of Omnicare, Inc. The following is a list of subsidiaries included in the consolidated financial statements of the Company as of December 31, 2001. Other subsidiaries which have been omitted from the list would not, when considered in the aggregate, constitute a significant subsidiary. Each of the companies is incorporated under the laws of the state following its name.
Doing Business As Name State of Legal Name (if other than legal name) Incorporation % Owned - -------------------------------------------------------------------------------------------------------------------------- AAHS Acquisition Corp. A-Avenue Health Services Delaware 100% Accu-Med Services, Inc. Delaware 100% ACP Acquisition Corp. Add-On Health Systems Delaware 100% AMC - New York, Inc. Royal Care Holdings, Inc. Delaware 100% AMC - Tennessee, Inc. The Pharmacy, Stephens Drugs Delaware 100% Anderson Medical Services, Inc. Delaware 100% Bach's Pharmacy (East) Inc. fka Pompton Nursing Home Suppliers Delaware 100% Bach's Pharmacy Services, LLC Delaware 100% Badger Acquisition LLC Delaware 100% Badger Acquisition of Brooksville LLC Delaware 100% Badger Acquisition of Kentucky LLC Delaware 100% Badger Acquisition of Minnesota LLC Delaware 100% Badger Acquisition of Ohio LLC Omnicare Health Network Delaware 100% Badger Acquisition of Orlando LLC Home Care Pharmacy of Florida Delaware 100% Badger Acquisition of Tampa LLC Bay Pharmacy Delaware 100% Badger Acquisition of Texas LLC Delaware 100% Bio-Pharm International, Inc. Delaware 100% BPNY Acquisition Corp. Brookside Park Pharmacy Delaware 100% BPTX Acquisition Corp. Brookside Park Pharmacy of Texas Delaware 100% Campo's Medical Pharmacy, Inc. Louisiana 100% Care Pharmaceutical Services, Inc. Delaware 100% Catapharm Corp. Delaware 100% CHP Acquisition Corp. Cherry Hill Pharmacy Delaware 100% CIP Acquisition Corp. Carter's Institutional Pharmacy Delaware 100% CompScript - Boca, Inc. Florida 100% CompScript - Mobile, Inc. Delaware 100% CompScript, Inc. Florida 100% CP Acquisition Corp. Central Pharmacy Oklahoma 100% Creekside Managed Care Pharmacy, Inc. Delaware 100% CTLP Acquisition Corp. Care Tech Delaware 100% D & R Pharmaceutical Services, Inc. Kentucky 100% Dixon Pharmacy, Inc. Illinois 100%
Doing Business As Name State of Legal Name (if other than legal name) Incorporation % Owned - -------------------------------------------------------------------------------------------------------------------------- Electra Acquisition Corp. Prometheus Pharmacy Systems, Inc. Delaware 100% Enloe Drugs, Inc. Delaware 100% Euro Bio-Pharm Clinical Services, Inc. Delaware 100% Evergreen Pharmaceutical of California, Inc. fka PIP Acquisition, West Val Premiere California 100% Evergreen Pharmaceutical, Inc. Washington 100% Hardardt Group, Inc., The Delaware 100% Heartland Repack Services LLC Delaware 100% HMIS, Inc. Delaware 100% Home Care Pharmacy, Inc. Delaware 100% Home Pharmacy Services, Inc. Missouri 100% Howard's Pharmacy, Inc. Ohio 100% Hytree Pharmacy, Inc. Ohio 100% Interlock Pharmacy Systems, Inc. Delaware 100% JHC Acquisition, Inc. Jacobs Health Care Systems Delaware 100% Konsult, Inc. Delaware 100% Langsam Health Services, Inc. Sequoia Health Services, Inc. Delaware 100% Langsam Medical Products, Inc. Sequoia Medical Products, Inc. Delaware 100% Lawrence Medical Supply, Inc. Delaware 100% LCPS Acquisition, LLC Medilife Pharmacy Delaware 100% Lo-Med Prescription Services, Inc. Ohio 100% LPI Acquisition Corp. Lipira Pharmacy Delaware 100% Managed Healthcare, Inc. Delaware 100% Med World Acquisition Corp. Delaware 100% Medical Arts Health Care, Inc. Georgia 100% Medical Services Consortium, Inc. CompScript - Miami Florida 100% MOSI Acquisition Corp. Medical Outpatient Services Delaware 100% Nihan & Martin, Inc. Delaware 100% NIV Acquisition Corp. Denman Pharmacy Services Delaware 100% North Shore Pharmacy Services, Inc. Delaware 100% OCR Services Corporation Delaware 100% OCR-RA Acquisition Corp. Long Term Care Pharmacy Delaware 100% OFL Corp. Delaware 100% Omnibill Services LLC Delaware 100% Omnicare Air Transport Services, Inc. Delaware 100% Omnicare Clinical Research, Inc. fka IBAH, Inc. Delaware 100% Omnicare Clinical Research, LLC fka Coromed, Inc. Delaware 100% Omnicare CR, Inc. Delaware 100% Omnicare Holding Company Delaware 100% Omnicare Management Company Delaware 100% Omnicare Pennsylvania Med Supply, LLC Delaware 100% Omnicare Pharmaceutics, Inc. fka IBAH Pharmaceutics Services, Inc. Delaware 100% Omnicare Pharmacies of Pennsylvania East, LLC Delaware 100%
Doing Business As Name State of Legal Name (if other than legal name) Incorporation % Owned - -------------------------------------------------------------------------------------------------------------------------- Omnicare Pharmacies of Pennsylvania West, Inc. Pennsylvania 100% Omnicare Pharmacies of the Great Plains Holding Company Delaware 100% Omnicare Pharmacy and Supply Services, Inc. South Dakota 100% Omnicare Pharmacy of Colorado, LLC Delaware 100% Omnicare Pharmacy of Maine Holding Company Delaware 100% Omnicare Pharmacy of Maine LLC Delaware 100% Omnicare Pharmacy of Massachusetts LLC Delaware 100% Omnicare Pharmacy of Nebraska LLC Delaware 100% Omnicare Pharmacy of the Midwest, Inc. fka Freed's Delaware 100% Omnicare Pharmacy of South Dakota LLC Delaware 100% Omnicare Pharmacy of Tennessee LLC Delaware 100% Omnicare.com, Inc. Delaware 100% PBM-Plus, Inc. Wisconsin 100% PCI Acquisition, LLC Delaware 100% Pharmacon Corp. New York 100% Pharmacy Associates of Glens Falls, Inc. Royal Care Pharmacy Services New York 100% Pharmacy Consultants, Inc. South Carolina 100% Pharm-Corp of Maine LLC Delaware 100% Pharmed Holdings, Inc. Delaware 100% PRN Pharmaceutical Services, Inc. Delaware 100% Resource Biometrics, Inc. California 100% Roeschen's Healthcare Corp. Wisconsin 100% Royal Care of Michigan LLC Delaware 100% SHC Acquisition Co., LLC Synergy Delaware 100% Shore Pharmaceutical Providers, Inc. Delaware 100% Southside Apothecary, Inc. New York 100% Specialized Home Infusion of Michigan, LLC Delaware 100% Specialized Patient Care Services, Inc. Alabama 100% Specialized Pharmacy Services, Inc. Michigan 100% Sterling Healthcare Services, Inc. Delaware 100% Superior Care Pharmacy, Inc. Delaware 100% Swish, Inc. Delaware 100% TCPI Acquisition Corp. Total Care Pharmacy Delaware 100% THG Acquisition Corp. Tandem Health Group Delaware 100% Three Forks Apothecary, Inc. Kentucky 100% UC Acquisition Corp. UniCare, Inc. Delaware 100% Value Health Care Services, Inc. Delaware 100% Value Pharmacy, Inc. Massachusetts 100%
Doing Business As Name State of Legal Name (if other than legal name) Incorporation % Owned - -------------------------------------------------------------------------------------------------------------------------- Vital Care Infusions Supply, Inc. New York 100% Weber Medical Systems, Inc. Delaware 100% Westhaven Services Co. Ohio 100% Williamson Drug Company, Incorporated Virginia 100% Winslow's Pharmacy New Jersey 100% Foreign Entities Country % Owned De-Skor ZAO Russia 50% Omnicare Clinical Research (Proprietary) Limited South Africa 100% Omnicare Clinical Research A/S Denmark 100% Omnicare Clinical Research AB Sweden 100% Omnicare Clinical Research AG Switzerland 100% Omnicare Clinical Research International B.V. Netherlands 100% Omnicare Clinical Research GmbH Germany 100% Omnicare Clinical Research GmbH & Co. KG IFNS Germany 100% Omnicare Clinical Research Limited UK 100% Omnicare Clinical Research LLC Russia 100% Omnicare Clinical Research N.V. Belgium 100% Omnicare Clinical Research Oy Finland 100% Omnicare Clinical Research Pte. Ltd. S Singapore 100% Omnicare Clinical Research Pty. Ltd. Australia 100% Omnicare Clinical Research S.A. Argentina 100% Omnicare Clinical Research S.L. Spain 100% Omnicare Clinical Research SARL France 100% Quebec, Inc. Canada 100%
EX-23 6 ex23-1.txt EXXHIBIT 23 EXHIBIT 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-4 (Nos. 333-53637 and 333-53749, insofar as it relates to Post-Effective Amendments No. 1 to Forms S-8 filed on June 26, 1998 and June 29, 1998, respectively, and 333-80917) and Form S-8 (Nos. 33-48209, 33-88856, 333-02667, 333-45801, 333-48067, 333-77845, 333-95949, 333-36874 and 333-75102) of Omnicare, Inc. of our report dated February 1, 2002, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Chicago, Illinois March 26, 2002 EX-24 7 ex24.txt EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY The undersigned director of OMNICARE, INC. ("Company") hereby appoints EDWARD L. HUTTON, JOEL F. GEMUNDER and CHERYL D. HODGES as his true and lawful attorneys-in-fact for the purpose of signing the Company's Annual Report on Form 10-K for the year ended December 31, 2001, and all amendments thereto, to be filed with the Securities and Exchange Commission. Each of such attorneys-in-fact is appointed with full power to act without the other. /s/ Timothy E. Bien March 20, 2002 - ------------------------------- ------------------------ Timothy E. Bien Date /s/ Charles Erhart, Jr. March 19, 2002 - ------------------------------- ------------------------ Charles Erhart, Jr. Date /s/ Patrick E. Keefe March 18, 2002 - ------------------------------- ------------------------ Patrick E. Keefe Date /s/ Sandra E. Laney March 19, 2002 - ------------------------------- ------------------------ Sandra E. Laney Date /s/ Andrea R. Lindell, DNSc, RN March 19, 2002 - ------------------------------- ------------------------ Andrea R. Lindell, DNSc, RN Date /s/ Sheldon Margen, M.D. March 19, 2002 - ------------------------------- ------------------------ Sheldon Margen, M.D. Date /s/ Kevin J. McNamara March 19, 2002 - ------------------------------- ------------------------ Kevin J. McNamara Date /s/ John H. Timoney March 20, 2002 - ------------------------------- ------------------------ John H. Timoney Date -----END PRIVACY-ENHANCED MESSAGE-----