-----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, QgH6oMX8bbS0SofoD2ubGsTr+KfS+Dxq8+LeJGCraBprZVqD81DTpTrA0oWHKsxI yKkTkT+ID0RYHxuLObe0MQ== 0000950117-02-002731.txt : 20021114 0000950117-02-002731.hdr.sgml : 20021114 20021114162546 ACCESSION NUMBER: 0000950117-02-002731 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08269 FILM NUMBER: 02825349 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-Q 1 a33684.txt OMNICARE, INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 1-8269 OMNICARE, INC. -------------- (Exact name of registrant as specified in its charter) Delaware 31-1001351 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
100 East RiverCenter Boulevard, Covington, Kentucky 41011 --------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (859) 392-3300 ------------------------------------------------------------------ Indicate by check mark whether the registrant: 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirement for the past 90 days. Yes x No --------- ------ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No --------- ------ COMMON STOCK OUTSTANDING - ------------------------
Number of Shares Date ------ ---- Common Stock, $1 par value 94,273,576 September 30, 2002
OMNICARE, INC. AND ------------------ SUBSIDIARY COMPANIES -------------------- INDEX -----
PAGE ---- PART I. FINANCIAL INFORMATION: - ------------------------------ ITEM 1. FINANCIAL STATEMENTS Consolidated Statements of Income - Three and nine months ended - September 30, 2002 and 2001 3 Consolidated Balance Sheets - September 30, 2002 and December 31, 2001 4 Consolidated Statements of Cash Flows - Nine months ended - September 30, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 33 ITEM 4. CONTROLS AND PROCEDURES 33 PART II. OTHER INFORMATION: - -------------------------- ITEM 1. LEGAL PROCEEDINGS 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 35
PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS -------------------- CONSOLIDATED STATEMENTS OF INCOME OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- --------------------------- 2002 2001 2002 2001 -------- -------- ---------- ---------- Sales $657,270 $541,193 $1,936,386 $1,594,903 Reimbursable out-of-pockets 7,448 6,650 20,801 18,840 -------- -------- ---------- ---------- Total net sales 664,718 547,843 1,957,187 1,613,743 -------- -------- ---------- ---------- Cost of sales 481,703 395,662 1,425,685 1,167,045 Reimbursed out-of-pocket expenses 7,448 6,650 20,801 18,840 -------- -------- ---------- ---------- Total direct costs 489,151 402,312 1,446,486 1,185,885 -------- -------- ---------- ---------- Gross profit 175,567 145,531 510,701 427,858 Selling, general and administrative expenses 103,888 86,359 306,007 259,868 Goodwill amortization (Note 7) -- 8,393 -- 24,890 Restructuring charges (Note 4) 11,096 15,409 23,195 15,409 Other expense (Note 5) -- -- -- 4,817 -------- -------- ---------- ---------- Operating income 60,583 35,370 181,499 122,874 Investment income 651 701 2,116 1,923 Interest expense (14,339) (14,201) (42,990) (42,525) -------- -------- ---------- ---------- Income before income taxes 46,895 21,870 140,625 82,272 Income taxes 17,829 8,310 53,425 31,272 -------- -------- ---------- ---------- Net income $ 29,066 $ 13,560 $ 87,200 $ 51,000 ======== ======== ========== ========== Earnings per share: Basic $ 0.31 $ 0.15 $ 0.93 $ 0.55 ======== ======== ========== ========== Diluted $ 0.31 $ 0.14 $ 0.92 $ 0.54 ======== ======== ========== ========== Weighted average number of common shares outstanding: Basic 94,245 93,345 94,129 92,992 ======== ======== ========== ========== Diluted 94,710 94,117 94,920 93,622 ======== ======== ========== ========== Comprehensive income $ 31,030 $ 14,825 $ 91,010 $ 51,750 ======== ======== ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these statements. 3 CONSOLIDATED BALANCE SHEETS OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED (In thousands, except share data)
September 30, December 31, 2002 2001 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 169,282 $ 168,396 Restricted cash 6,322 2,922 Accounts receivable, less allowances of $69,573 (2001-$45,573) 504,920 478,077 Unbilled receivables 33,640 23,621 Inventories 162,231 149,134 Deferred income tax benefits 25,913 28,147 Other current assets 95,633 77,297 ---------- ---------- Total current assets 997,941 927,594 Properties and equipment, at cost less accumulated depreciation of $180,800 (2001-$160,164) 155,379 155,073 Goodwill 1,188,462 1,123,800 Other noncurrent assets 93,748 83,809 ---------- ---------- Total assets $2,435,530 $2,290,276 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 161,553 $ 140,327 Current debt 364 393 Accrued employee compensation 23,456 25,015 Deferred revenue 26,278 39,338 Income taxes payable 6,353 9,256 Other current liabilities 84,310 54,944 ---------- ---------- Total current liabilities 302,314 269,273 Long-term debt 40,344 30,669 5.0% convertible subordinated debentures, due 2007 345,000 345,000 8.125% senior subordinated notes, due 2011 375,000 375,000 Deferred income tax liabilities 87,731 81,495 Other noncurrent liabilities 46,042 39,056 ---------- ---------- Total liabilities 1,196,431 1,140,493 ---------- ---------- Stockholders' equity: Preferred stock, no par value, 1,000,000 shares authorized, none issued and outstanding -- -- Common stock, $1 par value, 200,000,000 shares authorized, 95,410,700 shares issued and outstanding (2001-94,671,800 shares issued and outstanding) 95,411 94,672 Paid-in capital 736,743 722,701 Retained earnings 461,999 381,441 ---------- ---------- 1,294,153 1,198,814 Treasury stock, at cost-1,137,100 shares (2001-986,600 shares) (23,419) (19,824) Deferred compensation (30,511) (24,273) Accumulated other comprehensive income (1,124) (4,934) ---------- ---------- Total stockholders' equity 1,239,099 1,149,783 ---------- ---------- Total liabilities and stockholders' equity $2,435,530 $2,290,276 ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED (In thousands)
Nine Months Ended September 30, ---------------------- 2002 2001 --------- --------- Cash flows from operating activities: Net income $ 87,200 $ 51,000 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 24,920 24,356 Amortization 9,444 30,777 Provision for doubtful accounts 22,114 20,116 Deferred tax provision 12,342 19,805 Non-cash portion of restructuring charges 9,060 1,229 Changes in assets and liabilities, net of effects from acquisition of businesses: Accounts receivable and unbilled receivables (25,621) (16,683) Inventories (539) (28,655) Current and noncurrent assets (32,526) (16,523) Accounts payable 20,736 9,514 Accrued employee compensation (527) (5,154) Deferred revenue (13,060) (3,097) Current and noncurrent liabilities 17,056 3,177 --------- --------- Net cash flows from operating activities 130,599 89,862 --------- --------- Cash flows from investing activities: Acquisition of businesses (115,893) (16,207) Capital expenditures (16,762) (19,293) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust (3,400) (4,075) Other 263 314 --------- --------- Net cash flows from investing activities (135,792) (39,261) --------- --------- Cash flows from financing activities: Borrowings on line of credit facilities 90,000 70,000 Proceeds from long-term borrowings -- 375,000 Payments on line of credit facilities (80,000) (465,000) Principal payments on long-term obligations (64) (2,808) Fees paid for financing arrangements -- (14,418) Proceeds from stock awards and exercise of stock options, net of stock tendered in payment 352 6,057 Dividends paid (6,364) (6,293) Other 72 -- --------- --------- Net cash flows from financing activities 3,996 (37,462) --------- --------- Effect of exchange rate changes on cash 2,083 125 --------- --------- Net increase in cash and cash equivalents 886 13,264 Cash and cash equivalents at beginning of period - unrestricted 168,396 111,607 --------- --------- Cash and cash equivalents at end of period - unrestricted $ 169,282 $ 124,871 ========= =========
The Notes to Consolidated Financial Statements are an integral part of these statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED 1. Interim Financial Data The interim financial data is unaudited; however, in the opinion of the management of Omnicare, Inc., the interim data includes all adjustments (which include only normal adjustments, except as described in Notes 4 and 5) considered necessary for a fair presentation of the consolidated financial position, results of operations and cash flows of Omnicare, Inc. and its consolidated subsidiaries ("Omnicare" or the "Company"). These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in Omnicare's Annual Report on Form 10-K for the year ended December 31, 2001. Certain reclassifications of prior year amounts have been made to conform with the current year presentation. 2. Recently Issued Accounting Pronouncements In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement updates, clarifies and simplifies existing accounting pronouncements. This Statement will be effective for the Company beginning January 1, 2003. Management does not expect the standard to have a material impact on the Company's consolidated financial position, results of operations and cash flows. In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and requires liabilities associated with exit and disposal activities to be expensed as incurred. SFAS 146 will be effective for exit or disposal activities of the Company that are initiated after December 31, 2002. In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial Institutions," which is not applicable to the Company. 3. Segment Information Based on the "management approach," as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," Omnicare has two business segments. The 6 Company's largest segment is Pharmacy Services. Pharmacy Services provides distribution of pharmaceuticals, related pharmacy consulting, data management services and medical supplies to long-term care facilities in 45 states in the United States of America ("USA"). The Company's other reportable segment is Contract Research Organization ("CRO") Services, which provides comprehensive product development services to client companies in pharmaceutical, biotechnology, medical devices and diagnostics industries in 28 countries around the world, including the USA. The table below presents information about the reportable segments as of and for the three and nine months ended September 30, 2002 and 2001 and should be read in conjunction with the paragraphs that follow (in thousands):
Three Months Ended September 30, -------------------------------------------------------- Corporate Pharmacy CRO and Consolidated 2002: Services Services Consolidating Totals - ----------------------------------------------------------------------------------------------------------- Net sales $ 623,241 $ 41,477 $ - $ 664,718 Depreciation and amortization 10,176 524 662 11,362 Operating income (expense), excluding restructuring charges 75,084 5,354 (8,759) 71,679 Restructuring charges (2,911) (8,185) - (11,096) Operating income (expense) 72,173 (2,831) (8,759) 60,583 Total assets 2,079,031 147,949 208,550 2,435,530 Capital expenditures 7,560 217 158 7,935 - ----------------------------------------------------------------------------------------------------------- 2001: - ----------------------------------------------------------------------------------------------------------- Net sales $ 509,816 $ 38,027 $ - $ 547,843 Depreciation and amortization 17,317 952 450 18,719 Operating income (expense), excluding restructuring charges 54,914 3,327 (7,462) 50,779 Restructuring charges (6,840) (8,569) - (15,409) Operating income (expense) 48,074 (5,242) (7,462) 35,370 Total assets 2,000,800 124,885 148,764 2,274,449 Capital expenditures 6,839 744 308 7,891 - -----------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, -------------------------------------------------------- Corporate Pharmacy CRO and Consolidated 2002: Services Services Consolidating Totals - ----------------------------------------------------------------------------------------------------------- Net sales $1,829,918 $127,269 $ - $1,957,187 Depreciation and amortization 30,559 1,734 2,071 34,364 Operating income (expense), excluding restructuring charges 214,903 15,542 (25,751) 204,694 Restructuring charges (6,769) (16,426) - (23,195) Operating income (expense) 208,134 (884) (25,751) 181,499 Total assets 2,079,031 147,949 208,550 2,435,530 Capital expenditures 15,370 531 861 16,762 - ----------------------------------------------------------------------------------------------------------- 2001: - ----------------------------------------------------------------------------------------------------------- Net sales $1,503,395 $110,348 $ - $1,613,743 Depreciation and amortization 50,907 3,009 1,217 55,133 Operating income (expense), excluding restructuring charges and other expense 156,441 8,140 (21,481) 143,100 Restructuring charges (6,840) (8,569) - (15,409) Other expense (4,817) - - (4,817) Operating income (expense) 144,784 (429) (21,481) 122,874 Total assets 2,000,800 124,885 148,764 2,274,449 Capital expenditures 17,354 1,118 821 19,293 - -----------------------------------------------------------------------------------------------------------
7 In accordance with EITF Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred," the Company included in its reported CRO segment net sales amounts of $7.4 million and $20.8 million pretax for the three and nine months ended September 30, 2002, respectively ($6.7 million and $18.8 million pretax for the comparable prior year periods ended September 30, 2001, respectively). In accordance with Omnicare's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), the Company discontinued amortization of goodwill as of January 1, 2002. Accordingly, no goodwill amortization was recorded during the three and nine months ended September 30, 2002. Pretax goodwill amortization for the three and nine months ended September 30, 2001 totaled $8.1 million and $24.1 million, respectively, for the Pharmacy Services segment, and $0.3 million and $0.8 million, respectively, for the CRO Services segment. 4. Restructuring Charges In 2001, the Company announced the implementation of a second phase (the "Phase II Program") of its previously disclosed productivity and consolidation initiative. The Phase II Program, completed on September 30, 2002, further streamlined operations, increased efficiencies and helped enhance the Company's position as a high quality, cost-effective provider of pharmaceutical services. Building on the previous efforts, the Phase II Program included the merging or closing of seven pharmacy locations and the reconfiguration in size and function of an additional ten locations. The Phase II Program also included a reduction in occupied building space in certain locations and the rationalization or reduction of staffing levels in the CRO business in order to better garner the efficiencies of the integration and functional reorganization of that business. The Phase II Program encompassed a net reduction of approximately 460 employees, or about 5% of the Company's total workforce, across both the Pharmacy Services and CRO Services segments. In connection with the Phase II Program, the Company expensed $18.3 million pretax ($11.4 million aftertax, or $0.12 per diluted share) during the 2001 year. Further, approximately $11.1 million and $23.2 million ($6.9 million and $14.4 million aftertax, or $0.07 and $0.15 per diluted share, respectively) were recorded during the three and nine months ended September 30, 2002, respectively. The restructuring charges included severance pay, the buy-out of employment agreements, the buy-out of lease obligations, the write-off of leasehold improvements and other assets, and related fees and facility exit costs. 8 Details of the pretax restructuring charges recorded in 2001 and the nine months ended September 30, 2002 relating to the Phase II Program follow (in thousands):
2001 Utilized Balance at 2002 Utilized Balance at Provision/ during December 31, Provision/ during September 30, Accrual 2001 2001 Accrual 2002 2002 ---------- -------- ------------ ---------- -------- ------------- Restructuring charges: Employee severance $ 4,256 $ (2,614) $1,642 $ 2,177 $(1,699) $ 2,120 Employment agreement buy-outs 2,086 (1,578) 508 - (186) 322 Lease terminations 2,711 (2,105) 606 5,862 (1,395) 5,073 Other assets, fees and facility exit costs 9,291 (6,264) 3,027 15,156 (6,341) 11,842 ------- -------- ------ ------- ------- ------- Total restructuring charges $18,344 $(12,561) $5,783 $23,195 $(9,621) $19,357 ======= ======== ====== ======= ======= =======
As of September 30, 2002, the Company had paid approximately $6.1 million of severance and other employee-related costs relating to the reduction of approximately 460 employees. The remaining liabilities recorded at September 30, 2002 represent amounts not yet paid or settled relating to actions taken, and will be adjusted in future periods as these matters are finalized. In connection with the previously disclosed first phase of its productivity and consolidation initiative (the "Phase I Program"), Omnicare had liabilities of $1.5 million at December 31, 2001, of which $0.6 million was utilized in the nine months ended September 30, 2002. The remaining liabilities at September 30, 2002 of $0.9 million represent amounts not yet paid relating to actions taken in connection with the Phase I Program (largely comprised of remaining lease payments), and will be adjusted as these matters are settled. 5. Other Expense Included in the year-to-date September 2001 results are other expense items totaling $1.8 million pretax ($1.1 million aftertax, or $0.01 per diluted share) and $3.0 million pretax ($1.9 million aftertax, or $0.02 per diluted share). The $1.8 million special charge recorded in the first quarter of 2001 represents a repayment to the Medicare Part B program of overpayments made to one of the Company's pharmacy units during the period from January 1997 through April 1998. As part of its corporate compliance program, the Company learned of the overpayments, which related to Medicare Part B claims that contained documentation errors, and notified the Health Care Financing Administration for review and determination of the amount of overpayment. The $3.0 million special charge recorded in the second quarter of 2001 represents a settlement during June 2001 of certain contractual issues with a customer, which issues and amount relate to prior year periods. 6. Acquisitions In January 2002, Omnicare announced the completion of the acquisition of the assets comprising the pharmaceutical business of American Pharmaceutical Services, Inc. and other related entities (collectively, "APS"). The acquisition required cash consideration of $93.5 million (including an adjustment based on the closing balance sheet review). Up to an additional $18.0 million in total deferred payments may become payable in annual increments of up to $6.0 million each, contingent upon future performance, as evaluated in the first quarter of each of the 9 next three years. The Company has completed its initial purchase price allocations, including the identification of goodwill and other intangible assets based on an appraisal performed by an independent valuation firm. At the time of the acquisition, APS provided professional pharmacy and related consulting services to approximately 60,000 residents of skilled nursing and assisted living facilities through its network of 32 pharmacies in 15 states, as well as respiratory and Medicare Part B services for residents of long-term care facilities. From the acquisition, Omnicare has achieved certain economies of scale and cost synergies. The net assets and operating results of APS have been included in the Company's financial statements beginning in the first quarter of 2002. Unaudited pro forma combined results of operations of the Company and APS for the three and nine months ended September 30, 2001 are presented below. Such pro forma presentation has been prepared assuming that the APS acquisition had been made as of January 1, 2001. Pro forma information is not presented for the three and nine months ended September 30, 2002 as the results of APS are included in those of the Company from the closing date of January 7, 2002, and the difference from the beginning of the period is not significant. The unaudited pro forma combined financial information follows (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30, 2001 September 30, 2001 ------------------ ------------------ Net sales $615,066 $1,814,198 Net income $ 13,598 $ 50,600 Earnings per share: Basic $ 0.15 $ 0.54 Diluted $ 0.14 $ 0.54
In connection with the purchase of APS, the Company acquired amortizable intangible assets comprised of non-compete agreements and customer relationship assets totaling $1.3 million and $3.1 million, respectively. Amortization periods for the non-compete agreements and customer relationship assets are 10.0 years and 4.7 years, respectively, and 6.3 years on a weighted-average basis. The Company has also recorded goodwill totaling approximately $54 million in connection with the acquisition, although this amount is subject to adjustment based on certain open matters, including the payment of any deferred consideration, as discussed above. Further discussion of goodwill and other intangible assets is included in Note 7. On July 29, 2002, the Company made public its July 26, 2002 offer to acquire NCS HealthCare, Inc. ("NCS"). Under that proposal, the Company would acquire NCS in a merger transaction pursuant to which holders of Class A common stock, par value $0.01 per share, of NCS ("NCS Class A Common Stock") and Class B common stock, par value $0.01 per share, of NCS ("NCS Class B Common Stock" and, together with the NCS Class A Common Stock, the "Shares") would receive $3.00 per share in cash and the Company would assume and/or retire existing NCS debt at its full principal amount plus accrued interest, bringing the total value of the Omnicare offer to approximately $400 million. 10 Subsequent to the Company's offer, NCS announced the signing of a merger agreement with Genesis Health Ventures, Inc. ("Genesis"), whereby each outstanding Share would be converted into the right to receive 0.1 of a share of common stock, par value $0.02 per share, of Genesis and Genesis would retire or repay existing NCS debt, including any accrued and unpaid interest, a deal valued at less than one half of Omnicare's offer for the equity component of the proposed transaction. On August 1, 2002, the Company announced that it had filed a lawsuit in the Delaware Chancery Court to set aside the merger agreement between NCS and Genesis and certain related voting agreements and that it would commence a tender offer to acquire all of the outstanding Shares at an offer price per share of $3.50 in cash. On August 8, 2002, the Company commenced a cash tender offer for all of the outstanding Shares at $3.50 per share in cash. The cash tender offer remains ongoing. On August 20, 2002, the NCS Board of Directors announced that it had determined that the Company's offer was not in the best interest of NCS stakeholders and recommended that stockholders reject the offer and not tender their shares in the offer. By letter dated October 6, 2002, the Company forwarded to the NCS Board of Directors an executed Agreement and Plan of Merger (the "Omnicare Merger Agreement"). The letter further indicated that by executing the proposed Omnicare Merger Agreement, the Company had irrevocably committed itself (for the duration set forth in the letter) to a transaction with NCS pursuant to which the Company would acquire all of the outstanding Shares at a price of $3.50 per share in cash. On October 22, 2002, the NCS Board of Directors withdrew its recommendation that stockholders vote in favor of NCS's pending merger with Genesis. Moreover, as set forth in its proxy statement dated November 1, 2002, the NCS Board of Directors unanimously recommends that the NCS stockholders vote "against" the adoption of the merger agreement with Genesis. On October 25, 2002, the Delaware Chancery Court held that the Company had standing to assert a claim that by executing voting agreements with Genesis, the shares of NCS Class B Common Stock (ten votes per share) owned by Jon H. Outcalt, chairman of the Board of Directors of NCS ("Outcalt"), and Kevin B. Shaw, president and chief executive officer of NCS ("Shaw"), automatically converted into shares of NCS Class A Common Stock (one vote per share). The Court also found that because the Company was not an NCS stockholder on July 28, 2002, the date on which the NCS Board of Directors approved the merger agreement with Genesis and the voting agreements, it did not have standing to bring claims that the NCS Board of Directors breached their fiduciary duties. On October 29, 2002, the Delaware Chancery Court denied Omnicare's motion for summary judgment as to the first count of Omnicare's complaint, which sought a declaration that the execution of the voting agreements by Messrs. Outcalt and Shaw, in connection with the proposed NCS/Genesis merger, resulted in the automatic conversion of their NCS Class B Common Stock (ten votes per share) into NCS Class A Common Stock (one vote per share), and granted summary judgment in favor of NCS, Outcalt, Shaw, Boake A. Sells (a member of the 11 NCS Board), Richard L. Osbourne (a member of the NCS Board), Genesis and Geneva Sub, Inc., a wholly owned subsidiary of Genesis. Omnicare has filed an appeal with respect to the Court's rulings. Notwithstanding the Court's rulings, the NCS Directors are being sued by other NCS stockholder-plaintiffs for breaching their fiduciary duties in approving the merger agreement with Genesis and the related voting agreements. The Court's rulings do not address these claims. A motion for preliminary injunction relating to these stockholder claims is expected to be heard by the Delaware Chancery Court on November 14, 2002. If the Company acquires NCS pursuant to the Company's cash tender offer, it will use funds of approximately $423 million, of which approximately $100 million would be for the purchase of NCS's shares and the payment of expenses and approximately $323 million would be for the pay off of NCS's indebtedness and the redemption of NCS's notes. The Company presently intends to use available cash and additional borrowings under its Revolving Credit Facility to fund these payments. 7. Goodwill and Other Intangible Assets In accordance with SFAS 142, the Company discontinued the amortization of goodwill effective January 1, 2002. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization, net of tax, follows (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Net income, as reported $29,066 $13,560 $87,200 $51,000 Goodwill amortization, net of tax - 5,204 - 15,432 ------- ------- ------- ------- Adjusted net income $29,066 $18,764 $87,200 $66,432 ======= ======= ======= ======= Basic earnings per share(a): Net income, as reported $ 0.31 $ 0.15 $ 0.93 $ 0.55 Goodwill amortization, net of tax - 0.06 - 0.17 Adjusted net income $ 0.31 $ 0.20 $ 0.93 $ 0.71 ======= ======= ======= ======= Diluted earnings per share(a): Net income, as reported $ 0.31 $ 0.14 $ 0.92 $ 0.54 Goodwill amortization, net of tax - 0.06 - 0.16 Adjusted net income $ 0.31 $ 0.20 $ 0.92 $ 0.71 ======= ======= ======= =======
(a) Earnings per share (net income, as reported, and goodwill amortization, net of tax) is calculated independently for each amount presented. Accordingly, the sum of the individual net income, as reported, and goodwill amortization, net of tax disclosures may 12 not necessarily equal the earnings per share (adjusted net income) amount for the corresponding period. The Company determined that there was no adjustment required to the carrying value of goodwill at the date of adoption of SFAS 142. During the third quarter of 2002, the Company completed its annual impairment evaluation of goodwill and determined that no such impairment exists. Changes in the carrying amount of goodwill for the nine months ended September 30, 2002, by business segment, are as follows (in thousands):
Pharmacy CRO Services Services Total -------- -------- ----- Balance as of January 1, 2002 $1,085,938 $37,862 $1,123,800 Goodwill acquired in the nine months ended September 30, 2002 55,177 - 55,177 Other 8,745 740 9,485 ---------- ------- ---------- Balance as of September 30, 2002 $1,149,860 $38,602 $1,188,462 ========== ======= ==========
The "Other" caption above includes the settlement of acquisition matters relating to pre-2002 acquisitions (including payments pursuant to acquisition agreements such as deferred payments, indemnification payments and payments originating from earnout provisions), as well as the effect of adjustments due to foreign currency translations. The table below presents the Company's other intangible assets at September 30, 2002 and December 31, 2001, all of which are subject to amortization (in thousands):
September 30, 2002 ------------------------------------ Gross Net Carrying Accumulated Carrying Amount Amortization Amount ------ ------------ ------ Non-compete agreements $10,106 $(6,312) $3,794 Customer relationship assets 3,100 (498) 2,602 Other 373 (227) 146 ------- ------- ------ Total $13,579 $(7,037) $6,542 ======= ======= ======
December 31, 2001 ------------------------------------ Gross Net Carrying Accumulated Carrying Amount Amortization Amount ------ ------------ ------ Non-compete agreements $8,963 $(5,754) $3,209 Other 190 (149) 41 ------ ------- ------ Total $9,153 $(5,903) $3,250 ====== ======= ======
Pretax amortization expense related to intangible assets other than goodwill was $1.1 million for the nine months ended September 30, 2002 and 2001. 13 Estimated annual amortization expense for intangible assets subject to amortization for the next five fiscal years is as follows (in thousands):
Years Ended Amortization December 31, Expense ----------- ------- 2002 $1,416 2003 1,329 2004 1,160 2005 1,095 2006 750
8. Guarantor Subsidiaries The Company's $375.0 million senior subordinated notes due 2011 are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain wholly owned subsidiaries of the Company (the "Guarantor Subsidiaries"). The following condensed consolidating financial data illustrates the composition of Omnicare, Inc. ("Parent"), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of September 30, 2002 and December 31, 2001 for the balance sheet, the statement of income for each of the three and nine month periods ended September 30, 2002 and 2001, and the statement of cash flows for the nine months ended September 30, 2002 and 2001. Separate complete financial statements of the respective Guarantor Subsidiaries would not provide additional information which would be useful in assessing the financial condition of the Guarantor Subsidiaries and thus are not presented. No eliminations column is presented for the condensed consolidating statement of cash flows since there were no significant eliminating amounts during the periods presented. 14 8. Guarantor Subsidiaries (Continued) Summary Consolidating Statements of Income
(in thousands) Three Months Ended September 30, -------------------------------------------------------------------------- Guarantor Non-Guarantor Omnicare, Inc. 2002 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries - --------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $636,159 $28,559 $ -- $664,718 Total direct costs -- 465,856 23,295 -- 489,151 -------- -------- ------- -------- -------- Gross profit -- 170,303 5,264 -- 175,567 Selling, general and administrative expenses 5,325 92,965 5,598 -- 103,888 Restructuring charges -- 11,096 -- -- 11,096 -------- -------- ------- -------- -------- Operating income (loss) (5,325) 66,242 (334) -- 60,583 Investment income 497 70 84 -- 651 Interest expense (14,332) (7) -- -- (14,339) -------- -------- ------- -------- -------- Income (loss) before income taxes (19,160) 66,305 (250) -- 46,895 Income tax (benefit) expense (7,281) 25,205 (95) -- 17,829 Equity in net income of subsidiaries 40,945 -- -- (40,945) -- -------- -------- ------- -------- -------- Net income (loss) $ 29,066 $ 41,100 $ (155) $(40,945) $ 29,066 =========================================================================================================================== 2001 - --------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $523,906 $35,388 $(11,451) $547,843 Total direct costs -- 383,751 30,012 (11,451) 402,312 -------- -------- ------- -------- -------- Gross profit -- 140,155 5,376 -- 145,531 Selling, general and administrative expenses 4,337 85,510 4,905 -- 94,752 Restructuring charges -- 15,409 -- -- 15,409 -------- -------- ------- -------- -------- Operating income (loss) (4,337) 39,236 471 -- 35,370 Investment income 383 258 60 -- 701 Interest expense (13,467) (529) (205) -- (14,201) -------- -------- ------- -------- -------- Income (loss) before income taxes (17,421) 38,965 326 -- 21,870 Income tax (benefit) expense (6,620) 14,806 124 -- 8,310 Equity in net income of subsidiaries 24,361 -- -- (24,361) -- -------- -------- ------- -------- -------- Net income (loss) $ 13,560 $ 24,159 $ 202 $(24,361) $ 13,560 ===========================================================================================================================
15 8. Guarantor Subsidiaries (Continued) Summary Consolidating Statements of Income
(in thousands) Nine Months Ended September 30, ------------------------------------------------------------------------------------ Guarantor Non-Guarantor Omnicare, Inc. and 2002 Parent Subsidiaries Subsidiaries Eliminations Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $1,874,148 $ 83,039 $ -- $1,957,187 Total direct costs -- 1,378,724 67,762 -- 1,446,486 -------- ---------- -------- --------- ---------- Gross profit -- 495,424 15,277 -- 510,701 Selling, general and administrative expenses 17,089 272,522 16,396 -- 306,007 Restructuring charges -- 22,397 798 -- 23,195 -------- ---------- -------- --------- ---------- Operating income (loss) (17,089) 200,505 (1,917) -- 181,499 Investment income 1,537 389 190 -- 2,116 Interest expense (42,573) (235) (182) -- (42,990) -------- ---------- -------- --------- ---------- Income (loss) before income taxes (58,125) 200,659 (1,909) -- 140,625 Income tax (benefit) expense (22,088) 76,293 (780) -- 53,425 Equity in net income of subsidiaries 123,237 -- -- (123,237) -- -------- ---------- -------- --------- ---------- Net income (loss) $ 87,200 $ 124,366 $ (1,129) $(123,237) $ 87,200 ============================================================================================================================ 2001 - ---------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $1,540,353 $123,568 $ (50,178) $1,613,743 Total direct costs -- 1,127,493 108,570 (50,178) 1,185,885 -------- ---------- -------- --------- ---------- Gross profit -- 412,860 14,998 -- 427,858 Selling, general and administrative expenses 12,282 255,195 17,281 -- 284,758 Restructuring charges -- 15,409 -- -- 15,409 Other expense -- 4,817 -- -- 4,817 -------- ---------- -------- --------- ---------- Operating income (loss) (12,282) 137,439 (2,283) -- 122,874 Investment income 1,395 355 173 -- 1,923 Interest expense (40,485) (1,415) (625) -- (42,525) -------- ---------- -------- --------- ---------- Income (loss) before income taxes (51,372) 136,379 (2,735) -- 82,272 Income tax (benefit) expense (19,521) 51,677 (884) -- 31,272 Equity in net income of subsidiaries 82,851 -- -- (82,851) -- -------- ---------- -------- --------- ---------- Net income (loss) $ 51,000 $ 84,702 $ (1,851) $ (82,851) $ 51,000 ============================================================================================================================
16 8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets (in thousands) Guarantor Non-Guarantor Omnicare, Inc. September 30, 2002: Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents $ 124,800 $ 38,696 $ 5,786 $ -- $ 169,282 Restricted cash -- 6,322 -- -- 6,322 Accounts receivable, net (including intercompany) -- 504,133 12,539 (11,752) 504,920 Inventories -- 157,775 4,456 -- 162,231 Other current assets 2,565 151,498 1,123 -- 155,186 ---------- ---------- -------- ----------- ---------- Total current assets 127,365 858,424 23,904 (11,752) 997,941 ---------- ---------- -------- ----------- ---------- Properties and equipment, net 2,870 141,127 11,382 -- 155,379 Goodwill -- 1,124,656 63,806 -- 1,188,462 Other noncurrent assets 33,330 59,455 963 -- 93,748 Investment in subsidiaries 1,865,944 -- -- (1,865,944) -- ---------- ---------- -------- ----------- ---------- Total assets $2,029,509 $2,183,662 $100,055 $(1,877,696) $2,435,530 =========================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) $ 28,406 $ 276,375 $ 9,285 $ (11,752) $ 302,314 Long-term debt 40,000 344 -- -- 40,344 5.0% convertible subordinated debentures, due 2007 345,000 -- -- -- 345,000 8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000 Other noncurrent liabilities 2,004 131,416 353 -- 133,773 Stockholders' equity 1,239,099 1,775,527 90,417 (1,865,944) 1,239,099 ---------- ---------- -------- ----------- ---------- Total liabilities and stockholders' equity $2,029,509 $2,183,662 $100,055 $(1,877,696) $2,435,530 ============================================================================================================================= December 31, 2001: - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 127,110 $ 37,304 $ 3,982 $ -- $ 168,396 Restricted cash -- 2,922 -- -- 2,922 Accounts receivable, net (including intercompany) -- 462,882 24,648 (9,453) 478,077 Inventories -- 144,833 4,301 -- 149,134 Other current assets 944 126,049 2,072 -- 129,065 ---------- ---------- -------- ----------- ---------- Total current assets 128,054 773,990 35,003 (9,453) 927,594 ---------- ---------- -------- ----------- ---------- Properties and equipment, net 3,192 139,130 12,751 -- 155,073 Goodwill, net -- 1,060,523 63,277 -- 1,123,800 Other noncurrent assets 30,023 53,317 469 -- 83,809 Investment in subsidiaries 1,754,149 -- -- (1,754,149) -- ---------- ---------- -------- ----------- ---------- Total assets $1,915,418 $2,026,960 $111,500 $(1,763,602) $2,290,276 ========== ========== ======== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) $ 14,797 $ $246,338 $17,591 $ (9,453) $ 269,273 Long-term debt 30,000 609 60 -- 30,669 5.0% convertible subordinated debentures, due 2007 345,000 -- -- -- 345,000 8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000 Other noncurrent liabilities 838 119,227 486 -- 120,551 Stockholders' equity 1,149,783 1,660,786 93,363 (1,754,149) 1,149,783 ---------- ---------- -------- ----------- ---------- Total liabilities and stockholders' equity $1,915,418 $2,026,960 $111,500 $(1,763,602) $2,290,276 =============================================================================================================================
17 8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows (in thousands) Nine Months Ended September 30, --------------------------------------------------------- Guarantor Non-Guarantor Omnicare, Inc. 2002: Parent Subsidiaries Subsidiaries and Subsidiaries - ------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Provision for doubtful accounts $ -- $ 21,440 $ 674 $ 22,114 Other (25,868) 133,934 419 108,485 --------- --------- ------- --------- Net cash flows from operating activities (25,868) 155,374 1,093 130,599 --------- --------- ------- --------- Cash flows from investing activities: Acquisition of businesses -- (114,643) (1,250) (115,893) Capital expenditures -- (16,523) (239) (16,762) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust -- (3,400) -- (3,400) Other -- 146 117 263 --------- --------- ------- --------- Net cash flows from investing activities -- (134,420) (1,372) (135,792) --------- --------- ------- --------- Cash flows from financing activities: Borrowings on line of credit facilities 90,000 -- -- 90,000 Payments on line of credit facilities (80,000) -- -- (80,000) Other 13,558 (19,562) -- (6,004) --------- --------- ------- --------- Net cash flows from financing activities 23,558 (19,562) -- 3,996 --------- --------- ------- --------- Effect of exchange rate changes on cash -- -- 2,083 2,083 --------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents (2,310) 1,392 1,804 886 Cash and cash equivalents at beginning of period - unrestricted 127,110 37,304 3,982 168,396 --------- --------- ------- --------- Cash and cash equivalents at end of period - unrestricted $ 124,800 $ 38,696 $ 5,786 $ 169,282 =========================================================================================================== 2001: - ----------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Provision for doubtful accounts $ -- $ 19,092 $ 1,024 $ 20,116 Other (55,848) 121,317 4,277 69,746 --------- --------- ------- --------- Net cash flows from operating activities (55,848) 140,409 5,301 89,862 --------- --------- ------- --------- Cash flows from investing activities: Acquisition of businesses -- (16,207) -- (16,207) Capital expenditures (703) (16,102) (2,488) (19,293) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust -- (4,075) -- (4,075) Other -- 162 152 314 --------- --------- ------- --------- Net cash flows from investing activities (703) (36,222) (2,336) (39,261) --------- --------- ------- --------- Cash flows from financing activities: Borrowings on line of credit facilities 70,000 -- -- 70,000 Proceeds from long-term borrowings 375,000 -- -- 375,000 Payments on line of credit facilities (465,000) -- -- (465,000) Fees paid for financing arrangements (14,418) -- -- (14,418) Other 123,825 (126,619) (250) (3,044) --------- --------- ------- --------- Net cash flows from financing activities 89,407 (126,619) (250) (37,462) --------- --------- ------- --------- Effect of exchange rate changes on cash -- -- 125 125 --------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents 32,856 (22,432) 2,840 13,264 Cash and cash equivalents at beginning of period - unrestricted 48,663 59,274 3,670 111,607 --------- --------- ------- --------- Cash and cash equivalents at end of period - unrestricted $ 81,519 $ 36,842 $ 6,510 $ 124,871 ===========================================================================================================
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements, related notes and other financial information appearing elsewhere in this Report. In addition, consideration should be given to the disclosures at the "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information" caption below. Results of Operations Quarter Ended September 30, 2002 vs. 2001 Consolidated Diluted earnings per share for the three months ended September 30, 2002 were $0.31 versus $0.14 earned in the same prior year period, including the impact of restructuring charges in both periods, as discussed below. Net income for the 2002 third quarter was $29.1 million versus $13.6 million earned in the comparable 2001 period. Earnings before interest, taxes, depreciation and amortization ("EBITDA") totaled $71.9 million for the three months ended September 30, 2002 as compared with EBITDA of $54.1 million in the same period of 2001. Total net sales for the three months ended September 30, 2002 rose to $664.7 million from the $547.8 million recorded in the comparable prior year period. Effective January 1, 2002, in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), Omnicare adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") eliminating the amortization of goodwill related to acquisitions. Accordingly, no goodwill amortization was recorded during the third quarter of 2002. In the third quarter of 2001, this accounting standard would have had the effect of adding approximately $5.2 million aftertax ($0.06 per diluted share) to net income. In addition, the Company adopted Emerging Issues Task Force ("EITF") Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred," which requires that, in cases where a company acts as a principal, reimbursements received for "out-of-pocket" expenses incurred be characterized as revenue and the associated costs be included as expenses in the Company's income statement. As a result of this accounting pronouncement, which affects only the contract research organization ("CRO") business, CRO revenues and direct costs may fluctuate significantly based on the timing of when reimbursable expenses are incurred. EITF No. 01-14 had the effect of increasing both sales and cost of sales by $7.4 million in the third quarter of 2002 and $6.7 million in the same 2001 period. Accordingly, it had no impact on operating or net income. Included in the 2002 and 2001 third quarters were charges of $11.1 million and $15.4 million pretax, respectively, ($6.9 million and $9.6 million aftertax, or $0.07 and $0.10 per diluted share, respectively) related to the second phase of a productivity and consolidation 19 initiative (the "Phase II Program"). The restructuring program is further discussed at the "Restructuring Charges" section below. Diluted earnings per share for the third quarter of 2002 were $0.38, excluding the impact of restructuring charges associated with the Phase II Program, as compared with $0.30 earned in the prior year quarter, excluding goodwill amortization and restructuring charges as previously discussed above. Net income, on that basis, was $35.9 million for the 2002 third quarter versus the $28.3 million earned in the comparable 2001 quarter. EBITDA, on the same basis, totaled $83.0 million for the three months ended September 30, 2002 as compared with $69.5 million in the third quarter of 2001. Pharmacy Services Segment Omnicare's Pharmacy Services segment recorded sales of $623.2 million for the third quarter of 2002 as compared with $509.8 million recorded in the same prior year period, representing an increase of $113.4 million. Operating income (including restructuring charges) in this segment was $72.2 million for the third quarter of 2002, representing an increase of $24.1 million above the prior year quarter amount of $48.1 million. Excluding restructuring charges from both periods, operating income in this segment reached $75.1 million for the three months ended September 30, 2002 as compared with $54.9 million in the same prior year quarter. The number of residents served at September 30, 2002 increased to approximately 746,000 from 655,400 one year earlier. Pharmacy sales and residents served increased primarily due to the addition of American Pharmaceutical Services ("APS"), as discussed below, combined with new contract additions as a result of the efforts of the Company's National Sales & Marketing Group and pharmacy staff. Additionally, the increasing market penetration of newer drugs, which often carry higher prices but are significantly more effective in reducing overall healthcare costs than those they replace and the continuing growth of the clinical and other service programs, partially offset by lower government reimbursement formulas in some states, served to increase overall pharmacy sales. The increase in sales was leveraged by the lower operating cost structure brought about largely by the previously disclosed Phase II Program and the anticipated synergies as a result of the ongoing APS integration, in addition to the exclusion of goodwill amortization which was $8.1 million in the comparable prior year quarter. These factors, along with a gradually improving operating environment in the skilled nursing facility market, due in part to higher reimbursements under the Balanced Budget Refinement Act of 1999 and the Benefits Improvement and Protection Act of 2000, favorably impacted the performance of the Pharmacy Services segment during the third quarter. At the same time, certain portions of these acts expired on October 1, 2002 with Congress adjourning until after the 2002 elections before clarifying these Medicare funding issues. Congress is expected to consider these funding issues upon its return. Other healthcare funding issues remain, including pressures on federal and state Medicaid budgets due to the economic downturn which has led to decreasing reimbursement rates in certain states. While the Company has successfully adjusted to these pricing pressures, pricing pressures are likely to continue if economic recovery does not emerge. In January 2002, Omnicare announced the completion of the acquisition of the assets comprising the pharmaceutical business of American Pharmaceutical Services, Inc. and other related entities (collectively, "APS"). The acquisition required cash consideration of $93.5 20 million (including an adjustment based on the closing balance sheet review). Up to an additional $18.0 million in total deferred payments may become payable in annual increments of up to $6.0 million each, contingent upon future performance, as evaluated in the first quarter of each of the next three years. The Company has completed its initial purchase price allocation, including the identification of goodwill and other intangible assets based on an appraisal performed by an independent valuation firm. At the time of the acquisition, APS provided professional pharmacy and related consulting services to approximately 60,000 residents of skilled nursing and assisted living facilities through its network of 32 pharmacies in 15 states, as well as respiratory and Medicare Part B services for residents of long-term care facilities. From the acquisition, Omnicare has achieved certain economies of scale and cost synergies. The net assets and operating results of APS have been included in the Company's financial statements beginning in the first quarter of 2002. Based upon historical financial information, during the full 2002 fiscal year the acquired APS assets are expected to generate approximately $240.0 million in incremental revenues. On July 29, 2002, the Company made public its July 26, 2002 offer to acquire NCS HealthCare, Inc. ("NCS"). Under that proposal, the Company would acquire NCS in a merger transaction pursuant to which holders of Class A common stock, par value $0.01 per share, of NCS ("NCS Class A Common Stock") and Class B common stock, par value $0.01 per share, of NCS ("NCS Class B Common Stock" and, together with the NCS Class A Common Stock, the "Shares") would receive $3.00 per share in cash and the Company would assume and/or retire existing NCS debt at its full principal amount plus accrued interest, bringing the total value of the Omnicare offer to approximately $400 million. Subsequent to the Company's offer, NCS announced the signing of a merger agreement with Genesis Health Ventures, Inc. ("Genesis"), whereby each outstanding Share would be converted into the right to receive 0.1 of a share of common stock, par value $0.02 per share, of Genesis and Genesis would retire or repay existing NCS debt, including any accrued and unpaid interest, a deal valued at less than one half of Omnicare's offer for the equity component of the proposed transaction. On August 1, 2002, the Company announced that it had filed a lawsuit in the Delaware Chancery Court to set aside the merger agreement between NCS and Genesis and certain related voting agreements and that it would commence a tender offer to acquire all of the outstanding Shares at an offer price per share of $3.50 in cash. On August 8, 2002, the Company commenced a cash tender offer for all of the outstanding Shares at $3.50 per share in cash. The cash tender offer remains ongoing. On August 20, 2002, the NCS Board of Directors announced that it had determined that the Company's offer was not in the best interest of NCS stakeholders and recommended that stockholders reject the offer and not tender their shares in the offer. 21 By letter dated October 6, 2002, the Company forwarded to the NCS Board of Directors the executed Omnicare Agreement and Plan of Merger (the "Omnicare Merger Agreement"). The letter further indicated that by executing the proposed Omnicare Merger Agreement, the Company had irrevocably committed itself (for the duration set forth in the letter) to a transaction with NCS pursuant to which the Company would acquire all of the outstanding Shares at a price of $3.50 per share in cash. On October 22, 2002, the NCS Board of Directors withdrew its recommendation that stockholders vote in favor of NCS's pending merger with Genesis. Moreover, as set forth in its proxy statement dated November 1, 2002, the NCS Board of Directors unanimously recommends that the NCS stockholders vote "against" the adoption of the merger agreement with Genesis. On October 25, 2002, the Delaware Chancery Court held that the Company had standing to assert a claim that by executing voting agreements with Genesis, the shares of NCS Class B Common Stock (ten votes per share) owned by Jon H. Outcalt, chairman of the Board of Directors of NCS ("Outcalt"), and Kevin B. Shaw, president and chief executive officer of NCS ("Shaw"), automatically converted into shares of NCS Class A Common Stock (one vote per share). The Court also found that because the Company was not an NCS stockholder on July 28, 2002, the date on which the NCS Board of Directors approved the merger agreement with Genesis and the voting agreements, it did not have standing to bring claims that the NCS Board of Directors breached their fiduciary duties. On October 29, 2002, the Delaware Chancery Court denied Omnicare's motion for summary judgment as to the first count of Omnicare's complaint, which sought a declaration that the execution of the voting agreements by Messrs. Outcalt and Shaw, in connection with the proposed NCS/Genesis merger, resulted in the automatic conversion of their NCS Class B Common Stock (ten votes per share) into NCS Class A Common Stock (one vote per share), and granted summary judgment in favor of NCS, Outcalt, Shaw, Boake A. Sells (a member of the NCS Board), Richard L. Osbourne (a member of the NCS Board), Genesis and Geneva Sub, Inc., a wholly owned subsidiary of Genesis. Omnicare has filed an appeal with respect to the Court's rulings. Notwithstanding the Court's rulings, the NCS Directors are being sued by other NCS stockholder-plaintiffs for breaching their fiduciary duties in approving the merger agreement with Genesis and the related voting agreements. The Court's rulings do not address these claims. A motion for preliminary injunction relating to these stockholder claims is expected to be heard by the Delaware Chancery Court on November 14, 2002. CRO Services Segment Omnicare's Clinical Research ("CRO Services") segment recorded revenues of $41.5 million during the third quarter of 2002 as compared with $38.0 million recorded in the same prior year period, representing an increase of $3.5 million. In accordance with EITF No. 01-14, the Company included $7.4 million and $6.7 million in its CRO Services segment reported revenue and direct cost amounts for the three months ended September 30, 2002 and 2001, 22 respectively. Operating loss (including restructuring charges in both periods) in this segment was $2.8 million for the third quarter of 2002 as compared with an operating loss of $5.2 million in the same prior year quarter. Excluding restructuring charges from both periods, operating income in this segment was $5.4 million for the three months ended September 30, 2002, an increase of $2.1 million above the same prior year quarter amount of $3.3 million. The improvements in revenue, owing to solid business gains in prior quarters and the recovery of the overall drug research market, coupled with efforts made to streamline the organization and reduce fixed costs to better match expenses with revenues, and the exclusion of goodwill amortization totaling $0.3 million in the comparable prior year quarter, produced these substantial increases in profitability. Backlog at September 30, 2002 was $201.0 million, representing an increase of approximately $10.4 million from September 30, 2001 and $6.3 million from June 30, 2002 backlog of $194.7 million due to new business wins in the third quarter of 2002. Consolidated The Company's consolidated gross profit increased $30.1 million in the third quarter of 2002 from the prior year to $175.6 million. Gross profit as a percentage of total net sales decreased to 26.4% in the third quarter of 2002 from 26.6% in the same period of 2001 (26.7% and 26.9%, respectively, excluding the previously disclosed impact of EITF No. 01-14). Positively impacting overall gross profit was the Company's purchasing leverage associated with the procurement of pharmaceuticals, in part, due to efforts in integrating the APS business, and benefits realized from the Company's formulary compliance program, as well as the leveraging of fixed and variable overhead costs at the Company's pharmacies and the reduced cost structure brought about by the previously disclosed Phase II Program. These favorable factors were more than offset by the initial impact of the lower-margin APS business, the adoption of EITF No. 01-14, the previously mentioned shift in mix towards newer, branded drugs which typically produce higher gross profit, but lower gross profit margins, and the effect of lower government reimbursement formulas in some states. Omnicare's selling, general and administrative ("operating") expenses for the quarter ended September 30, 2002 of $103.9 million were higher than the comparable prior year amount of $86.4 million (excluding goodwill amortization of $8.4 million pretax, or $5.2 million aftertax), by $17.5 million, due to the overall growth of the business, including the APS acquisition. However, operating expenses as a percentage of total net sales totaled 15.6% in the 2002 third quarter, representing a decline from the 15.8% experienced in the comparable prior year period, excluding goodwill amortization (15.8% and 16.0%, respectively, excluding the previously disclosed impact of EITF No. 01-14). This decline is primarily due to improved leveraging of fixed and variable overhead costs over a higher sales base in the 2002 third quarter, and the year-over-year favorable impact of the Phase II Program. In connection with the Phase II Program discussed at the "Restructuring Charges" section below, the Company recorded pretax restructuring charges of $11.1 million and $15.4 million ($6.9 million and $9.6 million aftertax, or $0.07 and $0.10 per diluted share, respectively) in the third quarter of 2002 and 2001, respectively. The charges were primarily comprised of employee 23 severance pay, employment agreement buy-out costs, lease termination costs, the write-off of leasehold improvements and other assets, and related fees and facility exit costs. Investment income for the three months ended September 30, 2002 was $0.7 million, consistent with the same period of 2001. Lower interest rates served to offset the favorable impact of larger invested cash balances during the three months ended September 30, 2002 versus the same period of 2001. Interest expense for the three months ended September 30, 2002 of $14.3 million was relatively consistent with the comparable prior year quarter. The effective tax rate of 38% in the third quarter of 2002 was consistent with the comparable prior year quarter rate. The effective tax rates in the 2002 and 2001 third quarters are higher than the federal statutory rate largely as a result of the combined impact of state and local income taxes, various nondeductible expenses and tax-accrual adjustments. Year-to-Date September 30, 2002 vs. 2001 Consolidated Diluted earnings per share for the nine months ended September 30, 2002 were $0.92 versus $0.54 earned in the same prior year period, including the impact of restructuring charges in both periods and other expense in the 2001 period, as discussed below. Net income for the nine months ended September 30, 2002 was $87.2 million versus $51.0 million earned in the comparable 2001 period. EBITDA totaled $215.9 million for the nine months ended September 30, 2002 as compared with EBITDA of $178.0 million in the same period of 2001. Total net sales for the nine months ended September 30, 2002 rose to $1,957.2 million from the $1,613.7 million recorded in the comparable prior year period. In connection with the previously discussed SFAS 142, no goodwill amortization was recorded during the nine months ended September 30, 2002. In the nine months ended September 30, 2001, this accounting standard would have had the effect of adding approximately $15.4 million aftertax ($0.16 per diluted share) to net income. Further, in connection with the previously discussed EITF No. 01-14, sales and cost of sales increased by $20.8 million and $18.8 million in the nine months ended September 30, 2002 and 2001, respectively. Included in the year-to-date September 30, 2002 and 2001 periods, respectively, were charges of $23.2 million and $15.4 million pretax ($14.4 million and $9.6 million aftertax, or $0.15 and $0.10 per diluted share, respectively) related to the Phase II Program. The year-to-date September 30, 2001 period included other expense charges of $4.8 million pretax ($3.0 million aftertax, or $0.03 per diluted share). The Phase II Program and other expense are further discussed below. Diluted earnings per share for the nine months ended September 30, 2002 were $1.07, excluding the impact of restructuring charges associated with the Phase II Program, as compared 24 with $0.84 earned in the prior year period, excluding goodwill amortization, restructuring charges and other expense. Net income, on that basis, was $101.6 million for the 2002 nine month period versus the $79.0 million earned in the comparable 2001 period. EBITDA, on the same basis, totaled $239.1 million for the nine months ended September 30, 2002 as compared with $198.2 million in the comparable 2001 period. Pharmacy Services Segment Omnicare's Pharmacy Services segment recorded sales of $1,829.9 million for the nine months ended September 30, 2002 as compared with $1,503.4 million recorded in the same prior year period, representing an increase of $326.5 million. Operating income (including restructuring charges in both periods and other expense in the 2001 period) in this segment was $208.1 million for the nine months ended September 30, 2002, representing an increase of $63.3 million above the same prior year period amount of $144.8 million. Excluding restructuring charges from both periods and other expense in the 2001 period, operating income in this segment reached $214.9 million in the year-to-date September 30, 2002 period as compared with $156.4 million in the same 2001 period. A higher number of residents served, primarily due to the addition of the aforementioned APS business and new contract additions, the continued growth of the Company's clinical and other service programs, drug price inflation and the increasing market penetration of newer drugs, which often carry higher prices but are significantly more effective in reducing overall healthcare costs than those they replace, partially offset by lower government reimbursement formulas in some states, served to increase overall pharmacy sales. The increase in sales in relation to a lower operating cost structure brought about largely by the Phase II Program and the anticipated synergies as a result of the ongoing APS acquisition, in addition to the exclusion of goodwill amortization which was $24.1 million in the comparable prior year period, produced increased operating margins in the Pharmacy Services segment. These factors, along with a gradually improving operating environment in the skilled nursing facility market, due in part to higher reimbursements under the Balanced Budget Refinement Act of 1999 and the Benefits Improvement and Protection Act of 2000, favorably impacted the overall performance of the Pharmacy Services segment. At the same time, certain portions of these acts expired on October 1, 2002 with Congress adjourning until after the 2002 elections before clarifying these Medicare funding issues. Congress is expected to consider these funding issues upon its return. Other healthcare funding issues remain, including pressures on federal and state Medicaid budgets due to the economic downturn which has led to decreasing reimbursement rates in certain states. While the Company has successfully adjusted to these pricing pressures, pricing pressures are likely to continue if economic recovery does not emerge. CRO Services Segment The CRO Services segment recorded revenues of $127.3 million during the nine months ended September 30, 2002 as compared with $110.3 million recorded in the same prior year period, representing an increase of $17.0 million. In accordance with EITF No. 01-14, the Company included $20.8 million and $18.8 million in its CRO Services segment reported revenue and direct cost amounts for the nine months ended September 30, 2002 and 2001, respectively. Operating loss (including restructuring charges in both periods) in this segment was $0.9 million for the nine months ended September 30, 2002 as compared with an operating 25 loss of $0.4 million in the same prior year period. Excluding restructuring charges from both periods, operating income in this segment was $15.5 million in the year-to-date September 30, 2002 period, an increase of $7.4 million above the same prior year period amount of $8.1 million. The improvements in revenue, owing to solid business gains in prior quarters and the recovery of the overall drug research market, coupled with efforts made to streamline the organization and reduce fixed costs to better match expenses with revenues, and the exclusion of goodwill amortization totaling $0.8 million in the comparable prior year period, produced these substantial increases in profitability. Consolidated The year-to-date September 30, 2002 consolidated gross profit increased $82.8 million from the prior year to $510.7 million. Gross profit as a percentage of total net sales decreased to 26.1% in the nine months ended September 30, 2002 from 26.5% in the same period of 2001 (26.4% and 26.8%, respectively, excluding the previously disclosed impact of EITF No. 01-14). Positively impacting overall gross profit was the Company's purchasing leverage associated with the procurement of pharmaceuticals, in part, due to efforts in integrating the APS business and benefits realized from the Company's formulary compliance program, as well as the leveraging of fixed and variable overhead costs at the Company's pharmacies and the reduced cost structure brought about by the Phase II Program. These favorable factors were more than offset by the initial impact of the lower-margin APS business, the adoption of EITF No. 01-14, the shift in mix towards newer, branded drugs which typically produce higher gross profit, but lower gross profit margins, and the effect of lower government reimbursement formulas in some states. Operating expenses for the nine months ended September 30, 2002 of $306.0 million were higher than the comparable prior year amount of $259.9 million (excluding goodwill amortization of $24.9 million pretax, or $15.4 million aftertax), by $46.1 million, due to the overall growth of the business. However, operating expenses as a percentage of total net sales totaled 15.6% in the nine months ended September 30, 2002, representing a decline from the 16.1% experienced in the comparable prior year period, excluding goodwill amortization (15.8% and 16.3%, respectively, excluding the previously disclosed impact of EITF No. 01-14). This decline is primarily due to improved leveraging of fixed and variable overhead costs over a higher sales base in the nine months ended September 30, 2002, and the year-over-year favorable impact of the Phase II Program. In connection with the Phase II Program discussed at the "Restructuring Charges" section below, the Company recorded pretax restructuring charges of $23.2 million and $15.4 million ($14.4 million and $9.6 million aftertax, or $0.15 and $0.10 per diluted share, respectively) in the nine months ended September 30, 2002 and 2001, respectively. The charges were primarily comprised of employee severance pay, employment agreement buy-out costs, lease termination costs, the write-off of leasehold improvements and other assets, and related fees and facility exit costs. Included in the year-to-date September 2001 results are other expense items totaling $1.8 million pretax ($1.1 million aftertax, or $0.01 per diluted share) and $3.0 million pretax ($1.9 million aftertax, or $0.02 per diluted share). The $1.8 million special charge recorded in the first 26 quarter of 2001 represents a repayment to the Medicare Part B program of overpayments made to one of the Company's pharmacy units during the period from January 1997 through April 1998. As part of its corporate compliance program, the Company learned of the overpayments, which related to Medicare Part B claims that contained documentation errors, and notified the Health Care Financing Administration for review and determination of the amount of overpayment. The $3.0 million special charge recorded in the second quarter of 2001 represents a settlement during June 2001 of certain contractual issues with a customer, which issues and amount relate to prior year periods. Investment income for the nine months ended September 30, 2002 was $2.1 million, an improvement of $0.2 million over the same period of 2001. Larger average invested cash balances during the nine months ended September 30, 2002 versus the comparable prior year period, partially offset by the impact of lower interest rates in the 2002 versus 2001 period, was the primary driver of the year-to-year increase in investment income. Interest expense for the nine months ended September 30, 2002 of $43.0 million was relatively consistent with the comparable prior year period amount of $42.5 million. The effective tax rate of 38% in the year-to-date September 30, 2002 period was consistent with the comparable prior year period. The effective tax rates in the 2002 and 2001 nine months periods are higher than the federal statutory rate largely as a result of the combined impact of state and local income taxes, various nondeductible expenses and tax-accrual adjustments. Restructuring Charges In 2001, the Company announced the Phase II Program of its productivity and consolidation initiative. The Phase II Program, completed on September 30, 2002, further streamlined operations, increased efficiencies and helped enhance the Company's position as a high quality, cost-effective provider of pharmaceutical services. Building on previous efforts, the Phase II Program included the merging or closing of seven pharmacy locations and the reconfiguration in size and function of an additional ten locations. The Phase II Program also included a reduction in occupied building space in certain locations and the rationalization or reduction of staffing levels in the CRO business in order to better garner the efficiencies of the integration and functional reorganization of that business. The Phase II Program encompassed a net reduction of approximately 460 employees, or about 5% of the Company's total workforce, across both the Pharmacy Services and CRO Services segments. In connection with the Phase II Program, the Company expensed $18.3 million pretax ($11.4 million aftertax, or $0.12 per diluted share) during the 2001 year. Further, approximately $11.1 million and $23.2 million ($6.9 million and $14.4 million aftertax, or $0.07 and $0.15 per diluted share, respectively) were recorded in the three and nine months ended September 30, 2002, respectively. The restructuring charges included severance pay, the buy-out of employment agreements, the buy-out of lease obligations, the write-off of leasehold improvements and other assets, and related fees and facility exit costs. 27 Details of the pretax restructuring charges recorded in 2001 and the nine months ended September 30, 2002 relating to the Phase II Program follow (in thousands):
2001 Utilized Balance at 2002 Utilized Balance at Provision/ during December 31, Provision/ during September 30, Accrual 2001 2001 Accrual 2002 2002 ---------- --------- ------------ ---------- --------- ------------- Restructuring charges: Employee severance $ 4,256 $ (2,614) $1,642 $ 2,177 $(1,699) $ 2,120 Employment agreement buy-outs 2,086 (1,578) 508 -- (186) 322 Lease terminations 2,711 (2,105) 606 5,862 (1,395) 5,073 Other assets, fees and facility exit costs 9,291 (6,264) 3,027 15,156 (6,341) 11,842 ------- -------- ------ ------- ------- ------- Total restructuring charges $18,344 $(12,561) $5,783 $23,195 $(9,621) $19,357 ======= ======== ====== ======= ======= =======
As of September 30, 2002, the Company had paid approximately $6.1 million of severance and other employee-related costs relating to the reduction of approximately 460 employees. The remaining liabilities recorded at September 30, 2002 represent amounts not yet paid or settled relating to actions taken, and will be adjusted in future periods as these matters are finalized. In connection with the previously disclosed first phase of its productivity and consolidation initiative (the "Phase I Program"), Omnicare had liabilities of $1.5 million at December 31, 2001, of which $0.6 million was utilized in nine months ended September 30, 2002. The remaining liabilities at September 30, 2002 of $0.9 million represent amounts not yet paid relating to actions taken in connection with the Phase I Program (largely comprised of remaining lease payments), and will be adjusted as these matters are settled. Liquidity and Capital Resources Cash and cash equivalents at September 30, 2002 were $175.6 million compared with $171.3 million at December 31, 2001 (including restricted cash amounts of $6.3 million and $2.9 million, respectively). The Company generated positive net cash flows from operating activities of $130.6 million (including the impact of advance purchasing of pharmaceuticals, or "prebuys") during the nine months ended September 30, 2002. These funds, and borrowings of $90.0 million under the Company's line of credit facility, were used primarily for acquisition-related payments (primarily the APS acquisition, as well as amounts payable pursuant to acquisition agreements relating to pre-2002 acquisitions), debt repayment, capital expenditures and dividends. Net cash used in investing activities was $135.8 million and $39.3 million for the nine months ended September 30, 2002 and 2001, respectively. The large increase is primarily the result of the APS acquisition in the first quarter of 2002. The Company's capital requirements are primarily related to its acquisition program, as well as capital expenditures, including those related to investments in the Company's information technology systems. There are no material commitments and contingencies outstanding at September 30, 2002, other than the Company's cash tender offer for all of the outstanding shares of NCS and related redemption or repayment of 28 existing NCS debt, as well as certain acquisition-related payments potentially due in the future, including deferred payments, indemnification payments and payments originating from earnout provisions (including up to an additional $18.0 million relating to APS, contingent upon performance, payable in annual increments of up to $6.0 million each as evaluated in the first quarter of each of the next three years). Net cash flows provided by financing activities totaled $4.0 million for the nine months ended September 30, 2002 compared to a net use of $37.5 million for the comparable prior year period. On March 20, 2001, the Company completed the offering of $375.0 million of 8.125% senior subordinated notes due 2011 (the "Senior Notes"), issued at par through a private placement. On October 24, 2001, the Company's offer to exchange the originally issued Senior Notes for Senior Notes which have been registered under the Securities Act of 1933 expired with all Senior Notes having been exchanged. Concurrent with the original issuance of the Senior Notes, the Company entered into a new three-year syndicated $495.0 million revolving credit facility (the "Revolving Credit Facility"), including a $25.0 million letter of credit subfacility, with various lenders. Net proceeds from the Senior Notes of approximately $365.0 million and borrowings under the new credit facility of $70.0 million were used to repay outstanding indebtedness in connection with terminating the Company's then existing facilities. Subsequent to the closing of the Revolving Credit Facility, the Company received commitments from additional banks that allowed it to increase the size of the Revolving Credit Facility to $500.0 million. As of September 30, 2002, the Revolving Credit Facility bears an interest rate at the London Inter-bank Offerer Rate ("LIBOR") plus 1.375%, incurs commitment fees on the unused portion at a rate of 0.375% and has no utilization fee. In connection with the APS acquisition, the Company borrowed $90.0 million on the Revolving Credit Facility, of which $80.0 million was repaid during the nine month period ended September 30, 2002. The Company's current ratio of 3.3 to 1.0 at September 30, 2002 is relatively consistent with the 3.4 to 1.0 in existence at December 31, 2001. On August 7, 2002, the Company's Board of Directors declared a quarterly cash dividend of 2.25 cents per share for an indicated annual rate of 9 cents per share in 2002. Dividends of $6.4 million paid during the nine months ended September 30, 2002 were relatively consistent with those paid in the comparable prior year period. If the Company acquires NCS pursuant to the Company's cash tender offer, it will use funds of approximately $423 million, of which approximately $100 million would be for the purchase of NCS's shares and the payment of expenses and approximately $323 million would be for the pay off of NCS's indebtedness and the redemption of NCS's notes. The Company presently intends to use available cash and additional borrowings under its Revolving Credit Facility to fund these payments. The Company believes that cash flows from operations, credit facilities and other short- and long-term debt financings, if any, will be sufficient to satisfy its future working capital, acquisition contingency commitments, capital expenditures, debt servicing and other financing requirements for the foreseeable future. The Company may, in the future, refinance its indebtedness, issue additional indebtedness, or issue additional equity as deemed appropriate. The Company believes that, if needed, these additional external sources of financing are readily available. 29 Recently Issued Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement updates, clarifies and simplifies existing accounting pronouncements. This Statement will be effective for the Company beginning January 1, 2003. Management does not expect the standard to have a material impact on the Company's consolidated financial position, results of operations and cash flows. In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 supersedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and requires liabilities associated with exit and disposal activities to be expensed as incurred. SFAS 146 will be effective for exit or disposal activities of the Company that are initiated after December 31, 2002. In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial Institutions," which is not applicable to the Company. 30 Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information In addition to historical information, this report contains forward-looking statements and performance trends that are subject to certain known and unknown risks, uncertainties, contingencies and other factors that could cause actual results, performance or achievements to differ materially from those stated. Such forward-looking statements and trends include those relating to Omnicare's business outlook or position or future economic performance; the impact of the acquisition of APS; internal growth resulting from the development of new contracts; the impact of penetration of new drugs; the impact of clinical and other service programs; the impact of lower government reimbursement formulas in some states; the impact of the productivity and consolidation programs; the operating environment for skilled nursing facilities; the impact of reimbursement trends and expectations concerning legislative action with respect thereto; governmental pricing pressures due to the continuing economic downturn; the impact of Omnicare's efforts to acquire NCS; the impact of prior period business gains on current quarter CRO performance; the operating environment in the CRO industry; the impact of streamlining and cost reduction at the CRO organization; trends concerning CRO backlog; purchasing leverage; the formulary compliance program; the leveraging of costs; the impact of prebuys; the adequacy and availability of Omnicare's sources of liquidity and capital; the availability of external sources of financing; and the impact of new accounting rules and standards including SFAS 146. Such forward-looking statements involve actual known and unknown risks, uncertainties, contingencies and other factors that could cause actual results, performance or achievements to differ materially from those stated. Such risks, uncertainties, contingencies and other factors, many of which are beyond the control of Omnicare, include, but are not limited to: overall economic, financial and business conditions; trends for the continued growth of the businesses of Omnicare; the ability to implement productivity, consolidation and cost reduction efforts and to realize anticipated benefits; delays and further reductions in governmental reimbursement to customers and to Omnicare as a result of pressures on federal and state budgets due to the continuing economic downturn and other factors; the overall financial condition of Omnicare's customers; Omnicare's ability to assess and react to the financial condition of customers; the impact of seasonality on the business of Omnicare; the ability of vendors to provide products and services to Omnicare; the continued successful integration of the CRO business and acquired companies, including APS, and the ability to realize anticipated economies of scale and cost synergies; the impact and pace of pharmaceutical price increases; increases or decreases in reimbursement; the effect of new government regulations, executive orders and/or legislative initiatives, including those relating to reimbursement and drug pricing policies and changes in the interpretation and application of such policies; government budgetary pressures and shifting priorities; efforts by payors to control costs; the ability to consummate an acquisition transaction involving NCS; the outcome of litigation; the failure of Omnicare to obtain or maintain required regulatory approvals or licenses; loss or delay of CRO contracts for regulatory or other reasons; the ability of CRO projects to produce revenues in future periods; the ability to attract and retain needed management; the impact and pace of technological advances; the ability to obtain or maintain rights to data, technology and other intellectual property; the impact of consolidation in the pharmaceutical and long-term care industries; the continued availability of suitable acquisition candidates; changes in tax law and regulation; volatility in Omnicare's stock price and in the financial markets generally; access to capital and financing; the demand for 31 Omnicare's products and services; pricing and other competitive factors in the industry; variations in costs or expenses; and changes in accounting rules and standards. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omnicare's primary market risk exposure relates to interest rate risk exposure through its borrowings. The Company's debt obligations at September 30, 2002 include $40.0 million outstanding under its March 2001 three-year, $500.0 million variable-rate Revolving Credit Facility at an interest rate of LIBOR plus 1.375%, or 3.2% at September 30, 2002 (a one-hundred basis point change in the interest rate would impact pretax interest expense by approximately $0.4 million per year); $345.0 million outstanding under its 5.0% fixed rate convertible debentures, due 2007 (the "Convertible Debentures"); and $375.0 million outstanding under its 8.125% fixed rate Senior Notes, due 2011. At September 30, 2002, the fair value of Omnicare's Revolving Credit Facility approximates its carrying value, and the fair value of the Convertible Debentures and Senior Notes is approximately $310.9 million and approximately $390.9 million, respectively. The Company has operations and revenue that occur outside of the United States ("U.S.") and transactions that are settled in currencies other than the U.S. dollar, exposing it to market risk related to changes in foreign currency exchange rates. However, the substantial portion of the Company's operations and revenues and the substantial portion of the Company's cash settlements are exchanged in U.S. dollars. Therefore, changes in foreign currency exchange rates do not represent a substantial market risk exposure to the Company. The Company does not have any financial instruments held for trading purposes, and does not hedge any of its market risks with derivative instruments. ITEM 4. CONTROLS AND PROCEDURES (a) Based on a recent evaluation, which was completed within 90 days of the filing of this Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in periodic reports filed under the Securities Exchange Act of 1934. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their last evaluation. 33 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 15, 2002, the Company entered into a settlement agreement that resolved all matters relating to the Neighborcare Litigation, described below, and resulted in a dismissal with prejudice of the Neighborcare Litigation. Neighborcare Pharmacy Services, Inc. ("Neighborcare"), a subsidiary of Genesis Health Ventures, Inc., filed suit in the Circuit Court for Baltimore County, Maryland (Case No. 03-C-99-007379), against Omnicare and Heartland Health Services ("HHS"), a joint venture in which an Omnicare subsidiary is a partner (the "Neighborcare Litigation") and sought substantial damages and injunctive relief. The Neighborcare Litigation related to certain service agreements between Neighborcare and HCR/Manorcare on the one hand, and Omnicare or HHS and HCR/Manorcare, on the other, under which pharmacy services are provided to nursing homes and other long-term care facilities operated by HCR/Manorcare. All parties to the settlement of the Neighborcare Litigation entered into mutual releases. The settlement did not involve any payments by Omnicare. The settlement had no adverse impact on Omnicare's results of operations or financial position. 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Number Exhibit ------ ------- 11 Computation of Earnings Per Common Share 99.1 Certification of Chief Executive Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K (I) During the quarter ended September 30, 2002, the Company filed a Report on Form 8-K on July 29, 2002 reporting, under Items 5 and 7, the filing of a press release announcing its offer to acquire NCS Healthcare, Inc. (II) During the quarter ended September 30, 2002, the Company filed a Report on Form 8-K on August 14, 2002 reporting, under Items 7 and 9, the submission to the Secretary of the Securities and Exchange Commission of a "Statement Under Oath of Principal Executive Officer of Omnicare, Inc. Regarding Facts and Circumstances Relating to Exchange Act Filings" and a "Statement Under Oath of Principal Financial Officer of Omnicare, Inc. Regarding Facts and Circumstances Relating to Exchange Act Filings". (III) During the quarter ended September 30, 2002, the Company filed a Report on Form 8-K on August 19, 2002 reporting, under Item 5, that the Company entered into a settlement agreement on August 15, 2002, relating to the Neighborcare Litigation. 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Omnicare, Inc. -------------- Registrant Date: November 14, 2002 By: /s/ David W. Froesel, Jr. ----------------- ---------------------------- David W. Froesel, Jr. Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 36 SECTION 302 CEO CERTIFICATION I, Joel F. Gemunder, President and Chief Executive Officer of Omnicare, Inc. (the "Company"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 ----------------- /s/ Joel F. Gemunder -------------------- Joel F. Gemunder President and Chief Executive Officer 37 SECTION 302 CFO CERTIFICATION I, David W. Froesel, Jr., Senior Vice President and Chief Financial Officer of Omnicare, Inc. (the "Company"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 ----------------- /s/ David W. Froesel, Jr. ------------------------ David W. Froesel, Jr. Senior Vice President and Chief Financial Officer 38 EX-11 3 ex11.txt EXHIBIT 11 Exhibit 11 COMPUTATION OF EARNINGS PER COMMON SHARE ("EPS") OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED (in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ --------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Basic Earnings: Net income $29,066 $13,560 $87,200 $51,000 ======= ======= ======= ======= Shares Weighted average number of common shares outstanding 94,245 93,345 94,129 92,992 ======= ======= ======= ======= Basic EPS (c) $ 0.31 $ 0.15 $ 0.93 $ 0.55 ======= ======= ======= ======= Diluted Earnings (a): Net income $29,066 $13,560 $87,200 $51,000 ======= ======= ======= ======= Shares Weighted average number of common shares outstanding 94,245 93,345 94,129 92,992 Additional shares assuming conversion of stock options and stock warrants (b) 465 772 791 630 ------- ------- ------- ------- Weighted average common shares outstanding, as adjusted 94,710 94,117 94,920 93,622 ======= ======= ======= ======= Diluted EPS (c) $ 0.31 $ 0.14 $ 0.92 $ 0.54 ======= ======= ======= =======
(a) The $345.0 million of Convertible Debentures which are convertible into 8.7 million shares at $39.60 per share were outstanding during the three and nine months ended September 30, 2002 and 2001, but were not included in the computation of diluted EPS because the impact was anti-dilutive. (b) During the three and nine months ended September 30, 2002 and 2001, the anti-dilutive effect associated with selected 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 aggregate anti-dilutive stock options and warrants excluded for the quarter ended September 30, 2002 and 2001 totaled 5.5 million and 3.8 million, respectively. Further, 4.5 million and 3.8 million anti-dilutive options and warrants were excluded from the year-to-date September 30, 2002 and 2001, respectively. (c) In accordance with the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," Omnicare discontinued amortization of goodwill as of January 1, 2002. Accordingly, no goodwill amortization was recorded during the three and nine months ended September 30, 2002. Goodwill amortization during the three and nine months ended September 30, 2001 totaled $8.4 million before taxes ($5.2 million after taxes, or $0.06 per basic and diluted share) and $24.9 million before taxes ($15.4 million after taxes, or $0.17 per basic share and $0.16 per diluted share), respectively. EX-99 4 ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 SECTION 906 CEO CERTIFICATION I, Joel F. Gemunder, President and Chief Executive Officer of Omnicare, Inc. (the "Company"), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2002 (the "Periodic Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2002 /s/ Joel F. Gemunder ------------------------------------- Joel F. Gemunder President and Chief Executive Officer EX-99 5 ex99-2.txt EXHIBIT 99.2 Exhibit 99.2 SECTION 906 CFO CERTIFICATION I, David W. Froesel, Jr., Senior Vice President and Chief Financial Officer of Omnicare, Inc. (the "Company"), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2002 (the "Periodic Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2002 /s/ David W. Froesel, Jr. ________________________________________ David W. Froesel, Jr. Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----