-----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, JyDGTvYlfEM+AE71uET9HE1yOuxqOODqDV3ynCwjp24LhTgb086Tojv4C1Uk2CU0 vysHb4sQ7rGUwfjKfKFRnQ== 0000950117-04-000979.txt : 20040315 0000950117-04-000979.hdr.sgml : 20040315 20040315114806 ACCESSION NUMBER: 0000950117-04-000979 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08269 FILM NUMBER: 04668340 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-K 1 a37189.txt OMNICARE, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File No. 1-8269 OMNICARE, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 31-1001351 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) OMNICARE, INC. 1600 RIVERCENTER II 100 EAST RIVERCENTER BOULEVARD COVINGTON, KENTUCKY 41011 (Address of Principal Executive Offices) 859-392-3300 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on which Registered ------------------- ----------------------------------------- Common Stock ($1.00 Par Value) New York Stock Exchange Preferred Share Purchase Rights (No Par Value) New York Stock Exchange 4.0% Trust Preferred Income Equity Redeemable Securities issued by Omnicare Capital Trust I and guaranteed by Omnicare, Inc. New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Aggregate market value of the registrant's voting stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange Composite Transaction Listing on the last business day of the registrant's most recently completed second fiscal quarter (i.e., June 30, 2003) ($33.79 per share): $3,323,383,485. As of January 31, 2004, the registrant had 103,298,049 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of Omnicare, Inc.'s ("Omnicare", the "Company" or the "Registrant") definitive Proxy Statement for its 2004 Annual Meeting of Stockholders, to be held May 18, 2004, are incorporated by reference into Part III of this report. Definitive copies of its 2004 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year. OMNICARE, INC. 2003 FORM 10-K ANNUAL REPORT Table of Contents
PART I PAGE ---- Item 1. Business...................................................... 3 Item 2. Properties.................................................... 21 Item 3. Legal Proceedings............................................. 26 Item 4. Submission of Matters to a Vote of Security Holders........... 26 Executive Officers of the Company............................. 27 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters ............................... 28 Item 6. Selected Financial Data ...................................... 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 32 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 58 Item 8. Financial Statements and Supplementary Data................... 59 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 103 Item 9A. Controls and Procedures....................................... 103 PART III Item 10. Directors and Executive Officers of the Registrant............ 103 Item 11. Executive Compensation........................................ 104 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................. 104 Item 13. Certain Relationships and Related Transactions................ 104 Item 14. Principal Accountant Fees and Services........................ 104 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................ 105
As used in this document, unless otherwise specified or the context otherwise requires, the terms "Omnicare," "Company," "its," "we," "our" and "us" refer to Omnicare, Inc. and its consolidated subsidiaries. PART I ITEM 1 - BUSINESS Background Omnicare, Inc. is a leading provider of pharmaceuticals and related pharmacy services to long-term care institutions such as skilled nursing facilities ("SNFs"), assisted living facilities ("ALFs") and retirement centers, as well as hospitals and other institutional healthcare facilities. We also provide comprehensive clinical research for the pharmaceutical and biotechnology industries. We operate in two business segments. The largest segment, Pharmacy Services, provides distribution of pharmaceuticals, related pharmacy consulting, data management services and medical supplies to long-term care facilities throughout the United States. Pharmacy Services purchases, repackages and dispenses pharmaceuticals, both prescription and non-prescription, and provides computerized medical record-keeping and third-party billing for residents in these facilities. We also provide consultant pharmacist services, including evaluating residents' drug therapy, monitoring the drug distribution system within the nursing facility, assisting in compliance with state and federal regulations and providing proprietary clinical and health management programs. In addition, our Pharmacy Services segment provides ancillary services, such as infusion therapy, specialty pharmacy, respiratory and dialysis services, distributes medical supplies and offers clinical and financial software information systems to long-term care facilities. Since 1989, we have been involved in a program to acquire providers of pharmaceutical products and related pharmacy management services and medical supplies to long-term care facilities and their residents. Additional information regarding acquisitions is presented at Note 2 (Acquisitions) of the Notes to our 2003 Consolidated Financial Statements, included at Item 8 of this Filing. We provided pharmacy services to long-term care facilities comprising approximately 1,003,000 beds in 47 states and the District of Columbia at December 31, 2003. We also provide pharmaceutical case management services for retirees, employees and dependents who have drug benefits under corporate-sponsored healthcare programs. In addition, we provide operational software and support systems to long-term care pharmacy providers across the United States. The Pharmacy Services segment has no operating locations outside of the United States of America ("United States"). Our other business segment is contract research organization services ("CRO Services"). CRO Services is a leading international provider of comprehensive product development and research services to client companies in the pharmaceutical, biotechnology, medical device and diagnostics industries. Our CRO Services segment provides support for the design of regulatory strategy and clinical development of pharmaceuticals by offering comprehensive and fully integrated clinical, quality assurance, data management, medical writing and regulatory support for our client's drug development programs. As of December 31, 2003, our CRO Services segment operated in 29 countries around the world. 3 Financial information regarding our business segments is presented at Note 16 (Segment Information) of the Notes to our 2003 Consolidated Financial Statements, included at Item 8 of this Filing. Pharmacy Services We purchase, repackage and dispense prescription and non-prescription medication in accordance with physician orders and deliver such prescriptions to the nursing facility for administration to individual residents by the facility's nursing staff. We typically service nursing homes within a 150-mile radius of our pharmacy locations. We maintain a 24-hour, seven-day per week, on-call pharmacist service for emergency dispensing and delivery or for consultation with the facility's staff or the resident's attending physician. Upon receipt of a prescription, the relevant resident information is entered into our computerized dispensing and billing systems. At that time, the dispensing system checks the prescription for any potentially adverse drug interactions, duplicative therapy or resident sensitivity. When required and/or specifically requested by the physician or patient, branded drugs are dispensed and generic drugs are substituted in accordance with applicable state and federal laws as requested by the physician or resident. Subject to physician approval and oversight, and in accordance with our pharmaceutical care guidelines, we also provide for patient-specific therapeutic interchange of more efficacious and/or safer drugs for those presently being prescribed. See "The Omnicare Geriatric Pharmaceutical Care Guidelines'r'" below for further discussion. We provide a unit-of-use drug distribution system. This means that we repackage drugs for dispensing in single doses in tamper-resistant, drug-specific packaging labeled for individual residents. This differs from prescriptions filled by retail pharmacies, which typically are dispensed in vials or other bulk packaging requiring measurement of each dose by or for the patient. We believe the unit-of-use system improves control over drugs in the nursing facility, reduces medication errors and improves resident compliance with drug therapy by increasing the accuracy and timeliness of drug administration. Integral to our drug distribution system is our computerized medical records and documentation system. We provide to the facility computerized medication administration records, physician's order sheets and treatment records for each resident. Data extracted from these computerized records is also formulated into monthly management reports on resident care and quality assurance. We believe the computerized documentation system, in combination with the unit-of-use drug delivery system, results in greater efficiency in nursing time, improved control, reduced drug waste in the facility and lower error rates in both dispensing and administration. We believe these benefits improve drug efficacy and result in fewer drug-related hospitalizations, thereby lowering overall healthcare costs. Consultant Pharmacist Services Federal and state regulations mandate that long-term care facilities, in addition to providing a source of pharmaceuticals, retain consultant pharmacist services to monitor and report on prescription drug therapy in order to maintain and improve the quality of resident care. The 4 Omnibus Budget Reconciliation Act ("OBRA") implemented in 1990 sought to further upgrade and standardize care by setting forth more stringent standards relating to planning, monitoring and reporting on the progress of prescription drug therapy as well as overall drug usage. We provide consultant pharmacist services which help clients comply with the federal and state regulations applicable to nursing homes. The services offered by our consultant pharmacists include: o monthly drug regimen reviews for each resident in the facility to assess the appropriateness and efficacy of drug therapies, including a review of the resident's current medication usage, monitoring drug reactions to other drugs or food, monitoring lab results and recommending alternate therapies, dosing adjustments or discontinuing unnecessary drugs; o participation on the pharmacy and therapeutics, quality assurance and other committees of client facilities as well as periodic involvement in staff meetings; o monitoring and monthly reporting on overall drug usage; o development and maintenance of pharmaceutical policy and procedures manuals; and o assistance to the nursing facility in complying with state and federal regulations as they pertain to drug use. We have also developed a proprietary software system for the use of our consultant pharmacists. The system, called OSC2OR'r' (Omnicare System of Clinical and Cost Outcomes Retrieval), enables our pharmacists not only to perform their functions efficiently, but also provides the platform for consistent data retrieval for health and outcomes management. Additionally, we offer a specialized line of consulting services which help long-term care facilities to enhance care and reduce and contain costs as well as to comply with state and federal regulations. Under this service line, we offer: o data required for OBRA and other regulatory purposes, including reports on usage of chemical restraints known as psychotropic drugs, antibiotic usage (infection control) and other drug usage; o plan of care programs which assess each patient's state of health upon admission and monitor progress and outcomes using data on drug usage as well as dietary, physical therapy and social service inputs; o counseling related to appropriate drug usage and implementation of drug protocols; o on-site educational seminars for the nursing facility staff on topics such as drug information relating to clinical indications, adverse drug reactions, drug protocols and special geriatric considerations in drug therapy, and information and training on intravenous drug therapy and updates on OBRA and other regulatory compliance issues; and o nurse consultant services and consulting for dietary and medical records. 5 The Omnicare Geriatric Pharmaceutical Care Guidelines'r' In June 1994, to enhance the pharmaceutical care management services that we offer, we introduced to our client facilities and their attending physicians the Omnicare Geriatric Pharmaceutical Care Guidelines'r' ("Omnicare Guidelines'r'"). We believe the Omnicare Guidelines'r' is the first drug formulary ranking drugs by disease state according to their clinical effectiveness independent of their cost, specifically designed for the elderly residing in long-term care institutions and the community. The Omnicare Guidelines'r' ranks drugs used for specific diseases as preferred, acceptable or unacceptable based solely on their disease-specific clinical effectiveness in treating the elderly. The formulary takes into account such factors as pharmacology, safety and toxicity, efficacy, drug administration, quality of life and other considerations specific to the frail elderly population residing in facilities and for those living independently. The clinical evaluations and rankings are developed exclusively for us by the University of the Sciences in Philadelphia (formerly the Philadelphia College of Pharmacy), an academic institution recognized for its expertise in geriatric long-term care. In addition, the Omnicare Guidelines'r' provides relative cost information comparing the prices of the drugs to patients, their insurers or other payors of the pharmacy bill. As the Omnicare Guidelines'r' focuses on health benefits, rather than solely on cost, we believe that use of the Omnicare Guidelines'r' assists physicians in making the best clinical choices of drug therapy for the patient at the lowest cost to the payor of the pharmacy bill. Accordingly, we believe that the development of and compliance with the Omnicare Guidelines'r' is important in lowering costs for SNFs operating under the federal government's Prospective Payment System ("PPS") as well as state Medicaid programs, managed care and other payors, including residents or their families. The Omnicare Guidelines'r' is extensively reviewed and updated at least annually by the University of Sciences in Philadelphia, taking into account, among other factors, the latest advances as documented in the medical literature. Health and Outcomes Management We have expanded upon the data in the Omnicare Guidelines'r' to develop health and outcomes management programs targeted at major categories of disease commonly found in the elderly, such as congestive heart failure, stroke prevention, Alzheimer's disease, fracture prevention and pain management. These programs seek to identify patients who may be candidates for more clinically efficacious drug therapy and to work with physicians to optimize pharmaceutical care for these geriatric patients. We believe these programs can enhance the quality of care of elderly patients while reducing costs to the healthcare system which arise from the adverse outcomes of sub-optimal or inappropriate drug therapy. Outcomes-Based Algorithm Technology Combining data provided by our proprietary systems, the Omnicare Guidelines'r' and health management programs, our pharmacists seek to determine the best clinical and most cost-effective drug therapies and make recommendations for the most appropriate pharmaceutical treatment. 6 Since late 1997, we have augmented their efforts with the development of proprietary, computerized, data-base driven technology that electronically screens and identifies patients at risk for particular diseases and assists in determining treatment protocols. This system combines pharmaceutical, clinical and care planning data, and screens the data utilizing algorithms derived from medical best practice standards, allowing our pharmacists to make recommendations to improve the effectiveness of drug therapy in seniors, including identifying potentially underdiagnosed and undertreated conditions. Pharmaceutical Case Management Combining our clinical resources, including the Omnicare Guidelines'r', health and outcomes management programs and our comprehensive database of medical and pharmacy data, we have begun to provide pharmaceutical case management services to community dwelling retirees, employees and dependents who receive drug benefits under employer-sponsored healthcare programs. Because seniors living independently are often under the care of multiple practitioners with no coordination of prescribing, this population is highly susceptible to drug-related problems. Omnicare Senior Health Outcomes'r' addresses this need through programs designed to reduce unnecessary and inappropriate drug use, to add necessary drug therapy according to current practice standards for certain at-risk groups and to make therapeutic interventions in accordance with the Omnicare Guidelines'r' and health management programs. These services are provided on behalf of large corporate employers sponsoring healthcare benefits, including prescription drug benefits, that seek to protect the safety and quality of healthcare for their retirees, employees and dependents while containing or reducing their costs. Ancillary Services We provide the following ancillary products and services: Infusion Therapy Products and Services. With cost containment pressures in healthcare, SNFs and nursing facilities ("NFs") are increasingly called upon to treat patients requiring a high degree of medical care and who would otherwise be treated in the more costly hospital environment. We provide intravenous, or infusion, therapy products and services for these client facilities and, to a lesser extent, hospice and home care patients. Infusion therapy consists of the product (a nutrient, antibiotic, chemotherapy or other drugs in solution) and the intravenous administration of the product. We prepare the product to be administered using proper equipment in an aseptic environment and then deliver the product to the nursing home for administration by the nursing staff. Proper administration of intravenous ("IV") drug therapy requires a highly trained nursing staff. Upon request, our consultant pharmacists and nurse consultants provide an education and certification program on IV therapy to assure proper staff training and compliance with regulatory requirements in client facilities offering an IV therapy program. By providing an infusion therapy program, we enable our client SNFs and NFs to admit and retain patients who otherwise would need to be cared for in a hospital or another type of acute-care facility. The most common infusion therapies we provide are total parenteral nutrition, which 7 provides nutrients intravenously to patients with chronic digestive or gastro-intestinal problems, antibiotic therapy, chemotherapy, pain management and hydration. Wholesale Medical Supplies/Medicare Part B Billing. We distribute disposable medical supplies, including urological, ostomy, nutritional support and wound care products and other disposables needed in the nursing home environment. In addition, we provide direct Medicare billing services for certain of these product lines for patients eligible under the Medicare Part B program. As part of this service, we determine patient eligibility, obtain certifications, order products and maintain inventory on behalf of the nursing facility. We also contract to act as billing agent for certain nursing homes that supply these products directly to the patient. Other Services. We provide clinical care plan and financial information systems to long-term care facilities to assist them in preparing and monitoring plans of care for their residents as well as in predicting and tracking revenues and costs. We also offer operational software for long-term care pharmacies. We offer respiratory therapy products, durable medical equipment and specialty pharmacy services along with pharmacy benefit management and mail order pharmacy services. We provide comprehensive dialysis services on site in certain client long-term care facilities for residents with kidney failure or end-stage renal disease. Such services eliminate the need for transport of residents to off-site clinics for treatment, reducing trauma for the resident and costs for our client facilities. We continue to review the expansion of these as well as other products and services that may further enhance the Company's ability or that of its clients to provide quality healthcare services for their patients in a cost- effective manner. Contract Research Organization Our CRO segment provides comprehensive product development services globally to client companies in the pharmaceutical, biotechnology, medical devices and diagnostics industries. CRO Services provides support for the design of regulatory strategy and clinical development (phases I through IV) of pharmaceuticals by offering comprehensive and fully integrated project management, clinical monitoring, quality assurance, data management, statistical analysis, medical writing and regulatory support for our clients' drug development programs. As of December 31, 2003, including the conduct of business in the United States, the CRO Services segment operated in 29 countries. We believe that our involvement in the CRO business is a logical adjunct to our core institutional pharmacy business and will serve to leverage our assets and strengths, including our access to a large geriatric population and our ability to appropriately collect data for health and outcomes management. We believe such assets and strengths can be of value in developing new drugs targeted at diseases of the elderly and in meeting the Food and Drug Administration's geriatric dosing and labeling requirements for all prescription drugs provided to the elderly, as well as in documenting health outcomes to payors and plan sponsors in a managed care environment. Product and Market Development Our Pharmacy Services and CRO Services businesses engage in a continuing program for the development of new services and for marketing these services. While new service and new market development are important factors for the growth of these businesses, we do not expect that any 8 new service or marketing efforts, including those in the developmental stage, will require the investment of a significant portion of our assets. Materials/Supply We purchase pharmaceuticals through a wholesale distributor with whom we have a prime vendor contract, at prices based primarily upon contracts negotiated by us directly with pharmaceutical manufacturers. We also are a member of industry buying groups which contract with manufacturers for discounted prices. We have numerous sources of supply available to us and have not experienced any difficulty in obtaining pharmaceuticals or other products and supplies used in the conduct of our business. Patents, Trademarks, and Licenses Our business operations are not dependent upon any material patents, trademarks or licenses. Seasonality Our business operations are not significantly impacted by seasonality. Inventories We seek to maintain adequate on site inventories of pharmaceuticals and supplies to ensure prompt delivery service to our customers. Our primary wholesale distributor also maintains local warehousing in most major geographic markets in which we operate. Competition By its nature, the long-term care pharmacy business is highly regionalized and, within a given geographic region of operations, highly competitive. We are the nation's largest provider of pharmaceuticals and related pharmacy services to long-term care institutions such as SNFs, NFs, ALFs, retirement centers and other institutional healthcare facilities. In the geographic regions we serve, we compete with local, regional and other national institutional pharmacies, pharmacies owned by long-term care facilities and numerous retail pharmacies. We compete in these markets on the basis of quality, cost-effectiveness and the increasingly comprehensive and specialized nature of our services, along with the clinical expertise, pharmaceutical technology and professional support we offer. Our CRO business competes against other full-service CROs and client internal resources. The CRO industry is highly fragmented with a number of full-service CROs and many small, limited-service providers, some of which serve only local markets. Clients choose a CRO based on, among other reasons, reputation, references from existing clients, the client's relationship with the CRO, the CRO's experience with the particular type of project and/or therapeutic area of clinical development, the CRO's ability to add value to the client's development plan, the CRO's financial stability and the CRO's ability to provide the full range of services on a global basis as required by the client. We believe that we compete favorably in these respects. 9 Backlog Backlog is not a relevant factor in our Pharmacy Services segment since this segment's products and services are sold promptly on an as ordered basis. Our CRO Services segment reports backlog based on anticipated net revenue for services or projects, yet to be provided, that have been authorized by the customer through signed contracts, letter agreements and certain verbal commitments. Once work begins on a project, net revenue is recognized as the work is completed. Using this method of reporting backlog, at December 31, 2003, backlog was approximately $182.8 million, as compared with approximately $181.6 million at December 31, 2002. Backlog may not be a consistent indicator of future results of our CRO Services segment because it can be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years. Additionally, projects may be delayed or terminated by the customer, or delayed by regulatory authorities. Moreover, the scope of work can be increased or decreased during the course of a project. Customers At December 31, 2003, our Pharmacy Services segment served long-term care facilities comprising approximately 1,003,000 beds in 47 states and the District of Columbia. Our CRO Services segment operates in 29 countries and serves a broad range of clients, including many of the major multi-national pharmaceutical and biotechnology companies, as well as smaller companies in the pharmaceutical and biotechnology industries. No single customer comprised more than 10% of consolidated revenues in 2003 or 2002. Government Regulation Institutional pharmacies, as well as the long-term care facilities they serve, are subject to extensive federal, state and local regulation. These regulations cover required qualifications, day-to-day operations, reimbursement and the documentation of activities. In addition, our CRO Services are subject to substantial regulation, both domestically and abroad. We continuously monitor the effects of regulatory activity on our operations. Licensure, Certification and Regulation. States generally require that companies operating a pharmacy within the state be licensed by the state board of pharmacy. At December 31, 2003, we had pharmacy licenses, or pending applications, for each pharmacy we operate. In addition, at December 31, 2003, we delivered prescription products from our licensed pharmacies to four states, and the District of Columbia, in which we do not operate a pharmacy. These states regulate out-of-state pharmacies, however, as a condition to the delivery of prescription products to patients in these states. Our pharmacies hold the requisite licenses applicable in these states. In addition, our pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances. 10 Client long-term care facilities are also separately required to be licensed in the states in which they operate and, if serving Medicaid or Medicare patients, must be certified to be in compliance with applicable program participation requirements. Client facilities are also subject to the nursing home reforms of the Omnibus Budget Reconciliation Act of 1987 ("OBRA of 1987"), as amended, which imposed strict compliance standards relating to quality of care for nursing home operations, including vastly increased documentation and reporting requirements. In addition, pharmacists, nurses and other healthcare professionals who provide services on our behalf are in most cases required to obtain and maintain professional licenses and are subject to state regulation regarding professional standards of conduct. Federal and State Laws Affecting the Repackaging, Labeling and Interstate Shipping of Drugs. Federal and state laws impose certain repackaging, labeling and package insert requirements on pharmacies that repackage drugs for distribution beyond the regular practice of dispensing or selling drugs directly to patients at retail outlets. A drug repackager must register with the Food and Drug Administration ("FDA") as a manufacturing establishment, and is subject to FDA inspection for compliance with relevant good manufacturing practices ("GMP"). We hold all required registrations and licenses, and we believe our repackaging operations are in compliance with applicable federal and state GMP requirements. In addition, we believe we comply with all relevant requirements of the Prescription Drug Marketing Act for the transfer and shipment of pharmaceuticals. State Laws Affecting Access to Services. Some states have enacted "freedom of choice" or "any willing provider" requirements as part of their state Medicaid programs or in separate legislation. These laws and regulations may prohibit a third-party payor from restricting the pharmacies from which their participants may purchase pharmaceuticals. Similarly, these laws may preclude a nursing facility from requiring their patients to purchase pharmacy or other ancillary medical services or supplies from particular providers that deal with the nursing home. Limitations such as these may increase the competition which we face in providing services to nursing facility residents. Medicare and Medicaid. The nursing home pharmacy business has long operated under regulatory and cost containment pressures from state and federal legislation primarily affecting Medicaid and, to a lesser extent, Medicare. 11 As is the case for nursing home services generally, we receive reimbursement from the Medicaid and Medicare programs, directly from individual residents (private pay), long-term care facilities and from other payors such as third-party insurers. We believe that our reimbursement mix is in line with nursing home expenditures nationally. The table below represents our approximated payor mix for the last three years:
2003 2002 2001 ---- ---- ---- State Medicaid programs 47% 46% 44% Private pay and long-term care facilities(a) 45% 44% 44% Federal Medicare programs(b) 2% 2% 3% Other private sources(c) 6% 8% 9% --- --- --- Totals 100% 100% 100% === === ===
(a) Includes payments from skilled nursing facilities on behalf of their federal Medicare program-eligible residents. (b) Includes direct billing for medical supplies. (c) Includes our CRO revenues. For those patients who are not covered by government-sponsored programs or private insurance, we generally directly bill the patient or the patient's responsible party on a monthly basis. Depending upon local market practices, we may alternatively bill private patients through the nursing facility. Pricing for private pay patients is based on prevailing regional market rates or "usual and customary" charges. The Medicaid program is a cooperative federal-state program designed to enable states to provide medical assistance to aged, blind, or disabled individuals, or members of families with dependent children whose income and resources are insufficient to meet the costs of necessary medical services. State participation in the Medicaid program is voluntary. To become eligible to receive federal funds, a state must submit a Medicaid "state plan" to the Secretary of the Department of Health and Human Services ("HHS") for approval. The federal Medicaid statute specifies a variety of requirements which the state plan must meet, including requirements relating to eligibility, coverage of services, payment and administration. We have provider agreements to participate in state Medicaid programs. Federal law and regulations contain a variety of requirements relating to the furnishing of prescription drugs under Medicaid. First, states are given authority, subject to certain standards, to limit or specify conditions for the coverage of particular drugs. Second, federal Medicaid law establishes standards affecting pharmacy practice. These standards include general requirements relating to patient counseling and drug utilization review and more specific standards for SNFs and NFs relating to drug regimen reviews for Medicaid patients in such facilities. Regulations clarify that, under federal law, a pharmacy is not required to meet the general requirements for drugs dispensed to nursing facility residents if the nursing facility complies with the drug regimen review standards. However, the regulations indicate that states may nevertheless require pharmacies to comply with the general requirements, regardless of whether the nursing facility satisfies the drug regimen review requirement, and the states in which we operate currently do require our pharmacies to comply with these general standards. Third, federal regulations impose certain requirements relating to reimbursement for prescription drugs furnished to Medicaid patients. 12 Among other things, regulations establish "upper limits" on payment levels. In addition to requirements imposed by federal law, states have substantial discretion to determine administrative, coverage, eligibility and payment policies under their state Medicaid programs that may affect our operations. The Medicare program is a federally funded and administered health insurance program for individuals age 65 and over, or who are disabled. The Medicare program currently consists of three parts: Part A, which covers, among other things, inpatient hospital, skilled nursing facility, home healthcare and certain other types of healthcare services; Medicare Part B, which covers physicians' services, outpatient services, items and services provided by medical suppliers, and a limited number of specifically designated prescription drugs; and Medicare Part C, established by The Balanced Budget Act of 1997 ("BBA"), which generally allows beneficiaries to enroll in additional types of managed care programs beyond the traditional Medicare fee for service program. Part C has generally been referred to as "Medicare+Choice" and is now known as "Medicare Advantage." Many Medicare beneficiaries are being served through such Medicare+Choice/Medicare Advantage organizations. In addition to the limited Medicare coverage for specified products described above, some of these payor organizations providing healthcare benefits to Medicare beneficiaries offer expanded drug coverage. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ("MMA") established a new Medicare Part D, which will provide a new prescription drug benefit starting January 1, 2006. The Medicare program establishes requirements for participation of providers and suppliers in the Medicare program. Pharmacies are not subject to such certification requirements. SNFs and suppliers of medical equipment and supplies, however, including our supplier operations, are subject to specified standards. Failure to comply with these requirements and standards may adversely affect an entity's ability to participate in the Medicare program and receive reimbursement for services provided to Medicare beneficiaries. Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these government-sponsored programs. These audits and inquiries, as well as our own internal compliance program, from time to time have identified overpayment and other billing errors resulting in repayment or self-reporting. We believe that our billing practices materially comply with applicable state and federal requirements. However, the requirements may be interpreted in the future in a manner inconsistent with our interpretation and application. The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, executive orders and freezes and funding reductions, all of which may adversely affect our business. Payments for pharmaceutical supplies and services under the Medicare and Medicaid programs may not continue to be based on current methodologies or remain comparable to present levels. In this regard, we may be subject to rate reductions as a result of federal budgetary or other legislation related to the Medicare and Medicaid programs. In addition, various state Medicaid programs periodically experience budgetary shortfalls which may result in Medicaid payment reductions and delays in payment to us. 13 In addition, the failure, even if inadvertent, of our and/or our client institutions to comply with applicable reimbursement regulations could adversely affect our business. Additionally, changes in reimbursement programs or in regulations related thereto, such as reductions in the allowable reimbursement levels, modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicaid and Medicare expenditures, could adversely affect our business. Referral Restrictions. We have to comply with federal and state laws which govern financial and other arrangements between healthcare providers. These laws include the federal anti-kickback statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing of any item or service for which payment may be made in whole or in part under federal healthcare programs. We are also subject to the federal physician self-referral statute, which prohibits physicians from referring Medicare and Medicaid patients for certain "designated health services," including outpatient prescription drugs, durable medical equipment, and enteral supplies and equipment to an entity if the referring physician (or a member of the physician's immediate family) has a "financial relationship," through ownership or compensation with the entity. Many states have enacted similar statutes which are not necessarily limited to items and services for which payment is made by federal healthcare programs. Violations of these laws may result in fines, imprisonment, denial of payment for services, and exclusion from the federal programs and/or other state-funded programs. Other provisions in the Social Security Act and in other federal and state laws authorize the imposition of penalties, including criminal and civil fines and exclusions from participation in Medicare and Medicaid, for false claims, improper billing and other offenses. In addition, a number of states have undertaken enforcement actions against pharmaceutical manufacturers involving pharmaceutical marketing programs, including programs containing incentives to pharmacists to dispense one particular product rather than another. These enforcement actions arose under state consumer protection laws which generally prohibit false advertising, deceptive trade practices, and the like. We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws. These laws may, however, be interpreted in the future in a manner inconsistent with our interpretation and application. Healthcare Reform and Federal Budget Legislation. In recent years, federal legislation has resulted in major changes in the healthcare system, which significantly affected healthcare providers, either nationally or at the state level. The BBA, signed into law on August 5, 1997, sought to achieve a balanced federal budget by, among other things, reducing federal spending on the Medicare and Medicaid programs. With respect to Medicare, the law mandated establishment of a PPS for SNFs under which facilities are paid a federal per diem rate for virtually all covered SNF services, including ancillary services such as pharmacy. Payment is determined by one of 44 resource utilization group ("RUG") categories. PPS was implemented for cost reporting periods beginning 14 on or after July 1, 1998. The BBA also imposed numerous other cost savings measures affecting Medicare SNF services. The Medicare, Medicaid, SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA") sought to mitigate the impact of the reimbursement cuts resulting from the BBA. While certain of the payment increases mandated by these two laws expired October 1, 2002, SNFs continue to benefit from a BBRA provision (subsequently modified by BIPA) that temporarily increases the PPS per diem rates for certain high-acuity patients, including medically-complex patients with generally higher pharmacy costs, pending revisions to the PPS. The increases will continue until the Centers for Medicare & Medicaid Services ("CMS"), formerly the Health Care Financing Administration, implements a refined RUG system that better accounts for medically-complex patients. The Secretary of HHS did not implement such refinements in fiscal year 2003 or fiscal year 2004, and the Bush Administration has indicated that the refinements will not be implemented in fiscal year 2005. The revised rates may be more or less than the temporary statutory increases. The BBRA also provided for a 4% increase in payments otherwise determined under the BBA for all patient acuity categories for fiscal years 2001 and 2002. In addition, BIPA increased payment for the nursing component of each RUG category by 16.66% for services furnished between April 1, 2001 and October 1, 2002, and increased payment rates by 3.16% for all patients for fiscal year 2001. We believe these provisions of the BBRA and BIPA improved the financial condition of SNFs and provided incentives to increase occupancy and Medicare admissions, particularly among the more acutely ill. Moreover, BIPA further refined the consolidated billing requirements enacted under the BBA. Specifically, effective January 1, 2001, the law limits consolidated billing requirements to items and services furnished to SNF residents in a Medicare Part A covered stay and to therapy services covered under Part B. In other words, for residents not covered under a Part A stay, SNFs may choose to bill for non-therapy Part B services and supplies, or they may elect to have suppliers continue to bill Medicare directly for these services. As noted, certain payment increases in Medicare reimbursement for SNFs provided under the BBRA and BIPA expired on October 1, 2002 with no further action taken by Congress to date. The impact of these expirations on the Company's customers did not result in a significant impact on Omnicare in 2002 or 2003. Moreover, CMS published a final rule on August 4, 2003 adopting a 3.0% market basket index in SNF PPS rates for fiscal year 2004, which began October 1, 2003. In addition, the rule increased fiscal year 2004 rates by an additional 3.26% to reflect cumulative forecast errors since the start of the SNF PPS on July 1, 1998. Together, CMS estimates that these adjustments will result in an estimated $850 million increase in Medicare payments to SNFs in fiscal year 2004. The MMA includes a major expansion of the Medicare prescription drug benefit under a new Medicare Part D, which goes into effect on January 1, 2006. Part D benefits will be offered through stand-alone prescription drug plans or through Medicare managed care plans (now called Medicare Advantage plans). Under the MMA, Medicare beneficiaries may enroll in prescription drug plans offered by private entities, which will provide coverage of outpatient prescription drugs (subject to various co-payments, deductibles and coverage limitations). Additionally, 15 Medicare beneficiaries who are also entitled to full benefits under a state Medicaid program (so-called "dual eligibles") will receive drug coverage under the new federal benefit rather than the state Medicaid program, including nursing home residents served by the Company whose drug costs are currently covered by Medicaid. Further, federal subsidies will be provided to companies offering prescription drug coverage to retirees if such coverage meets certain requirements. Implementation of the new Medicare benefit under the MMA will require implementing regulations by CMS, including rules and standards with respect to private entities' applications to offer such benefit as well as access for enrollees residing in long-term care facilities. The legislation's impact on the Company will also depend on Medicare beneficiaries' response to the Part D drug benefit plans offered. In addition, the MMA requires the Secretary of the Department of HHS to conduct a study on current standards of practice for pharmacy services provided to patients in long-term care settings. This study is to assess the standards of practice, evaluate the impact of those standards with respect to patient safety, reduction of medication errors and quality of care. The Secretary is to report to Congress on the findings of the study, including a description of the Secretary's plans to implement the MMA in a manner consistent with applicable federal and state laws designed to protect the safety and quality of care of nursing facility patients, and recommendations regarding necessary actions and appropriate reimbursement to ensure the provision of prescription drugs to Medicare beneficiaries in nursing facilities consistent with existing patient safety and quality of care standards. The MMA also includes provisions that will institute administrative reforms designed to improve Medicare program operations. It is uncertain at this time the impact that the MMA's legislative reforms ultimately will have on the Company. Until the Part D benefit goes into effect, Medicare beneficiaries can receive assistance with their outpatient prescription drug costs beginning in June 2004 through a new prescription drug discount card program. The discount program, which will provide enrollees with access to negotiated discounted prices for prescription drugs, will be offered through card sponsors whose programs have been reviewed and approved by the Secretary of HHS. In addition, certain low income seniors can receive a transitional assistance benefit of $600 annually beginning in June 2004. Moreover, for several years, the federal government has examined the appropriateness of the "average wholesale price" ("AWP") as a basis for reimbursement of outpatient prescription drugs under Part B of the Medicare program and certain state Medicaid programs. AWP is an industry term that typically is understood to represent a suggested resale price for wholesale sales to pharmacies. The MMA reforms the Medicare Part B prescription drug payment methodology. With certain exceptions, most Part B drugs will be reimbursed at 85 percent of the April 1, 2003 AWP effective January 1, 2004, and some products are facing even lower reimbursement levels. Beginning in 2005, the majority of drugs under Medicare Part B will be reimbursed under either: (1) an "average sales price" methodology intended to more closely reflect actual drug acquisition costs; or (2) a "competitive acquisition program," whereby a physician would obtain products from a specialty pharmacy or distributor organization selected pursuant to competitive procedures; the physician would only bill for his or her professional services and the specialty pharmacy or distributor would bill Medicare directly at a negotiated rate. The Company's revenues for drugs dispensed under Medicare Part B are not significant in comparison to total revenues. Discounted AWP plus a dispensing fee is also the basis for many state Medicaid programs' reimbursement of drugs to pharmacy providers for Medicaid beneficiaries generally 16 as well as under certain private reimbursement programs. If other government or private health insurance programs discontinue or modify the use of AWP or otherwise implement payment methods that reduce the reimbursement for drugs and biologicals, it could adversely affect the Company's level of reimbursement. With respect to Medicaid, the BBA repealed the "Boren Amendment" federal payment standard for Medicaid payments to Medicaid NFs effective October 1, 1997, giving states greater latitude in setting payment rates for such facilities. The law also granted states greater flexibility to establish Medicaid managed care programs without the need to obtain a federal waiver. Although these waiver programs generally exempt institutional care, including NFs and institutional pharmacy services, some states do use managed care principles in their long-term care programs. Moreover, no assurances can be given that additional Medicaid programs ultimately will not change the reimbursement system for long-term care, including pharmacy services, from fee-for-service to managed care negotiated or capitated rates. Our operations have not been adversely affected in states with managed care programs in effect. Some states, however, are facing budget shortfalls, and most states are taking steps to implement cost controls within their Medicaid programs. There can be no assurance that future changes in Medicaid payments to pharmacies, NFs or managed care systems will not have an adverse impact on our business. It is uncertain at this time what additional healthcare reform initiatives, if any, will be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretation of governmental policies, or other changes affecting the healthcare system. There can be no assurance that future healthcare or budget legislation or other changes will not have an adverse effect on our business. Contract Research Organization Services. The clinical services performed by our CRO Services are subject to various regulatory requirements designed to ensure the quality and integrity of the data produced as a result of these services. The industry standard for conducting clinical testing is embodied in the good clinical practice ("GCP") and Investigational New Drugs ("IND") regulations administered by the FDA. Research conducted at institutions supported by funds from the National Institutes of Health ("NIH") must also comply with multiple project assurance agreements and guidelines administered by NIH and the HHS Office of Research Protection. The requirements for facilities engaging in pharmaceutical, clinical trial, supply preparation, labeling and distribution are set forth in the good manufacturing practices ("GMP") regulations and in GCP guidelines. The United States and European Union ("EU") also recognize the Guidelines for Good Clinical Practice adopted by the International Conference on Harmonisation ("ICH"). GCP, IND and GMP regulations, and ICH guidelines, have been mandated by the FDA and the European Medicines Evaluation Agency (the "EMEA") and have been adopted by similar regulatory authorities in other countries. GCP, IND and GMP regulations, and ICH guidelines, stipulate requirements for facilities, equipment, supplies and personnel engaged in the conduct of studies to which these regulations apply. The regulations require that written, standard operating procedures ("SOPs") are followed during the conduct of studies and for the recording, reporting and retention of study data and records. To help assure compliance, our CRO Services has a worldwide staff of experienced quality assurance professionals which monitor ongoing compliance with these regulations and guidelines by auditing 17 study data and conducting regular inspections of testing procedures and facilities. The FDA and other regulatory authorities require that study results and data submitted to such authorities are based on studies conducted in accordance with GCP and IND provisions. These provisions include: o complying with specific regulations governing the selection of qualified investigators; o obtaining specific written commitments from the investigators; o disclosure of financial conflicts of interest; o verifying that patient informed consent is obtained; o instructing investigators to maintain records and reports; o verifying drug or device accountability; and o permitting appropriate governmental authorities access to data and study sites for their review and inspection. Records for clinical studies must be maintained for specific periods for inspection by the FDA, EU or other authorities during audits. Non-compliance with GCP or IND requirements can result in the disqualification of data collected during the clinical trial and may lead to debarment of an investigator or CRO if fraud is detected. CRO Services' SOPs related to clinical studies are written in accordance with regulations and guidelines appropriate to a global standard with regional variations in the regions where they will be used, thus helping to ensure compliance with GCP. CRO Services also generally complies with a reasonable interpretation of the ICH Guideline for Good Clinical Practice, EU GCP regulations and U.S. GCP regulations for North America. In addition, we believe that our CRO Services is in compliance with the federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and our CRO Services employees have been trained to comply with this legislation. Although we believe that we are in compliance in all material respects with federal, state and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions. Health Information Practices. The Company, along with the healthcare industry in general, is impacted by HIPAA, which mandates, among other things, the adoption of standards for the exchange of electronic health information in an effort to enhance the efficiency and simplify the administration of the healthcare system. In addition, HIPAA requires HHS to adopt standards for electronic transactions and code sets; unique identifiers for providers, employers, health plans and individuals; security and electronic signatures; privacy; and enforcement. While HIPAA ultimately is designed to reduce administrative expenses within the healthcare system, the law likely will initially require significant, and possibly costly, changes for the industry. Compliance with the Electronic Healthcare Transactions and Code Sets was required by October 16, 2003, as long as HIPAA covered entities filed for a compliance extension. The Company filed for such an extension. However, on September 23, 2003, CMS acknowledged that not all healthcare providers were capable of submitting HIPAA-compliant claims transactions, and therefore adopted a contingency plan for Medicare that would permit the continued use of non-compliant electronic transactions in order to avoid disruption of providers' cash flow due to rejection of 18 non-HIPAA compliant claims. The contingency plan will continue in effect until terminated by CMS. CMS also encouraged providers to work with other third-party payors to determine the state of readiness and the willingness of such other plans to accept non-HIPAA compliant transactions after October 16, 2003. Most health plans and healthcare providers such as the Company were required to comply with the HIPAA privacy standards by April 14, 2003. On February 20, 2003, HHS published standards for the security of electronic health information. The Company must comply with the requirements of the security standards no later than April 20, 2005. Most recently, CMS published a rule in January 2004 announcing the adoption of the National Provider Identifier as the standard unique health identifier for healthcare providers to use in filing and processing healthcare claims and other transactions. The rule is effective May 23, 2005, with a compliance date of May 23, 2007. The Company adheres to the relevant organizational structure provisions of HIPAA's privacy regulation in order that the Company's business units and divisions may permissibly use and disclose protected health information with each other. Omnicare's Employee Retirement Income Security Act health benefits plan is a HIPAA covered entity. As required by the statute, Omnicare has appointed privacy and security officers. The privacy regulations require healthcare providers like Omnicare, to provide a notice describing patient's privacy rights and our privacy practices to all of the patients to whom we provide healthcare products or services. In addition to HIPAA, the Company works to ensure that it adheres to state privacy laws and other state privacy requirements not preempted by HIPAA, including those which furnish greater privacy protection for the individual than HIPAA. Although we believe our contract arrangements with healthcare payors and providers and our business practices are materially in compliance with applicable federal and state electronic transmission, privacy and security laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions. Compliance Program. The Office of Inspector General ("OIG") has issued guidance to various sectors of the healthcare industry to help providers design effective voluntary compliance programs to prevent fraud, waste and abuse in healthcare programs, including Medicare and Medicaid. In addition, the Company and its operating units are subject in the ordinary course of business to audit, compliance, administrative and investigatory reviews by federal and state authorities covering various aspects of its business. In 1998, Omnicare voluntarily adopted a compliance program to assist us in complying with applicable government regulations, and the Company continues to maintain and support its compliance program. Environmental Matters In operating our facilities, historically we have not encountered any major difficulties in effecting compliance with applicable pollution control laws. No material capital expenditures for environmental control facilities are expected. While we cannot predict the effect which any future legislation, regulations, or interpretations may have upon our operations, we do not anticipate any changes that would have a material adverse impact to Omnicare. 19 Employees At December 31, 2003, we employed approximately 12,100 persons (including 5,200 part-time employees), of which approximately 11,700 are located within, and 400 outside of, the United States. Available Information We make available free of charge on or through our Corporate Web site, at http://www.omnicare.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission ("SEC"). Additionally, the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. Information regarding operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. Information that we file with the SEC is also available at the SEC's Web site at http://www.sec.gov. 20 ITEM 2 - PROPERTIES We have offices, distribution centers and other key operating facilities in various locations in and outside the United States. As of December 31, 2003, we operated a total of 208 facilities, six of which we owned. A list of the 70 more significant facilities [defined as having at least 12,500 square feet ("sq. ft.")] we operated as of December 31, 2003 follows, grouped by segment and summarized by geographic location. The owned properties are held in fee and are not subject to any material encumbrance. We consider all of these facilities to be in good operating condition and generally to be adequate for present and anticipated needs.
Leased Area Owned Area ---------------------------- Location Type (sq. ft.) (sq. ft.) Expiration Date - ----------------------------- ------------------------------- ---------- --------- ---------------- Pharmacy Services: Livonia, Michigan Offices and Distribution Center -- 50,438 May 31, 2007 Des Plaines, Illinois Offices and Distribution Center -- 47,971 May 31, 2008 Indianapolis, Indiana Warehouse -- 42,651 March 30, 2007 Milwaukee, Wisconsin Offices and Distribution Center -- 41,816 March 31, 2009 Perrysburg, Ohio Offices and Distribution Center 40,500 -- -- Indianapolis, Indiana Offices and Distribution Center -- 39,740 May 1, 2014 Kirkland, Washington Offices and Distribution Center -- 38,689 April 14, 2008 Cheshire, Connecticut Offices and Distribution Center -- 38,400 June 30, 2010 Florissant, Missouri Offices and Distribution Center 38,014 -- -- Louisville, Kentucky Offices and Distribution Center -- 37,400 April 30, 2008 Decatur, Illinois Offices and Distribution Center 21,070 15,528 March 1, 2007 Kansas City, Missouri Offices and Distribution Center -- 36,048 October 21, 2009 Toledo, Ohio Distribution Center -- 36,039 July 31, 2007
21
Leased Area Owned Area ------------------------------ Location Type (sq. ft.) (sq. ft.) Expiration Date - ----------------------------- ------------------------------- ---------- --------- ------------------ Eastlake, Ohio Offices and Distribution Center -- 35,066 January 31, 2006 Glasgow, Kentucky Offices and Distribution Center 33,070 -- -- Hunt Valley, Maryland Offices and Distribution Center -- 30,600 January 31, 2007 Rockford, Illinois Offices and Distribution Center -- 29,100 November 30, 2009 Salt Lake City, Utah Offices and Distribution Center -- 28,400 January 31, 2009 Crystal, Minnesota Offices and Distribution Center -- 28,255 January 31, 2008 Portland, Oregon Offices and Distribution Center -- 28,150 April 30, 2008 San Diego, California Offices and Distribution Center -- 26,680 December 1, 2006 Des Plaines, Illinois Offices and Distribution Center -- 26,673 May 31, 2008 Plainview, New York Offices and Distribution Center -- 25,500 June 30, 2005 Englewood, Ohio Offices and Distribution Center -- 25,000 Month-to-Month Sharon, Pennsylvania Offices and Distribution Center -- 25,000 April 1, 2004 Chestnut Ridge, New York Offices and Distribution Center -- 24,429 May 31, 2009 Cincinnati, Ohio Offices and Distribution Center -- 24,375 September 30, 2009 Oklahoma City, Oklahoma Offices and Distribution Center -- 24,000 Month-to-Month Hickory, North Carolina Offices and Distribution Center 24,000 -- --
22
Leased Area Owned Area ----------------------------- Location Type (sq. ft.) (sq. ft.) Expiration Date - ----------------------------- ------------------------------- ---------- --------- ----------------- Griffith, Indiana Offices and Distribution Center -- 23,600 April 1, 2012 Wadsworth, Ohio Offices and Distribution Center -- 22,960 June 30, 2006 Pittsburgh, Pennsylvania Offices and Distribution Center -- 22,677 January 31, 2009 Reno, Nevada Offices and Distribution Center -- 22,593 June 30, 2008 Londondery, New Hampshire Offices and Distribution Center -- 22,400 May 31, 2011 Mentor, Ohio Offices and Distribution Center -- 22,364 August 1, 2007 Milford, Ohio Offices -- 22,000 December 31, 2007 Dublin, Ohio Offices -- 21,468 Month-to-Month Malta, New York Offices and Distribution Center -- 20,930 October 31, 2004 Greensburg, Pennsylvania Offices and Distribution Center -- 20,000 February 3, 2006 Henderson, Kentucky Offices and Distribution Center -- 20,000 December 31, 2007 St. Petersburg, Florida Offices and Distribution Center -- 19,835 April 30, 2007 Spartanburg, South Carolina Offices and Distribution Center 9,500 10,000 Month-to-Month Longwood, Florida Offices and Distribution Center -- 19,200 Month-to-Month Rochester, New York Offices and Distribution Center -- 18,675 June 30, 2006 Boca Raton, Florida Offices and Distribution Center -- 18,661 December 31, 2007 Springfield, Ohio Offices and Distribution Center -- 18,000 December 31, 2004
23
Leased Area Owned Area ------------------------------ Location Type (sq. ft.) (sq. ft.) Expiration Date - ----------------------------- ------------------------------- ---------- --------- ------------------ Peabody, Massachusetts Offices and Distribution Center -- 17,500 April 30, 2007 Naperville, Illinois Offices -- 17,400 October 31, 2004 Springfield, Missouri Offices and Distribution Center -- 17,000 April 30, 2004 Pompton Plains, New Jersey Offices and Distribution Center -- 16,041 August 5, 2004 Allentown, Pennsylvania Offices and Distribution Center -- 15,475 March 31, 2006 West Boylston, Massachusetts Offices and Distribution Center -- 15,000 August 31, 2004 West Seneca, New York Offices and Distribution Center -- 15,000 August 31, 2004 Fort Worth, Texas Offices and Distribution Center -- 14,500 June 30, 2004 Ashland, Kentucky Offices and Distribution Center -- 14,000 Month-to-Month Sioux Falls, South Dakota Offices and Distribution Center -- 13,921 July 31, 2005 Spokane, Washington Offices and Distribution Center -- 13,750 October 31, 2006 Columbus, Ohio Offices and Distribution Center -- 13,600 June 30, 2004 Tyler, Texas Offices and Distribution Center -- 13,482 July 14, 2007 Houston, Texas Offices and Distribution Center -- 13,235 September 30, 2004 Gardiner, Maine Offices and Distribution Center -- 13,000 October 31, 2007 Van Nuys, California Offices and Distribution Center -- 12,555 February 28, 2006
24
Leased Area Owned Area ----------------------------- Location Type (sq. ft.) (sq. ft.) Expiration Date - ----------------------------- ------------------------------- ---------- --------- ----------------- CRO Services: King of Prussia, Pennsylvania Offices -- 150,000 June 30, 2010 Troy, New York Offices -- 28,569 March 31, 2005 Cologne, Germany Offices -- 25,155 June 30, 2005 Chippenham, United Kingdom Offices -- 22,800 June 23, 2016 Schwalbach, Germany Offices -- 19,780 July 31, 2004 Bad Soden, Germany Offices and Laboratories -- 12,712 June 30, 2004 Corporate: Covington, Kentucky Offices -- 42,400 December 31, 2012 Fort Wright, Kentucky Offices -- 14,237 March 31, 2008
25 ITEM 3 - LEGAL PROCEEDINGS There are no pending legal or governmental proceedings to which we are a party or to which any of our property is subject that we believe will have a material adverse effect on us. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 26 ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE COMPANY Our executive officers as of February 29, 2004 are as follows:
First Elected to Name Age Office(1) Present Office - --------------------- --- --------------------------- -------------------- Joel F. Gemunder 64 President and May 20, 1981 Chief Executive Officer(2) Patrick E. Keefe 58 Executive Vice February 5, 1997 President - Operations Timothy E. Bien 53 Senior Vice President - May 20, 1996 Professional Services and Purchasing David W. Froesel, Jr. 52 Senior Vice President March 4, 1996 and Chief Financial Officer Cheryl D. Hodges 51 Senior Vice President February 8, 1994 and Secretary
(1) Executive officers are elected for one-year terms at the annual organizational meeting of the Board of Directors which follows the annual meeting of stockholders. (2) Mr. Gemunder was appointed Chief Executive Officer of the Company on May 21, 2001, having served as the President and a principal executive officer of the Company since 1981. 27 PART II ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock; Holders of Record Our Common Stock is listed on the New York Stock Exchange, and the following table sets forth the ranges of high and low closing prices during each of the calendar quarters of 2003 and 2002.
2003 2002 --------------- --------------- High Low High Low ------ ------ ------ ------ First Quarter $27.21 $23.46 $25.89 $20.85 Second Quarter $33.79 $25.03 $28.35 $23.84 Third Quarter $36.62 $32.89 $25.44 $18.41 Fourth Quarter $41.68 $35.73 $24.22 $19.52
The number of holders of record of our Common Stock on January 31, 2004 was 2,325. This amount does not include stockholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage firms and banks. Dividends On February 5, 2004, the Board of Directors approved a quarterly cash dividend of $0.0225, for an indicated annual rate of $0.09 per common share for 2004, which is consistent with annual dividends paid per common share for the 2003 and 2002 years. It is presently intended that cash dividends on common shares will continue to be paid on a quarterly basis; however, future dividends are necessarily dependent upon our future earnings and financial condition, and other factors not currently determinable. Recent Sales of Unregistered Securities We, as part of our acquisition program, have historically issued our common shares and warrants ("Securities") from time to time in private transactions not registered under the Securities Act of 1933 in connection with the purchase of the assets or stock of businesses acquired. During the quarter and year ended December 31, 2003, one transaction was completed involving 78,668 unregistered Securities. When such Securities are issued, they are issued in reliance on the exemption from registration contained at Section 4(2) of the Securities Act. 28 ITEM 6 - SELECTED FINANCIAL DATA The following table summarizes certain selected financial data, which should be read in conjunction with our Consolidated Financial Statements and related Notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included at Items 8 and 7, respectively, of this Filing. Five-Year Summary of Selected Financial Data Omnicare, Inc. and Subsidiary Companies (In thousands, except per share data)
For the years ended and at December 31, 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA:(a)(b)(c) Total net sales(d) $3,499,174 $2,632,754 $2,183,036 $1,987,839 $1,880,998 ========== ========== ========== ========== ========== Net income $ 194,368 $ 125,906 $ 74,271 $ 48,817 $ 57,721 ========== ========== ========== ========== ========== Earnings per share data: Basic $ 1.97 $ 1.34 $ 0.80 $ 0.53 $ 0.63 ========== ========== ========== ========== ========== Diluted $ 1.93 $ 1.33 $ 0.79 $ 0.53 $ 0.63 ========== ========== ========== ========== ========== Dividends per share $ 0.09 $ 0.09 $ 0.09 $ 0.09 $ 0.09 ========== ========== ========== ========== ========== Weighted average number of common shares outstanding: Basic 98,800 94,168 93,124 92,012 90,999 ========== ========== ========== ========== ========== Diluted 103,243 94,905 93,758 92,012 91,238 ========== ========== ========== ========== ========== BALANCE SHEET DATA:(a) Cash and cash equivalents (including restricted cash) $ 188,127 $ 141,083 $ 171,318 $ 113,907 $ 97,267 Working capital 920,328 704,908 658,321 560,729 430,102 Total assets 3,395,021 2,427,585 2,290,276 2,210,218 2,167,973 Long-term debt (excluding current portion)(e) 1,082,677 720,187 750,669 780,706 736,944 Stockholders' equity(e) 1,676,024 1,275,062 1,149,783 1,068,423 1,028,380 OTHER FINANCIAL DATA:(a) EBITDA(f) $ 440,603 $ 301,849 $ 247,564 $ 204,660 $ 205,669 Net cash flows from operating activities 169,484 159,109 153,087 132,701 101,114 Net cash flows from investing activities (678,049) (152,383) (46,802) (76,116) (203,517) Capital expenditures(g) 17,115 24,648 26,222 32,423 58,749 Net cash flows from financing activities 554,484 (37,966) (49,555) (41,777) 145,502
See the related notes to Five-Year Summary of Selected Financial Data on the following pages. 29 The financial information above should be read in conjunction with the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. (a) Omnicare, Inc. ("Omnicare" or the "Company") has had an active acquisition program in effect since 1989. See Note 2 of the Notes to Consolidated Financial Statements for additional information concerning acquisitions. (b) The following aftertax charges (credits) are included in net income for the years ended December 31 (in thousands):
2003 2002 2001 2000 1999 ------ ------- ------- ------- ------- Call premium and write-off of unamortized debt issuance costs $7,853(1) $ -- $ -- $ -- $ -- Restructuring and other related charges -- 14,381(2) 11,374(2) 17,135 22,698 Other expense -- -- 2,987(3) -- -- Acquisition expenses, pooling-of- interests -- -- -- -- (376) ------ ------- ------- ------- ------- Total $7,853 $14,381 $14,361 $17,135 $22,322 ====== ======= ======= ======= =======
(1) See Note 7 of the Notes to Consolidated Financial Statements. (2) See Note 12 of the Notes to Consolidated Financial Statements. (3) See Note 13 of the Notes to Consolidated Financial Statements. (c) In accordance with the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), Omnicare discontinued amortization of goodwill as of January 1, 2002. Accordingly, no goodwill amortization was recorded during the years ended December 31, 2003 and 2002. The following aftertax goodwill amortization expense amounts are included in net income for the years ended December 31 (in thousands):
2003 2002 2001 2000 1999 ---- ---- ------- ------- ------- Goodwill amortization $-- $-- $20,583 $20,582 $19,675 === === ======= ======= =======
30 (d) In accordance with Emerging Issues Task Force ("EITF") Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred" ("EITF No. 01-14"), Omnicare has recorded reimbursements received for "out-of-pocket" expenses on a grossed-up basis in the income statement as revenues and direct costs. EITF No. 01-14 relates solely to the Company's contract research services business. (e) In 2003, the Company completed a refinancing plan in which it raised $1,033.6 million. See Note 7 of the Notes to Consolidated Financial Statements for further information on these transactions. (f) "EBITDA" represents earnings before interest (net of investment income), income taxes, depreciation and amortization. Omnicare believes that certain investors find EBITDA to be a useful tool for measuring a company's ability to service its debt; however, EBITDA does not represent net cash flows from operating activities, as defined by U.S. Generally Accepted Accounting Principles, and should not be considered as a substitute for operating cash flows as a measure of liquidity or net income as an indicator of Omnicare's operating performance. Omnicare's calculation of EBITDA may differ from the calculation of EBITDA by others. The following is a reconciliation of the EBITDA calculation for the years ended December 31 (in thousands):
2003 2002 2001 2000 1999 --------- -------- -------- -------- -------- Net income $ 194,368 $125,906 $ 74,271 $ 48,817 $ 57,721 Add: Interest expense, net of investment income 77,134 53,535 53,709 53,164 44,634 Income taxes 116,081 77,145 45,514 28,706 33,950 Depreciation and amortization 53,020 45,263 74,070 73,973 69,364 --------- -------- -------- -------- -------- EBITDA 440,603 301,849 247,564 204,660 205,669 Subtract: Interest expense, net of investment income (77,134) (53,535) (53,709) (53,164) (44,634) Income taxes (116,081) (77,145) (45,514) (28,706) (33,950) Changes in assets and liabilities, net of effects from acquisition of businesses (170,024) (67,711) (40,860) (43,389) (75,298) Add: Provision for doubtful accounts 44,680 31,163 25,490 26,729 22,056 Deferred tax provision 43,685 15,428 17,305 19,767 23,073 Write-off of debt issuance costs 3,755 -- -- -- -- Non-cash portion of restructuring charges -- 9,060 2,811 6,804 4,198 --------- -------- -------- -------- -------- Net cash flows from operating activities $ 169,484 $159,109 $153,087 $132,701 $101,114 ========= ======== ======== ======== ========
(g) Primarily represents the purchase of computer equipment and software, machinery and equipment, and furniture, fixtures and leasehold improvements. 31 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A") The following discussion should be read in conjunction with the consolidated financial statements, related notes and other financial information appearing elsewhere in this report. In addition, see the "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information" caption below. Overview of 2003 - -------------------------------------------------------------------------------- For Omnicare, the year 2003 was one of strong growth and development, owing largely to the success of its acquisition and integration model. During the year, the Company made two strategically important acquisitions that, together, increased the size of its institutional pharmacy business by 30%. The Company undertook and essentially completed the integration of these acquisitions and began reaping the benefits of its acquisition plan, successfully completed a major refinancing, and continued to generate solid growth and enhancements in the cost structure of its core pharmacy business. On January 15, 2003, the Company completed the acquisition of NCS HealthCare, Inc. ("NCS"), which represented the largest acquisition made in the Company's 15-year history of making institutional pharmacy acquisitions. This acquisition significantly expanded the Company's presence in the long-term care pharmacy market, increasing the number of beds served by Omnicare by approximately 24% to approximately 936,000, and annualized revenues by approximately 24% to approximately $3.3 billion at the time of the acquisition. In addition to its large institutional pharmacy operation, NCS also added other businesses, including a hospital pharmacy management business, an information technology business providing pharmacy operating software and certain specialty pharmacy businesses. On July 15, 2003, Omnicare completed the acquisition of SunScript Pharmacy Corporation ("SunScript"), which increased the number of beds served by Omnicare by approximately 5% to approximately 981,000, and annualized revenues by approximately 5% to approximately $3.6 billion at the time of the acquisition. The Company's integration plan for these acquisitions included the realization of economies of scale and cost synergies in purchasing of pharmaceuticals, and in consolidation of overlapping geographic locations and redundant functions. To date, the Company has consolidated 68 pharmacies serving approximately 128,000 beds, or the majority of the NCS and SunScript pharmacies that are to be consolidated, as well as certain Omnicare pharmacies closed as part of the overall consolidation plan. In addition, the other acquired pharmacies have been migrated to the Company's systems and programs in order to achieve the targeted savings in the purchasing of pharmaceuticals and other economies of scale. Like others in the contract research ("CRO") industry, the performance of the Company's CRO business reflects the somewhat volatile nature of this business given the numerous variables outside the Company's control. The softness in revenues in 2003 was attributable to several client-driven cancellations or delays in the commencement or continuation of certain projects. 32 Given that these delays were client-driven decisions, and as such unpredictable, the Company was unable to immediately adjust costs accordingly, which impacted margins for the year. Certain of these projects are expected to be under way in 2004, and positive trends in new business have begun to emerge in the first quarter of 2004. Given this, along with recent cost reduction efforts, the Company anticipates improved performance in its CRO business in 2004. Omnicare continued to generate strong operating cash flow in 2003, primarily as a result of its earnings growth. Moreover, to finance the NCS transaction on a long-term basis and to enhance its financial strength, the Company undertook a major refinancing in June 2003. The Company's balance sheet reflects the favorable capital structure that the Company put in place in connection with this refinancing. As part of its capital restructuring, the Company raised $250.0 million in a term A loan, and completed an offering of $250.0 million of 6.125% senior subordinated notes, $345.0 million of 4.0% contingent convertible notes and 6,468,750 shares of its common stock. In connection with the refinancings, the Company entered into a new, four-year $750.0 million credit facility, consisting of the aforementioned $250.0 million term loan commitment and a $500 million revolving credit commitment. Omnicare used the net proceeds from the 6.125% senior subordinated notes and the term A loan to repay the existing credit facility. A portion of the 4.0% contingent convertible notes and a portion of the net proceeds from the common stock offering were used to purchase and retire the Company's outstanding $345.0 million of 5% convertible subordinated debentures. During the second quarter of 2003, the Company entered into an interest rate swap agreement on all $250.0 million of its aggregate principal amount of the 6.125% senior subordinated notes. Omnicare's total debt to total capitalization was approximately 40.2% at December 31, 2003, down approximately 750 basis points from the end of the first quarter of 2003, which was the last quarter prior to the June refinancing. The Company believes that the refinancing has enhanced its financial position and provided the financial flexibility to support its ongoing growth strategies. Looking ahead, the Company continues to monitor key issues related to healthcare funding, including the increasing pressures on state Medicaid budgets arising from the economic downturn coupled with growth in enrollees as eligibility is expanded; the escalation in drug costs owing to higher drug utilization among seniors and the aging of the population; the introduction of new, more efficacious, albeit more expensive, medications, offset somewhat by increasing use of generic medications; and the impact of any changes in healthcare policy relating to the future funding of the Medicaid and Medicare programs, including the MMA, signed into law by President Bush on December 8, 2003. The MMA includes a new Medicare outpatient drug benefit effective January 1, 2006. Under the MMA, Medicare beneficiaries may enroll in prescription drug plans offered by private entities, which will provide coverage of outpatient prescription drugs (subject to various co-pays, deductibles and coverage limitations). Additionally, Medicare beneficiaries who are also entitled to full benefits under a state Medicaid program (so-called "dual eligibles"), will receive drug coverage under the new federal benefit rather than the state Medicaid program, including nursing home residents served by the Company whose drug costs are currently covered by Medicaid. Regulations governing implementation of this benefit are now being promulgated. Moreover, the Secretary of the Department of Health and Human Services is required to conduct a study on the impact of the Medicare drug benefit structure on nursing home residents. The purpose of the 33 study is to ensure that the patient safety and quality of care standards that are currently part of regulation and pharmacy practice as well as appropriate reimbursements are maintained. Accordingly, it is difficult to predict the impact or outcome of this legislation. Nonetheless, pharmaceuticals remain the most cost-effective means of treating the chronic illnesses of the frailest members of society, and the geriatric pharmaceutical business offers meaningful solutions to containing healthcare costs while ensuring the well-being of the nation's growing elderly population. The Company's strategy for future growth remains aligned with such economic interests and demographic trends in healthcare. By expanding the Company's core pharmaceutical distribution business and then leveraging that business through the development and expansion of clinical and information services, the Company intends to continue its value creation strategy. Results of Operations - -------------------------------------------------------------------------------- The following summary table presents net sales and results of operations for Omnicare for each of the years ended December 31, 2003, 2002 and 2001 (in thousands, except per share amounts). In accordance with the SEC's release entitled "Conditions for Use of Non-GAAP Financial Measures," the Company has disclosed in this MD&A, with the exception of earnings before interest, income taxes, depreciation and amortization ("EBITDA") (discussed below), only those measures that are in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP").
For the years ended December 31, 2003 2002 2001 ------------------------------------ Total net sales $3,499,174 $2,632,754 $2,183,036 ========== ========== ========== Net income $ 194,368 $ 125,906 $ 74,271 ========== ========== ========== Earnings per share: Basic $ 1.97 $ 1.34 $ 0.80 ========== ========== ========== Diluted $ 1.93 $ 1.33 $ 0.79 ========== ========== ========== EBITDA(a) $ 440,603 $ 301,849 $ 247,564 ========== ========== ==========
(a) See Five-Year Summary of Selected Financial Data for a reconciliation of EBITDA to net cash flows from operating activities at Item 6 of the Company's Annual Report on Form 10-K. The Company believes that certain investors find EBITDA to be a useful tool for measuring a company's ability to service its debt; however, EBITDA does not represent net cash flows from operating activities, as defined by U.S. GAAP, and should not be considered as a substitute for operating cash flows as a measure of liquidity or net income as an indicator of the Company's 34 operating performance. The Company's calculation of EBITDA may differ from the calculation of EBITDA by others. Effective January 1, 2002, in accordance with U.S. GAAP, the Company 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 years ended December 31, 2003 and 2002. This accounting standard would have had the effect of adding approximately $33.2 million pretax ($20.6 million aftertax, or $0.22 per diluted share) to net income for the year ended December 31, 2001. 2003 vs. 2002 - -------------------------------------------------------------------------------- Consolidated Total net sales for 2003 increased to $3,499.2 million from $2,632.8 million in 2002. Net income for 2003 was $194.4 million versus $125.9 million in 2002. Diluted earnings per share were $1.93 for the year ended December 31, 2003 versus $1.33 in 2002. EBITDA for 2003 totaled $440.6 million in comparison with $301.8 million for 2002. Included in 2003 interest expense was a charge of $12.7 million pretax ($7.9 million aftertax, or $0.08 per diluted share), relating to the call premium and write-off of unamortized debt issuance costs associated with the Company's early redemption of its 5.0% convertible subordinated debentures discussed under the "Financial Condition, Liquidity and Capital Resources" caption below. Included in 2002 net income were aggregate charges of $23.2 million ($14.4 million aftertax, or $0.15 per diluted share) relating to the Phase II productivity and consolidation program described hereafter under the "Restructuring Charges" caption below. 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 professional fees and other facility exit costs. Pharmacy Services Segment Omnicare's Pharmacy Services segment recorded sales of $3,345.3 million for the year ended December 31, 2003, exceeding the 2002 amount of $2,467.2 million by $878.1 million, or 35.6%. At December 31, 2003, Omnicare served long-term care facilities comprising approximately 1,003,000 beds as compared with approximately 754,000 beds served at December 31, 2002. The increase in revenues and in beds served was primarily a result of the acquisitions of NCS in January 2003 and SunScript in July 2003, as discussed below. The results of the NCS and SunScript acquisitions were included only from their date of acquisition, or January 15, 2003 and July 15, 2003, respectively. Annualized sales relating to the ongoing NCS and SunScript businesses aggregated approximately $815 million at the time of acquisition. Additionally, Pharmacy Services sales increased due to growth in new business, increasing 35 occupancy, the continued implementation and expansion of the Company's clinical and other service programs, drug price inflation, and the increased market penetration of newer branded drugs targeted at the diseases of the elderly, which often carry higher prices but are significantly more effective in reducing overall healthcare costs than those they replace. Partially offsetting the increase in sales were pricing pressures, including lower government reimbursement formulas and other cost control measures in some states, and the increasing number and usage of generic drugs. The Company estimates that drug price inflation for its highest dollar volume products in 2003 was approximately 5%. Operating income of the Pharmacy Services segment was $413.0 million in 2003, a $124.8 million improvement as compared with the $288.2 million earned in 2002. As a percentage of the segment's sales, operating income was 12.3% in 2003, compared with 11.7% in 2002. The improved operating income was primarily the result of increased sales, as discussed above, a lower operating cost structure reflecting principally the impact of the productivity and consolidation initiative completed at the end of the third quarter of 2002 (the "Phase II Program"), the completion of the integration of American Pharmaceutical Services, Inc. and related entities (collectively, "APS"), the overall synergies (including economies of scale, drug purchasing improvements and consolidation of redundant pharmacy locations, which serve to leverage the Company's operating cost structure) from the NCS and SunScript integrations (although operating margins were initially unfavorably impacted in the first and third quarters of 2003, respectively, by the addition of the lower-margin NCS and SunScript business), and the $6.8 million year-over-year pretax impact of restructuring charges in 2002 (as compared to no such charges in 2003). On July 15, 2003, Omnicare acquired the SunScript pharmacy services business from Sun Healthcare Group, Inc. The acquisition, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $82 million. Up to an additional $15.0 million may become payable post-closing, subject to adjustment. At the time of the acquisition, SunScript provided pharmaceutical products and related consulting services to skilled nursing and assisted living facilities comprising approximately 43,000 beds located in 19 states (excluding beds in Sun Healthcare facilities that Sun Healthcare is divesting in unrelated transactions). SunScript served these facilities through its network of 31 long-term care pharmacies. The net assets and operating results of SunScript have been included from the date of acquisition in the Company's financial statements. On January 15, 2003, Omnicare closed its acquisition of NCS. The acquisition of NCS, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $500 million. The cash consideration included the payoff of certain NCS debt totaling approximately $325.5 million, which was retired by Omnicare immediately following the acquisition. At the time of the acquisition, NCS provided professional pharmacy and related services to long-term care facilities, including skilled nursing and assisted living facilities in 33 states, and managed hospital pharmacies in 10 states. NCS added approximately 182,000 beds served in the 36 first quarter of 2003. The net assets and operating results of NCS have been included from the date of acquisition in the Company's financial statements. On January 7, 2002, Omnicare completed the acquisition of the assets comprising the pharmaceutical business of APS. At the time of the acquisition, APS provided professional pharmacy-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. The acquisition, accounted for as a purchase business combination, included cash consideration and transaction costs, aggregating approximately $132 million (including an adjustment based on the closing balance sheet review and $18.0 million in deferred payments made in 2003, satisfying all future contingent payments under the acquisition agreement). CRO Services Segment Omnicare's CRO Services segment recorded revenues of $153.9 million for the year ended December 31, 2003, which were $11.6 million, or 7.0%, lower than the $165.5 million recorded in 2002. In accordance with EITF Issue No. 01-14, the Company included $24.8 million and $26.3 million of reimbursable out-of-pockets in its CRO Services segment reported revenue and direct cost amounts for the years ended December 31, 2003 and 2002, respectively. Revenues for the year ended December 31, 2003 were lower than in 2002 largely due to the impact of client-driven cancellations or delays in the commencement or continuation of certain projects. Operating income in the CRO Services segment was $12.6 million in 2003 compared with $4.6 million in 2002. As a percentage of the segment's revenue, operating income was 8.2% in 2003 compared with 2.8% in 2002. The improvement in operating income was primarily attributable to the year-over-year impact of restructuring charges associated with the Phase II productivity and consolidation program, which resulted in $16.4 million of pretax expense in 2002 and no expense in 2003 (as the Phase II Program was finalized in 2002). This improvement was partially offset by the unfavorable impact on operating income of the lower revenues discussed above. Backlog at December 31, 2003 of $182.8 million was relatively consistent with the December 31, 2002 backlog of $181.6 million. Consolidated The Company's consolidated gross profit of $897.6 million increased $206.5 million in 2003 from the prior-year amount of $691.1 million. Gross profit as a percentage of total net sales of 25.7% in the year ended December 31, 2003, was slightly lower than the 26.2% experienced during 2002. Positively impacting overall gross profit margin were the Company's purchasing leverage associated with the procurement of pharmaceuticals due, in part, to the completion of the integration of the APS business and benefits realized from the Company's formulary compliance program, as well as the increased use of generic drugs, and leveraging of fixed and variable overhead costs at the Company's pharmacies as a result of the reduced cost structure brought about by the Phase II Program. These favorable factors were offset primarily by the initial impact of the lower-margin NCS and SunScript business in the first and third quarters, respectively (which impact diminished as the Company achieved economies of scale, drug 37 purchasing improvements, and consolidated redundant pharmacy locations), and, to a lesser extent, by the previously mentioned shift in mix toward newer, branded drugs targeted at the diseases of the elderly that typically produce higher gross profit but lower gross profit margins, and pricing pressures, incuding lower government reimbursement formulas and other cost control measures in some states. Sales mix for the Company also impacts gross profit and includes primarily sales of pharmaceuticals and, to a lesser extent, contract research services, infusion therapy products and services, medical supplies, and other miscellaneous products and services. Sales of pharmaceuticals account for the majority of the Company's sales and gross profit. Contract research services and infusion therapy gross profit margins are typically higher than gross profit margins associated with sales of pharmaceuticals. Increased leverage in purchasing favorably impacts gross profit and is primarily derived through discounts from suppliers. Leveraging of fixed and variable overhead costs primarily relates to generating higher sales volumes from pharmacy facilities with no increase in fixed costs (e.g., rent) and minimal increases in variable costs (e.g., utilities), as well as the elimination of pharmacies through the Company's productivity and consolidation initiatives, further discussed below. The Company believes it will be able to continue to leverage fixed and variable overhead costs through internal and acquired growth. Government and other reimbursement formulas generally adjust to take into account drug price inflation or deflation. In order to enhance its gross profit margins, the Company strategically allocates its resources to those activities that will increase internal sales growth and favorably impact sales mix or will lower costs. In addition, through the ongoing development of its pharmaceutical purchasing programs, the Company is able to obtain discounts and thereby manage its pharmaceutical costs. Omnicare's selling, general and administrative ("operating") expenses for the year ended December 31, 2003 of $510.0 million were higher than the 2002 amount of $411.3 million by $98.7 million, due to the overall growth of the business, including the acquisitions of NCS and SunScript in the first and third quarters of 2003, respectively. Operating expenses as a percentage of total net sales, however, totaled 14.6% in 2003, representing a decline from the 15.6% experienced in 2002. This decline is primarily due to the year-over-year favorable impact of the Phase II Program completed at the end of the third quarter of 2002, as well as realization of operational efficiencies from the APS, NCS and SunScript acquisitions, and the leveraging of fixed and variable overhead costs over a larger sales base in 2003 than that which existed in 2002. Investment income for the year ended December 31, 2003 was $4.2 million, an improvement of $0.9 million over the 2002 year. Larger average invested cash balances during 2003 as compared with 2002 was the primary driver of the increase in investment income. Interest expense for the year ended December 31, 2003 was $81.3 million compared with $56.8 million in the 2002 year. The increase primarily related to the financing of the NCS acquisition 38 in January 2003, initially through borrowings on the Company's three-year $500.0 million revolving credit facility ("Revolving Credit Facility") of $499.0 million. The interest expense for the 2003 year also included a call premium and the write-off of unamortized debt issuance costs aggregating $12.7 million before taxes ($7.9 million aftertax, or $0.08 per diluted share) related to the Company's early redemption and retirement of its $345 million aggregate principal amount of 5.0% convertible subordinated debentures, as further described in the "Financial Condition, Liquidity and Capital Resources" caption below. Partially offsetting this increase was reduced interest expense associated with Omnicare's repayment of $94.1 million on the term A loan during 2003. The effective income tax rate was 37.4% in 2003, relatively consistent with the prior-year rate of 38.0%. The effective tax rates in 2003 and 2002 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. 2002 vs. 2001 - -------------------------------------------------------------------------------- Consolidated Total net sales for 2002 increased to $2,632.8 million from $2,183.0 million in 2001. Net income for 2002 was $125.9 million versus $74.3 million in 2001. Diluted earnings per share were $1.33 for the year ended December 31, 2002 versus $0.79 in 2001. EBITDA for 2002 totaled $301.8 million in comparison with $247.6 million for 2001. Included in 2002 and 2001 were aggregate charges of $23.2 million and $18.3 million pretax, respectively ($14.4 million and $11.4 million aftertax, or $0.15 and $0.12 per diluted share, respectively), relating to the Phase II productivity and consolidation program described hereafter under the "Restructuring Charges" caption below. 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 professional fees and other facility exit costs. Included in the 2001 results are other expense items totaling $4.8 million pretax ($3.0 million aftertax, or $0.03 per diluted share). Specifically, in early 2001, Omnicare recorded a $1.8 million pretax special charge representing a repayment to the Medicare 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 (now known as the Centers for Medicare & Medicaid Services) for review and determination of the amount of overpayment. Further, the Company recorded a $3.0 million pretax special charge in mid-2001, representing a settlement in June 2001 of certain contractual issues with a customer, which issues and amount relate to prior-year periods. 39 Pharmacy Services Segment Omnicare's Pharmacy Services segment recorded sales of $2,467.2 million for the year ended December 31, 2002, exceeding the 2001 amount of $2,033.8 million by $433.4 million, or 21.3%. At December 31, 2002, Omnicare served long-term care facilities comprising approximately 754,000 beds as compared with approximately 662,000 beds served at December 31, 2001. The increase in beds served was a result of the acquisition of APS, as discussed below, and the efforts of the Company's National Sales & Marketing Group and pharmacy staff to develop new contracts with long-term care facilities. The increase in sales relating to the APS acquisition approximated $240 million. Additionally, Pharmacy Services sales increased due to the continued implementation and expansion of the Company's clinical and other service programs, drug price inflation, and the increased market penetration of newer drugs, which often carry higher prices but are significantly more effective in reducing overall healthcare costs than those they replace. Lower government reimbursement formulas in some states partially offset the increase in pharmacy sales. The Company estimates that drug price inflation for its highest dollar volume products in 2002 was approximately 5%. Operating income of the Pharmacy Services segment was $288.2 million in 2002, an $87.4 million improvement as compared with the $200.8 million earned in 2001. As a percentage of the segment's sales, operating income was 11.7% in 2002, compared with 9.9% in 2001. The improved operating income was primarily the result of increased sales, as discussed above, a lower operating cost structure reflecting principally the impact of the Phase II Program started in the third quarter of 2001, the overall synergies realized from the APS integration (although margins were initially unfavorably impacted early in 2002 by the addition of the lower margin APS business), the exclusion of goodwill amortization in 2002 as previously discussed (an expense that totaled $32.1 million pretax in 2001), the year-to-year favorable impact of restructuring charges of $1.7 million (which totaled $6.8 million pretax in 2002 compared with $8.5 million pretax in 2001), and other expense items in 2001 totaling $4.8 million pretax. Improvement in operating performance in 2002 was also attributable to a more stable and gradually improving operating environment in the skilled nursing facility ("SNF") market, a result of enactment of the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"). On January 7, 2002, Omnicare completed the acquisition of the assets comprising the pharmaceutical business of APS. The acquisition, accounted for as a purchase business combination, included cash consideration and transaction costs aggregating approximately $132 million (including an adjustment based on the closing balance sheet review and $18.0 million in deferred payments made in 2003, satisfying all future contingent payments under the acquisition agreement). 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. 40 CRO Services Segment Omnicare's CRO Services segment recorded revenues of $165.5 million for the year ended December 31, 2002, which were $16.2 million, or 10.9%, greater than the $149.3 million recorded in 2001. In accordance with EITF No. 01-14, the Company included $26.3 million and $23.9 million of reimbursable out-of-pockets in its CRO Services segment reported revenue and direct cost amounts for the years ended December 31, 2002 and 2001, respectively. Despite volatility in revenues in the latter half of 2002 related to client-driven delays or cancellations of certain projects, the increase in CRO Services revenue was achieved due to solid business gains arising from the efforts of the Company's integrated global selling efforts and relative stability in the overall drug research market. Higher levels of demand were recognized from both major pharmaceutical manufacturers and biotechnology companies, and the Company's expanding presence throughout the world. Operating income in the CRO Services segment was $4.6 million in 2002 compared with $2.5 million in 2001. As a percentage of the segment's revenue, operating income was 2.8% in 2002 compared with 1.7% in 2001. The improvement in operating performance was attributable to the favorable impact of the aforementioned increase in revenues, the realization of benefits from the Company's initiatives to integrate and streamline the organization, and the exclusion of goodwill amortization in 2002 (which totaled $1.1 million pretax in 2001). Offsetting the improvement in operating performance was the $6.6 million year-to-year impact of restructuring charges associated with the Phase II productivity and consolidation program, which totaled $16.4 million pretax in 2002 compared with $9.8 million in 2001. Backlog at December 31, 2002 was $181.6 million, representing a decrease of $13.9 million from December 31, 2001 backlog of $195.5 million due to projects moving out of backlog, as well as the cancellation of certain projects in 2002. Consolidated The Company's consolidated gross profit of $691.1 million increased $111.7 million in 2002 from the prior-year amount of $579.4 million. Gross profit as a percentage of total net sales of 26.2% in the year ended December 31, 2002, was slightly lower than the 26.5% experienced during 2001. Positively impacting overall gross profit margin was the Company's purchasing leverage associated with the procurement of pharmaceuticals, due in part 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 through the reduced cost structure brought about by the Phase II Program. These favorable factors were offset primarily by the initial impact of the lower-margin APS business and, to a lesser extent, the previously mentioned shift in mix toward newer, branded drugs that typically produce higher gross profit, but lower gross profit margins, and the effects of lower government reimbursement formulas in some states. Omnicare's operating expenses for the year ended December 31, 2002 of $411.3 million were higher than the 2001 amount of $349.5 million, by $61.8 million, due to the overall growth of the business, including the acquisition of APS. Operating expenses as a percentage of total net sales, however, totaled 15.6% in 2002, representing a decline from the 16.0% experienced in 2001. 41 This decline is due to the year-over-year favorable impact of the Phase II Program and the leveraging of fixed and variable overhead costs over a larger sales base in 2002 than that which existed in 2001. Investment income for the year ended December 31, 2002 was $3.3 million, an improvement of $0.7 million over the 2001 year. Larger average invested cash balances during 2002 as compared with 2001, partially offset by the impact of lower interest rates in 2002 versus 2001, was the primary driver of the slight increase in investment income. Interest expense during 2002 of $56.8 million was relatively consistent with the comparable prior year amount of $56.3 million. The effective income tax rate was 38% in 2002, consistent with the prior year. The effective tax rates in 2002 and 2001 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 - -------------------------------------------------------------------------------- Phase I Program In 2000, the Company completed its previously disclosed productivity and consolidation program (the "Phase I Program"). In connection with the Phase I Program, the Company had liabilities of $0.6 million at December 31, 2002, of which $0.3 million was utilized during the year ended December 31, 2003. The remaining liabilities at December 31, 2003 of $0.3 million represent amounts not yet paid relating to actions taken (consisting of remaining lease payments), and will be adjusted as these matters are settled. Phase II Program In 2001, the Company announced the implementation of a second phase of the productivity and consolidation initiative (the "Phase II Program"). 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 10 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 a total of $18.3 million pretax ($11.4 million aftertax, or $0.12 per diluted share) for restructuring charges during the year ended December 31, 2001. Further, approximately $23.2 million pretax ($14.4 million aftertax, 42 or $0.15 per diluted share) was recorded during the year ended December 31, 2002, when the amounts were required to be recognized in accordance with U.S. GAAP. 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. Details of the pretax restructuring charges relating to the Phase II Program follow (in thousands):
2001 Utilized Balance at 2002 Provision/ during December 31, Provision/ Accrual 2001 2001 Accrual ---------- -------- ------------ ---------- Restructuring charges: Employee severance $ 4,256 $ (2,614) $1,642 $ 2,177 Employment agreement buy-outs 2,086 (1,578) 508 -- Lease terminations 2,711 (2,105) 606 5,862 Other assets, fees and facility exit costs 9,291 (6,264) 3,027 15,156 ------- -------- ------ ------- Total restructuring charges $18,344 $(12,561) $5,783 $23,195 ======= ======== ====== =======
Utilized Balance at Utilized Balance at during December 31, during December 31, 2002 2002 2003 2003 -------- ------------ -------- ------------ Restructuring charges: Employee severance $ (2,655) $1,164 $(1,164) $ -- Employment agreement buy-outs (214) 294 (294) -- Lease terminations (1,846) 4,622 (1,155) 3,467 Other assets, fees and facility exit costs (14,690) 3,493 (2,878) 615 -------- ------ ------- ------ Total restructuring charges $(19,405) $9,573 $(5,491) $4,082 ======== ====== ======= ======
As of December 31, 2003, the Company had paid approximately $8.5 million of severance and other employee-related costs relating to the reduction of approximately 460 employees. The remaining liabilities recorded at December 31, 2003 represent amounts not yet paid or settled relating to actions taken (primarily consisting of remaining lease payments), and will be adjusted in future periods as these matters are finalized. Impact of Inflation - -------------------------------------------------------------------------------- As previously mentioned, the Company estimates that drug price inflation for its highest dollar volume products in 2003 approximated 5%, which tends to impact sales and costs of sales at approximately the same level. Therefore, inflation has not materially affected Omnicare's income from continuing operations, inasmuch as government and other reimbursement formulas generally adjust to take into account drug price inflation or deflation. 43 Financial Condition, Liquidity and Capital Resources - -------------------------------------------------------------------------------- Cash and cash equivalents at December 31, 2003 were $188.1 million compared with $141.1 million at December 31, 2002 (including restricted cash amounts of $0.7 million and $3.1 million, respectively). The Company generated positive net cash flows from operating activities of $169.5 million during the year ended December 31, 2003, compared with net cash flows from operating activities of $159.1 million and $153.1 million during the years ended December 31, 2002 and 2001, respectively. These operating cash flows, as well as new borrowings and common stock issuance proceeds (further discussed below), were used primarily for debt repayment, acquisition-related payments, capital expenditures and dividends. The increase in net cash flows from operating activities during 2003 was driven primarily by earnings growth, as previously discussed at the "Results of Operations" caption above. Net cash used in investing activities was $678.0 million, $152.4 million and $46.8 million in 2003, 2002 and 2001, respectively. Acquisitions of businesses required cash payments of $663.4 million (including amounts payable pursuant to acquisition agreements relating to pre-2003 acquisitions) in 2003, which were primarily funded by borrowings and existing cash balances. Acquisitions of businesses during 2002 and 2001 required $127.8 million and $20.3 million, respectively, of cash payments (including amounts payable pursuant to acquisition agreements relating to pre-2002 and pre-2001 acquisitions, respectively) which were primarily funded by borrowings under the Revolving Credit Facility and operating cash flows. The Company's capital requirements are primarily comprised of its acquisition program and capital expenditures, largely relating to investments in the Company's information technology systems. Net cash provided by financing activities was $554.5 million for the year ended December 31, 2003. Net cash used for financing activities was $38.0 million and $49.6 million in 2002 and 2001, respectively. In connection with the aforementioned NCS acquisition, the Company borrowed $499.0 million under its Revolving Credit Facility in the first quarter of 2003. The Company also completed its refinancing plan in June 2003, as discussed below, in which it raised $1,033.6 million. Partially offsetting these borrowings were payments on line of credit facilities and the term A loan of $593.1 million during 2003, as well as the early redemption and retirement during 2003 of $345.0 million of 5.0% convertible subordinated debentures due 2007 ("5% Convertible Debentures"). During 2002, the Company used $120.0 million in cash generated from its operations to fully pay down the outstanding obligations under its Revolving Credit Facility, including the $90.0 million drawn down in early 2002 in connection with the aforementioned APS acquisition. On February 5, 2004, 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 common share for 2004, which is consistent with annual dividends paid per common share for the 2003, 2002 and 2001 years. Aggregate dividends of $8.9 million paid during the year ended December 31, 2003 were relatively consistent with the $8.5 million paid in each of the two years ended December 31, 2002. 44 There were no material commitments and contingencies outstanding at December 31, 2003, other than the contractual obligations summarized in the "Disclosures About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations" caption below, certain acquisition-related payments potentially due in the future, including deferred payments, indemnification payments and payments originating from earnout provisions that may become payable (including up to an additional $15.0 million relating to SunScript, that may become payable post-closing, subject to adjustment) and the matters discussed in Note 15, "Commitments and Contingencies," of the Notes to Consolidated Financial Statements. Disclosures About Off-Balance Sheet Arrangements and Aggregate Contractual - -------------------------------------------------------------------------- Obligations - ----------- At December 31, 2003, the Company had one unconsolidated entity, Omnicare Capital Trust I (the "Trust"), which was established for the purpose of facilitating the convertible trust preferred securities offering, due 2033 ("trust PIERS" or "Preferred Income Equity Redeemable Securities"). For financial reporting purposes, the Trust is treated as an equity method investment of Omnicare. The Trust is a 100%-owned finance subsidiary of the Company. The Company has fully and unconditionally guaranteed the securities of the Trust. The contingent convertible notes issued by the Company to the Trust in connection with the issuance by the Trust of the trust PIERS are presented as a separate line item on Omnicare's consolidated balance sheet, and the related disclosures concerning the trust PIERS, the guarantee and the contingent convertible notes are included in Omnicare's notes to consolidated financial statements. Omnicare records interest payable to the Trust as interest expense in its consolidated statement of income. At December 31, 2003, the Company had no other unconsolidated entities, or any financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements. 45 The following summarizes the Company's contractual obligations at December 31, 2003, and the effect such obligations are expected to have on the Company's liquidity and cash flows in future periods. Contractual Obligations (in thousands): - --------------------------------------
Less Than 1 Total Year 1-3 Years 4-5 Years After 5 Years ---------- ----------- --------- --------- ------------- Long-term debt obligations $1,125,897 $ 20,513 $ 69,743 $65,641 $ 970,000 Capital lease obligations 667 196 221 89 161 Operating lease obligations 111,220 26,950 42,219 25,382 16,669 Purchase obligations (a) 16,042 16,022 16 4 -- Other current obligations (b) 309,760 309,760 -- -- -- Other long-term liabilities 122,647 -- 38,163 513 83,971 ---------- -------- -------- ------- ---------- Total contractual cash obligations $1,686,233 $373,441 $150,362 $91,629 $1,070,801 ========== ======== ======== ======= ==========
(a) Purchase obligations primarily consist of open inventory purchase orders at December 31, 2003. (b) Other current obligations primarily consist of accounts payable at December 31, 2003. As of December 31, 2003, the Company had approximately $10.5 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals. As discussed further below, during the second quarter of 2003, the Company completed its offering of $250.0 million aggregate principal amount of 6.125% senior subordinated notes due 2013 ("6.125% Senior Notes"), issued at par, and 6,468,750 shares of common stock, $1 par value, at $29.16 per share for gross proceeds of $189 million and the offering, through the Trust, of $345 million aggregate principal amount of convertible trust preferred securities due 2033. In March 2001, the Company entered into a three-year syndicated $500.0 million revolving line of credit facility (the "Revolving Credit Facility"), including a $25.0 million letter of credit subfacility, with various lenders. The three-year Revolving Credit Facility had no outstanding loans as of December 31, 2002. In January 2003, the Company borrowed $499.0 million under the Revolving Credit Facility to finance its acquisition of NCS (see Note 2 of the Notes to Consolidated Financial Statements). The Revolving Credit Facility was retired in connection with mid-2003 refinancing transactions, as further discussed below. In connection with the mid-2003 financings, the Company entered into a new, four-year $750.0 million credit facility ("Credit Facility") consisting of a $250 million term A loan commitment and a $500 million revolving credit commitment. The new Credit Facility bears interest at the Company's option at a rate equal to either: (i) the London Interbank Offered Rate ("LIBOR") plus a margin that varies depending on certain ratings on the Company's senior long-term debt; or (ii) the higher of (a) the prime rate or (b) the sum of the federal funds effective rate plus 46 0.50%. Additionally, the Company is charged a commitment fee on the unused portion of the revolving credit portion of the Credit Facility, which also varies depending on such ratings. At December 31, 2003, the interest rate was LIBOR plus 1.375% and the commitment fee was 0.375%. There is no utilization fee associated with the Credit Facility. The Company used the net proceeds from the 6.125% Senior Notes offering and borrowings of $250.0 million under the term A loan portion of the new Credit Facility to repay the balance of the Company's existing Revolving Credit Facility of $474 million, with remaining proceeds being used for general corporate purposes. The Company paid down $94.1 million on the term A loan during 2003. The $155.9 million outstanding at December 31, 2003 under the term A loan is due in quarterly installments, in varying amounts, through 2007, with approximately $20.5 million due within one year. There are no amounts outstanding as of December 31, 2003 under the revolving credit commitment of the Credit Facility. In December 1997, the Company issued $345.0 million of 5% Convertible Debentures. The Company used a portion of the net proceeds from the common stock offering and the net proceeds from the trust PIERS offering to redeem the entire outstanding $345 million aggregate principal amount of the Company's 5% Convertible Debentures, with remaining proceeds being used for general corporate purposes. The total redemption price, including the call premium, was approximately $353.9 million. Accordingly, a $12.7 million pretax charge ($7.9 million aftertax, or $0.08 per diluted share) was recognized in interest expense during the year ended December 31, 2003 for the call premium and the write-off of remaining unamortized debt issuance costs associated with the redemption of the 5% Convertible Debentures. Concurrent with the issuance of the 2001 Revolving Credit Facility, the Company completed the issuance, at par value, of $375.0 million of 8.125% senior subordinated notes due 2011 ("8.125% Senior Notes"). The 8.125% Senior Notes were subsequently exchanged for replacement notes with identical terms, which were registered with the Securities and Exchange Commission. During the second quarter of 2003, the Company entered into an interest rate swap agreement ("Swap Agreement") on all $250.0 million of its aggregate principal amount of the 6.125% Senior Notes. Under the Swap Agreement, which hedges against exposure to long-term U.S. dollar interest rates, the Company will receive a fixed rate of 6.125% and pay a floating rate based on LIBOR with a maturity of six months plus a spread of 2.27%. The floating rate is determined semi-annually, in arrears, two London Banking Days prior to the first of each December and June, commencing December 1, 2003. The Company records interest expense on the 6.125% Senior Notes at the floating rate. The estimated LIBOR-based floating rate was 3.50% at December 31, 2003. The Swap Agreement, which matches the terms of the 6.125% Senior Notes, is designated and accounted for as a fair value hedge. The Company is accounting for the Swap Agreement in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, so changes in fair value of the Swap Agreement are offset by changes in the recorded carrying value of the related 6.125% Senior Notes. The fair value of the Swap Agreement is recorded as a noncurrent liability and reduced the carrying value of the related 6.125% Senior Notes by $23.2 million as of December 31, 2003. 47 In connection with the offering of the trust PIERS in the second quarter of 2003, the Company issued a corresponding amount of contingent convertible notes due 2033 to the Trust. The trust PIERS offer fixed cash distributions at a rate of 4.0% per annum payable quarterly, and a fixed conversion price of $40.82 under a contingent conversion feature whereby the holders may convert their trust PIERS if the closing sales price of Omnicare common stock for a predetermined period, beginning with the quarter ending September 30, 2003, is more than 130% of the then-applicable conversion price or, during a predetermined period, if the daily average of the trading prices for the trust PIERS is less than 105% of the average of the conversion values for the trust PIERS through 2028 (98% for any period thereafter through maturity). The trust PIERS also will pay contingent distributions, commencing with the quarterly distribution period beginning June 15, 2009, if the average trading prices of the trust PIERS for a predetermined period equals 115% or more of the stated liquidation amount of the trust PIERS. Embedded in the trust PIERS are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision. The embedded derivatives are periodically valued by a third-party advisor, and at December 31, 2003, the values of both derivatives were not material. However, the values are subject to change, based on market conditions, which could affect the Company's future results of operations. Omnicare irrevocably and unconditionally guarantees, on a subordinated basis, certain payments to be made by the Trust in connection with the trust PIERS. The Credit Facility, the 8.125% Senior Notes, the 6.125% Senior Notes and the 4% Contingent Convertible Notes contain representations and warranties, covenants and events of default customary for such facilities. Interest rates charged on borrowings outstanding under the Credit Facility are based on prevailing market rates as discussed in the following section. The Company believes that net cash flows from operating activities, credit facilities and other short- and long-term debt financings, if any, will be sufficient to satisfy its future working capital needs, acquisition contingency commitments, debt servicing, capital expenditures and other financing requirements for the foreseeable future. While no such plans currently exist, 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. Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------------------- Omnicare's primary market risk exposure relates to interest rate risk exposure through its borrowings. The Company's debt obligations at December 31, 2003 include $155.9 million outstanding under the term A loan portion of its June 2003 four-year, variable-rate Credit Facility at an interest rate of LIBOR plus 1.375%, or 2.5% at December 31, 2003 (a 100 basis point change in the interest rate would impact pretax interest expense by approximately $1.6 million per year); $375.0 million outstanding under its fixed-rate 8.125% Senior Notes, due 2011; $250.0 million outstanding under its fixed-rate 6.125% Senior Notes, due 2013; and $345.0 million outstanding under its 4.0% fixed-rate convertible debentures (the "4.0% Convertible Debentures"), due 2033. During the second quarter of 2003, the Company entered into a Swap Agreement on all $250.0 million of its aggregate principal amount of the 6.125% 48 Senior Notes. Under the Swap Agreement, which hedges against exposure to long-term U.S. dollar interest rates, the Company will receive a fixed rate of 6.125% and pay a floating rate based on LIBOR with a maturity of six months plus a spread of 2.27%. The estimated LIBOR-based floating rate was 3.50% at December 31, 2003 (a 100 basis point change in the interest rate would impact pretax interest expense by approximately $2.5 million per year). The Swap Agreement, which matches the terms of the 6.125% Senior Notes, is designated and accounted for as a fair value hedge. The Company is accounting for the Swap Agreement in accordance with SFAS No. 133, as amended, so changes in fair value of the Swap Agreement are offset by changes in the recorded carrying value of the related 6.125% Senior Notes. The fair value of the Swap Agreement is recorded as a noncurrent liability and reduced the carrying value of the related 6.125% Senior Notes by $23.2 million as of December 31, 2003. At December 31, 2003, the fair value of Omnicare's Credit Facility approximates its carrying value, and the fair value of the 8.125% Senior Notes, 6.125% Senior Notes and 4.0% Convertible Debentures is approximately $409.7 million, $250.6 million and $439.9 million, respectively. Embedded in the trust PIERS are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision. The embedded derivatives are periodically valued by a third-party advisor, and at December 31, 2003, the values of both derivatives were not material. However, the values are subject to change, based on market conditions, which could affect the Company's future results of operations. The Company has operations and revenue that occur outside of the 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. Critical Accounting Policies - -------------------------------------------------------------------------------- The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders' equity, revenues and expenses, and related disclosures of commitments and contingencies. On a regular basis, the Company evaluates the estimates used, including those related to bad debts, contractual allowances, inventory valuation, impairment of goodwill, insurance accruals, pension obligations, restructuring accruals, income taxes and other operating allowances and accruals. Management bases its estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company's significant accounting policies are summarized in Note 1 of the Notes to Consolidated Financial Statements. The Company believes the following critical accounting policies involve more significant judgments and estimates used in the preparation of the consolidated financial statements. 49 Revenue Recognition Pharmacy Services Revenue is recognized when products or services are delivered or provided to the customer. A significant portion of the Company's revenues from sales of pharmaceutical and medical products is reimbursable from state Medicaid and, to a lesser extent, the federal Medicare programs. The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and records an estimated contractual allowance for certain sales and receivable balances. Accordingly, the total net sales and receivables reported in the Company's financial statements are recorded at the amount ultimately expected to be received from these payors. Contractual allowances are adjusted to actual as cash is received and claims are settled. The Company evaluates several criteria in developing the estimated contractual allowances on a monthly basis, including historical trends based on actual claims paid, current contract and reimbursement terms, and changes in customer base and payor/product mix. Contract Research Services A portion of the Company's revenues are earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and diagnostics companies, based on contract terms. Most of the contracts provide for services to be performed on a units of service basis. These contracts specifically identify the units of service and unit pricing. Under these contracts, revenue is generally recognized upon completion of the units of service, unless the units of service are performed over an extended period of time. For extended units of service, revenue is recognized based on labor hours expended as a percentage of total labor hours expected to be expended. For time-and-materials contracts, revenue is recognized at contractual hourly rates, and for fixed-price contracts, revenue is recognized using a method similar to that used for extended units of service. The Company's contracts provide for additional service fees for scope of work changes. The Company recognizes revenue related to these scope changes when underlying services are performed and realization is assured. In a number of cases, clients are required to make termination payments in addition to payments for services already rendered. Any anticipated losses resulting from contract performance are charged to earnings in the period identified. Billings and payments are specified in each contract. Revenue recognized in excess of billings is classified as unbilled receivables, while billings in excess of revenue are classified as deferred revenue. Allowance for Doubtful Accounts The Company establishes the allowance for doubtful accounts based on historical credit losses and specifically identified credit risks. Management reviews this allowance on an ongoing basis for appropriateness. Factors considered in determining the adequacy of the allowance include current and expected economic conditions and each customer's payment history and creditworthiness. Judgment is used to assess the collectibility of account balances and the creditworthiness of a customer. Given the Company's experience, management believes that the reserves for potential losses are adequate, but if one or more of the Company's larger customers were to default on its obligations, the Company could be exposed to losses in excess of the provisions established. If economic conditions worsen, or the Company's customers' 50 reimbursement rates were to be adversely affected, impacting the Company's customers' ability to pay, management may adjust the allowance for doubtful accounts accordingly. Inventories The Company maintains inventory at lower of cost or market, with cost determined on the basis of the first-in, first-out method. There are no significant obsolescence reserves recorded since the Company has not historically experienced (nor does it expect to experience) significant levels of inventory write-offs. Omnicare uses a periodic inventory system. Physical inventories are typically performed on a monthly basis at all pharmacy sites, and in all cases at least once a quarter. Cost of goods sold is recorded based on the actual results of the physical inventory counts, and is estimated when a physical inventory is not performed in a particular month. The Company evaluates various criteria in developing estimated cost of goods sold during non-inventory months, including the historical cost of goods sold trends based on prior physical inventory results; a review of cost of goods sold information reflecting current customer contract terms; and consideration and analysis of changes in customer base, product mix, payor mix, state Medicaid and third-party insurance reimbursement levels or other issues that may impact cost of goods sold. Actual cost of goods sold has not varied significantly from estimated amounts in non-inventory months. Goodwill SFAS 142 requires that goodwill and other indefinite-lived intangible assets be reviewed for impairment using a fair value based approach at least annually. SFAS 142 requires the Company to assess whether there is an indication that goodwill is impaired, and requires goodwill to be tested between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying amount. The Company's assessments to date have indicated that goodwill has not been impaired. Events may occur in the future that could result in an impairment of the Company's goodwill, and any resulting impairment charge could be material to the Company's financial position, results of operations or cash flows. The assessment of goodwill impairment requires estimates of future cash flows. To the extent the carrying value of the assets exceed their fair value, an impairment loss would be recorded. Changes in these estimates of future cash flows due to unforeseen events could affect the outcome of the Company's goodwill impairment analysis. Insurance Accruals The Company is self-insured for certain health, property and casualty insurance claims. The Company closely monitors and continually evaluates its historical claims experience and obtains input from third-party insurance professionals to estimate the appropriate level of accrual for incurred claims. Although significant fluctuations may occur in the short term due to unforeseen events and claims, the Company's experience, coupled with its stop-loss coverage, has indicated that its methodology provides for reasonable insurance expense estimates over a long-term period. 51 Employee Benefit Plans For certain of its employee benefit plans, the Company utilizes estimates in developing its actuarial assumptions (including such items as the expected long-term rate of return on plan assets, discount rate and rate of compensation increase, among other items), and relies on actuarial computations to estimate the future potential liability, expense and funding requirements associated with these benefits. These actuarial assumptions and estimates, if assessed differently, could have an impact on the Company's consolidated financial position, results of operations or cash flows. However, a 1% change in the discount rate used to calculate the Company's pension obligations would not have a material impact on the Company's operating results. Restructuring Programs The Company has recorded accruals in connection with its restructuring programs, primarily for facility exit costs (including lease obligations) and involuntary termination benefits. The accruals were established based on management's best estimate of the costs to be incurred and the timing of payments. Changes in these estimates or actual results could require the Company to make adjustments to the recorded accruals. Management reviews these accruals on a regular basis for appropriateness. Income Taxes The Company estimates its tax liabilities based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as well as about the realization of deferred tax assets (including those relating to net operating losses). If the provisions for current or deferred taxes are not adequate, if the Company is unable to realize certain deferred tax assets or if the tax laws change unfavorably, the Company could experience potential losses. Likewise, if provisions for current and deferred taxes are in excess of those eventually needed, if the Company is able to realize additional deferred tax assets or if tax laws change favorably, the Company could experience potential gains. A 1% change in the Company's overall 2003 effective tax rate would impact income tax and net income by $3.1 million (or $0.03 per diluted share). Recently Issued Accounting Standards - -------------------------------------------------------------------------------- In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). This Statement includes new disclosure requirements related to a company's pensions. The annual disclosure provisions of SFAS 132 are effective for fiscal years ending after December 15, 2003. The new interim disclosure provisions are effective for the first interim period beginning after December 15, 2003. The required disclosure provisions of SFAS 132 have been incorporated into the notes to consolidated financial statements. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R"). The statement clarifies some of the 52 provisions of the initial FASB Interpretation No. 46 ("FIN 46"), issued in January 2003. FIN 46-R is effective for the Company for financial statements initially issued after December 31, 2003. The adoption of FIN 46 did not have, and FIN 46-R is not expected to have, a material impact on the Company's consolidated financial position, results of operations or cash flows. In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB 104"), which supersedes SAB 101, "Revenue Recognition in Financial Statements". SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The guidance of EITF 00-21 was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of SAB 104 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Outlook - -------------------------------------------------------------------------------- The Company derives approximately one-half of its revenues directly from government sources, principally state Medicaid and to a lesser extent federal Medicare programs, and one-half from the private sector (including individual residents, third-party insurers and SNFs). As part of ongoing operations, the Company and its customers are subject to regulatory changes in the level of reimbursement received from the Medicare and Medicaid programs. Since 1997, Congress has passed a number of federal laws that have effected major changes in the healthcare system. The Balanced Budget Act of 1997 (the "BBA") sought to achieve a balanced federal budget by, among other things, changing the reimbursement policies applicable to various healthcare providers. In a significant change for the SNF industry, the BBA provided for the introduction in 1998 of the prospective payment system ("PPS") for Medicare-eligible residents of SNFs. Prior to PPS, SNFs under Medicare received cost-based reimbursement. Under PPS, Medicare pays SNFs a fixed fee per patient per day based upon the acuity level of the resident, covering substantially all items and services furnished during a Medicare-covered stay, including pharmacy services. PPS resulted in a significant reduction of reimbursement to SNFs. Admissions of Medicare residents, particularly those requiring complex care, declined in many SNFs due to concerns relating to the adequacy of reimbursement under PPS. This caused a weakness in Medicare census leading to a significant reduction of overall occupancy in the SNFs the Company serves. This decline in occupancy and acuity levels adversely impacted Omnicare's results beginning in 1999, as the Company experienced lower utilization of Omnicare services, coupled with PPS-related pricing pressure from Omnicare's SNF customers. In 1999 and 2000, Congress sought to restore some of the reductions in reimbursement resulting from PPS. A BBRA provision (subsequently modified by BIPA) gave SNFs a temporary rate increase for certain specific high-acuity patients beginning April 1, 2000, and ending when the 53 Centers for Medicare & Medicaid Services ("CMS") implements a refined patient classification system under PPS. CMS did not implement such refinements in fiscal year 2003, and the Bush Administration has indicated that the refinements also will not be implemented in fiscal year 2004, thus continuing the additional rate increases currently in place for certain high-acuity patients. BBRA also included an overall 4% across-the-board increase in payments otherwise determined under the BBA for all patients for federal fiscal years 2001 and 2002. In 2000, BIPA further increased reimbursement by means of a temporary 16.66% across-the-board increase in the nursing component of the federal rate for all patients for services furnished before October 1, 2002, and for fiscal year 2001, a 3.16% rate increase for all patients. These provisions of the BBRA and BIPA helped to improve the financial condition of SNFs, motivated them to increase admissions, particularly of higher acuity residents, and stabilized the unfavorable operating trends attributable to PPS. While certain of the increases in Medicare reimbursement for SNFs provided for under the BBRA and the BIPA expired on October 1, 2002, the impact of these expirations on the Company's customers has not had a significant impact on Omnicare to date. Nonetheless, the loss of revenues associated with future changes in SNF payments could, in the future, have an adverse effect on the financial condition of the Company's SNF clients which could, in turn, adversely affect the timing or level of their payments to Omnicare. Partially offsetting the October 1, 2002 expiration of certain payment increases under BBRA and BIPA discussed above, CMS published, on August 4, 2003, a final rule announcing a 3.0% market basket increase in SNF PPS rates for fiscal year 2004, which began October 1, 2003. In addition, the rule increased fiscal year 2004 rates by an additional 3.26% to reflect cumulative forecast errors since the start of the SNF PPS on July 1, 1998. Together, CMS estimates that these adjustments will result in an estimated $850 million increase in Medicare payments to SNFs in fiscal year 2004. Moreover, the final rule does not adopt refinements to the current patient classification system for fiscal year 2004, which results in the continuation of the temporary add-on payment for certain high-acuity patients established by the BBRA. CMS estimates that these temporary payments will equal approximately $1 billion in fiscal year 2004. President Bush's proposed fiscal year 2005 budget indicates that the refinements will not be adopted in fiscal year 2005. In December 2003, Congress enacted the MMA, which includes a major expansion of the Medicare prescription drug benefit under a new Medicare Part D. Until the Part D benefit goes into effect on January 1, 2006, Medicare beneficiaries can receive assistance with their outpatient prescription drug costs beginning in June 2004 through a new prescription drug discount card program, which will give enrollees access to negotiated discounted prices for prescription drugs. Under the MMA, Medicare beneficiaries may enroll in prescription drug plans offered by private entities, which will provide coverage of outpatient prescription drugs. Medicare beneficiaries who are also entitled to benefits under a state Medicaid program (so-called "dual eligibles") will have their prescription drug costs covered by the new Medicare drug benefit, including nursing home residents served by the Company whose drug costs are currently covered by state Medicaid programs. Implementation of the new Medicare drug benefit will require implementing regulations by CMS. In addition, the Secretary of the Department of Health and Human Services is required to conduct a study of current standards of practice for pharmacy services provided to patients in long-term care settings, and, among other things, make recommendations regarding necessary actions and appropriate reimbursement to ensure the provision of prescription drugs to 54 Medicare beneficiaries in nursing facilities consistent with existing patient safety and quality of care standards. The MMA also reforms the Medicare Part B prescription drug payment methodology. The Company's revenues for drugs dispensed under Medicare Part B are not significant in comparison to total revenues. The MMA also includes provisions that will institute administrative reforms designed to improve Medicare program operations. It is uncertain at this time the impact that the MMA's legislative reforms ultimately will have on the Company. 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. On May 28, 2003, President Bush signed into law the "Jobs and Growth Reconciliation Tax Act," which includes $20 billion in temporary aid to the states, $10 billion of which is earmarked for state Medicaid programs. This additional funding expires June 30, 2004. In addition, some states continue to experience budget shortfalls, which may prompt them to consider implementing reductions in Medicaid reimbursement and other cost control measures. While the Company has managed to adjust to these pricing pressures to date, such pressures are likely to continue or escalate if economic recovery does not fully emerge, and there can be no assurance that such occurrence will not have an adverse impact on the Company's business. Longer term, funding for federal and state healthcare programs must consider the aging of the population and the growth in enrollees as eligibility is expanded; the escalation in drug costs owing to higher drug utilization among seniors and the introduction of new, more efficacious but also more expensive medications; and the long-term financing of the Medicare and Medicaid programs. Given competing national priorities, it remains difficult to predict the outcome and impact on the Company of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs. Demographic trends indicate that demand for long-term care will increase well into the middle of this century as the elderly population grows significantly. Moreover, those over 65 consume a disproportionately high level of healthcare services, including prescription drugs, when compared with the under-65 population. There is widespread consensus that appropriate pharmaceutical care is generally considered the most cost-effective form of treatment for the chronic ailments afflicting the elderly and also one that is able to improve the quality of life. Further, the pace and quality of new drug development is yielding many promising new drugs targeted at the diseases of the elderly. These new drugs may be more expensive than older, less effective drug therapies due to rising research costs. However, they are significantly more effective in curing or ameliorating illness and in lowering overall healthcare costs by reducing, among other things, hospitalizations, physician visits, nursing time and lab tests. These trends not only support long-term growth for the geriatric pharmaceutical industry but also containment of healthcare costs and the well-being of the nation's growing elderly population. In order to fund this growing demand, the Company anticipates that the government and the private sector will continue to review, assess and possibly alter healthcare delivery systems and payment methodologies. While it is not possible to predict the effect of any further initiatives on Omnicare's business, management believes that the Company's expertise in geriatric pharmaceutical care and pharmaceutical cost management position Omnicare to help meet the challenges of today's healthcare environment. Further, while volatility can occur from time to 55 time in the contract research business owing to factors such as the success or failure of its clients' compounds, the timing or budgetary constraints of its clients, or consolidation in the pharmaceutical industry, new drug discovery remains an important priority of pharmaceutical manufacturers. Pharmaceutical manufacturers, in order to optimize their research and development efforts, will continue to turn to contract research organizations to assist them in accelerating drug research development and commercialization. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information - -------------------------------------------------------------------------------- In addition to historical information, this report contains certain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are made on the basis of management's views and assumptions regarding business performance as of the time the statements are made, and management does not undertake any obligation to update these statements. These forward-looking statements include, but are not limited to, all statements regarding the intent, belief or current expectations regarding the matters discussed or incorporated by reference in this document (including statements as to "beliefs," "expectations," "anticipations," "intentions" or similar words) and all statements which are not statements of historical fact. Forward-looking statements in this report include, but are not limited to, the following: expectations concerning the Company's financial performance, results of operations or business outlook; trends in the long-term healthcare and contract research industries generally; anticipated demographic trends in the healthcare industry; the impact of drug price inflation; changes in government and other reimbursement formulas to take into account drug price inflation or deflation; the ability to allocate resources in order to enhance gross profit margins; the ability to continue the Company's valuation creation strategy through expanding its core pharmaceutical business and leveraging that business through the development and expansion of clinical information services; the Company's ability to continue to leverage fixed and variable overhead costs through internal and acquired growth; the impact of the 2003 refinancing in enhancing the Company's financial position and providing financial flexibility to support its ongoing growth strategies; other factors affecting the Company's strategy for future growth; the effectiveness of the Company's unit-of-use controls and computerized documentation system; the effectiveness of the Company's health and outcomes management programs; the ability to leverage the Company's CRO business and its core pharmacy business as anticipated; expectations concerning product and market development efforts; trends concerning the commencement, continuation or cancellation of CRO projects and backlog; the effectiveness of recent cost reduction efforts in the CRO; volatility in the CRO business; anticipated business performance of the CRO in 2004; trends in healthcare funding issues, including state Medicaid budgets, enrollee eligibility, escalating drug prices due to higher utilization among seniors and the aging of the population; the introduction of more expensive medications, and increasing use of generic medications; the impact of any changes in healthcare policy relating to the future funding of the Medicaid and Medicare programs; the cost-effectiveness of pharmaceuticals in treating chronic illnesses for the elderly; the effectiveness of the Company's formulary compliance program; the effectiveness of the Company's pharmaceutical purchasing programs and its ability to obtain 56 discounts and manage pharmaceutical costs; the adequacy and availability of the Company's sources of liquidity and capital; payments of future quarterly dividends; the adequacy of the Company's net cash flows from operating activities, credit facilities and other long and short-term debt financings to satisfy the Company's future working capital needs, acquisition contingency commitments, debt servicing, capital expenditures and other financing requirements for the foreseeable future; the ability, if necessary, to refinance indebtedness or issue additional indebtedness or equity; interest rate risk on the Company's outstanding debt; valuations of derivative instruments embedded in the Company's trust PIERS instruments; the adequacy of the Company's allowance for doubtful accounts; expectations concerning inventory write-offs; the adequacy of insurance expense estimates and methodology; the adequacy of the provisions for current or deferred taxes; the impact of reduced government reimbursement rates to the Company's SNF clients which could adversely affect the timing or level of SNF payments to the Company; the impact of the MMA; the impact of continued pressure on federal and state Medicaid budgets and budget shortfalls which have led to decreasing reimbursement rates and other cost control measures in certain states; the Company's ability to respond to such federal and state budget shortfalls and corresponding reductions in Medicaid reimbursement rates; the effect of any changes and considerations in long-term healthcare funding policies for Medicare and Medicaid programs; expected demand for long-term care; the pace and quality of new drug development targeted at diseases of the elderly; the impact of newer drugs that, although more expensive, are more efficient at treating illness and thereby reduce overall healthcare costs; trends and expectations concerning long-term growth prospects for the geriatric care industry and the containment of healthcare costs for the elderly; expectations concerning the growth in the elderly population; anticipated changes in healthcare delivery systems and payment methodologies in order to fund growing demand; the ability of the Company to utilize its expertise in geriatric pharmaceutical care and pharmaceutical cost management to meet the anticipated challenges of the healthcare environment; the belief that new drug discovery will remain an important priority for pharmaceutical manufacturers; and expectations concerning the continued need for pharmaceutical manufacturers to utilize contract research businesses in optimizing research and development efforts. These forward-looking statements, together with other statements that are not historical, involve known and unknown risks, uncertainties, contingencies and other factors that could cause 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 the Company, include, but are not limited to: overall economic, financial, political and business conditions; trends in the long-term healthcare and contract research industries; competition in the pharmaceutical, long-term care and contract research industries; the impact of consolidation in the pharmaceutical and long-term care industries; trends in long-term care occupancy rates and demographics; the ability to attract new clients and service contracts and retain existing clients and service contracts; trends for the continued growth of the Company's businesses; the effectiveness of the Company's formulary compliance program; trends in drug pricing, including the impact and pace of pharmaceutical price increases; delays and reductions in reimbursement by the government and other payors to customers and to the Company as a result of pressures on federal and state budgets; the overall financial condition of the Company's customers; the ability of the Company to assess and react to the financial condition of its customers; the effectiveness of the 57 Company's pharmaceutical purchasing programs and its ability to obtain discounts and manage pharmaceutical costs; the ability of vendors and business partners to continue to provide products and services to the Company; the continued successful integration of acquired companies and the ability to realize anticipated revenues, economies of scale, cost synergies and profitability; the continued availability of suitable acquisition candidates; pricing and other competitive factors in the industry; increases or decreases in reimbursement rates and the impact of other cost control measures; the impact on the Company's revenues, profits and margins resulting from market trends in the use of newer branded drugs versus generic drugs; the number and usage of generic drugs and price competition in the drug marketplace; the ability to attract and retain needed management; competition for qualified staff in the healthcare industry; the impact and pace of technological advances; the ability to obtain or maintain rights to data, technology and other intellectual property; the demand for the Company's products and services; variations in costs or expenses; the ability to implement productivity, consolidation and cost reduction efforts and to realize anticipated benefits; the ability of clinical research projects to produce revenues in future periods; the ability to benefit from streamlining efforts at the CRO; trends concerning CRO backlog; the effectiveness of the Company's implementation and expansion of its clinical and other service programs; the effect of new legislation, government regulations, and/or executive orders, including those relating to reimbursement and drug pricing policies and changes in the interpretation and application of such policies; the impact of the MMA and its implementing regulations; legislation and regulations affecting payment and reimbursement rates for SNFs; trends in federal and state budgets and their impact on Medicaid reimbursement rates; government budgetary pressures and shifting priorities; the Company's ability to adjust to federal and state budget shortfalls; efforts by payors to control costs; the failure of the Company or the long-term care facilities it serves to obtain or maintain required regulatory approvals or licenses; loss or delay of contracts pertaining to Omnicare's CRO business for regulatory or other reasons; the outcome of litigation; potential liability for losses not covered by, or in excess of, insurance; the impact of differences in actuarial assumptions and estimates pertaining to employee benefit plans; events or circumstances which result in an impairment of goodwill; market conditions which adversely affect the valuation of the trust PIERS instruments; the outcome of audit, compliance, administrative or investigatory reviews; volatility in the market for the Company's stock and in the financial markets generally; access to adequate capital and financing; changes in international economic and political conditions and currency fluctuations between the U.S. dollar and other currencies; changes in tax laws and regulations; and changes in accounting rules and standards. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, the Company's actual results, performance or achievements could differ materially from those expressed in, or implied by, such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. Except as otherwise required by law, the Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required under this Item is set forth in the "Quantitative and Qualitative Disclosures about Market Risk" caption at Part II, Item 7, of this Filing. 58 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Financial Statement Schedule
Page ---- Financial Statements: Report of Independent Auditors 60 Consolidated Statements of Income 61 Consolidated Balance Sheets 62 Consolidated Statements of Cash Flows 63 Consolidated Statements of Stockholders' Equity 64 Notes to Consolidated Financial Statements 65 Financial Statement Schedule: II - Valuation and Qualifying Accounts S-1
All other financial statement schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or Notes thereto. 59 Report of Independent Auditors To the Stockholders and Board of Directors of Omnicare, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Omnicare, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill. /s/ PricewaterhouseCoopers LLP - ------------------------------------- PricewaterhouseCoopers LLP Chicago, Illinois February 6, 2004 60 CONSOLIDATED STATEMENTS OF INCOME OMNICARE, INC. AND SUBSIDIARY COMPANIES (In thousands, except per share data)
For the years ended December 31, ------------------------------------ 2003 2002 2001 ---------- ---------- ---------- Sales $3,474,354 $2,606,450 $2,159,131 Reimbursable out-of-pockets 24,820 26,304 23,905 ---------- ---------- ---------- Total net sales 3,499,174 2,632,754 2,183,036 ---------- ---------- ---------- Cost of sales 2,576,794 1,915,397 1,579,732 Reimbursed out-of-pocket expenses 24,820 26,304 23,905 ---------- ---------- ---------- Total direct costs 2,601,614 1,941,701 1,603,637 ---------- ---------- ---------- Gross profit 897,560 691,053 579,399 Selling, general and administrative expenses 509,977 411,272 349,545 Goodwill amortization (Note 5) -- -- 33,199 Restructuring charges (Note 12) -- 23,195 18,344 Other expense (Note 13) -- -- 4,817 ---------- ---------- ---------- Operating income 387,583 256,586 173,494 Investment income 4,166 3,276 2,615 Interest expense (Note 7) (81,300) (56,811) (56,324) ---------- ---------- ---------- Income before income taxes 310,449 203,051 119,785 Income taxes 116,081 77,145 45,514 ---------- ---------- ---------- Net income $ 194,368 $ 125,906 $ 74,271 ========== ========== ========== Earnings per share: Basic $ 1.97 $ 1.34 $ 0.80 ========== ========== ========== Diluted $ 1.93 $ 1.33 $ 0.79 ========== ========== ========== Weighted average number of common shares outstanding: Basic 98,800 94,168 93,124 ========== ========== ========== Diluted 103,243 94,905 93,758 ========== ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these statements. 61 CONSOLIDATED BALANCE SHEETS OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands, except share data) December 31, 2003 2002 ----------------------- ASSETS Current assets: Cash and cash equivalents $ 187,413 $ 137,936 Restricted cash 714 3,147 Accounts receivable, less allowances of $108,813 (2002-$68,593) 678,255 522,857 Unbilled receivables 15,281 25,062 Inventories 326,550 190,464 Deferred income tax benefits 53,224 18,621 Other current assets 121,651 103,471 ---------- ---------- Total current assets 1,383,088 1,001,558 Properties and equipment, at cost less accumulated depreciation of $200,498 (2002-$177,870) 148,307 139,908 Goodwill 1,690,558 1,188,907 Other noncurrent assets 173,068 97,212 ---------- ---------- Total assets $3,395,021 $2,427,585 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 296,089 $ 175,648 Current debt 20,709 110 Accrued employee compensation 30,611 22,627 Deferred revenue 22,454 25,254 Income taxes payable 16,244 6,837 Other current liabilities 76,653 66,174 ---------- ---------- Total current liabilities 462,760 296,650 Long-term debt 135,855 187 5.0% convertible subordinated debentures, due 2007 -- 345,000 8.125% senior subordinated notes, due 2011 375,000 375,000 6.125% senior subordinated notes, net, due 2013 226,822 -- 4.0% contingent convertible notes, due 2033 345,000 -- Deferred income tax liabilities 50,913 84,071 Other noncurrent liabilities 122,647 51,615 ---------- ---------- Total liabilities 1,718,997 1,152,523 ---------- ---------- Commitments and contingencies (Note 15) 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, 105,050,900 shares issued (2002-95,441,400 shares issued) 105,051 95,441 Paid-in capital 986,138 737,421 Retained earnings 684,348 498,856 Treasury stock, at cost-1,863,000 shares (2002-1,139,900 shares) (46,087) (23,471) Deferred compensation (49,528) (29,018) Accumulated other comprehensive income (3,898) (4,167) ---------- ---------- Total stockholders' equity 1,676,024 1,275,062 ---------- ---------- Total liabilities and stockholders' equity $3,395,021 $2,427,585 ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these statements. 62 CONSOLIDATED STATEMENTS OF CASH FLOWS OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands) For the years ended December 31, --------------------------------- 2003 2002 2001 --------- --------- --------- Cash flows from operating activities: Net income $ 194,368 $ 125,906 $ 74,271 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 37,783 33,129 32,164 Amortization 15,237 12,134 41,906 Provision for doubtful accounts 44,680 31,163 25,490 Deferred tax provision 43,685 15,428 17,305 Write-off of debt issuance costs 3,755 -- -- Non-cash portion of restructuring charges -- 9,060 2,811 Changes in assets and liabilities, net of effects from acquisition of businesses: Accounts receivable and unbilled receivables (96,971) (41,788) (50,774) Inventories (87,278) (28,261) (12,949) Current and noncurrent assets 8,988 (37,046) 6,292 Accounts payable 31,121 34,829 15,130 Accrued employee compensation 705 517 (1,993) Deferred revenue (2,800) (14,084) 11,005 Current and noncurrent liabilities (23,789) 18,122 (7,571) --------- --------- --------- Net cash flows from operating activities 169,484 159,109 153,087 --------- --------- --------- Cash flows from investing activities: Acquisition of businesses (663,411) (127,783) (20,263) Capital expenditures (17,115) (24,648) (26,222) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust 2,433 (225) (622) Other 44 273 305 --------- --------- --------- Net cash flows from investing activities (678,049) (152,383) (46,802) --------- --------- --------- Cash flows from financing activities: Borrowings on line of credit facilities and term loans 749,000 90,000 70,000 Payments on line of credit facilities and term loans (593,103) (120,000) (475,000) Proceeds from long-term borrowings 595,000 -- 375,000 Payments on long-term borrowings and obligations (354,167) (214) (2,898) Fees paid for financing arrangements (24,541) -- (16,254) Proceeds from stock offering, net of issuance costs 178,774 -- -- Proceeds from stock awards and exercise of stock options, net of stock tendered in payment 12,275 667 8,065 Dividends paid (8,876) (8,491) (8,468) Other 122 72 -- --------- --------- --------- Net cash flows from financing activities 554,484 (37,966) (49,555) --------- --------- --------- Effect of exchange rate changes on cash 3,558 780 59 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 49,477 (30,460) 56,789 Cash and cash equivalents at beginning of year - unrestricted 137,936 168,396 111,607 --------- --------- --------- Cash and cash equivalents at end of year - unrestricted $ 187,413 $ 137,936 $ 168,396 ========= ========= =========
The Notes to Consolidated Financial Statements are an integral part of these statements. 63 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands, except per share data) Common Paid-in Retained Treasury Stock Capital Earnings Stock -------- -------- -------- -------- Balance at January 1, 2001 $ 92,731 $692,695 $315,638 $(10,808) Dividends paid ($0.09 per share) -- -- (8,468) -- Stock acquired for benefit plans -- -- -- (83) Exercise of stock options 1,430 20,691 -- (6,614) Stock awards, net of amortization 511 9,747 -- (2,319) Other -- (432) -- -- -------- -------- -------- -------- Subtotal 94,672 722,701 307,170 (19,824) -------- -------- -------- -------- Net income -- -- 74,271 -- Other comprehensive income (loss), net of tax: Cumulative translation adjustment -- -- -- -- Unrealized appreciation in fair value of investments -- -- -- -- Equity adjustment for minimum pension liability -- -- -- -- -------- -------- -------- -------- Comprehensive income (loss) -- -- 74,271 -- -------- -------- -------- -------- Balance at December 31, 2001 94,672 722,701 381,441 (19,824) Dividends paid ($0.09 per share) -- -- (8,491) -- Stock acquired for benefit plans -- -- -- (112) Exercise of stock options 229 4,055 -- (313) Stock awards, net of amortization 540 10,807 -- (3,222) Other -- (142) -- -- -------- -------- -------- -------- Subtotal 95,441 737,421 372,950 (23,471) -------- -------- -------- -------- Net income -- -- 125,906 -- Other comprehensive income (loss), net of tax: Cumulative translation adjustment -- -- -- -- Unrealized appreciation in fair value of investments -- -- -- -- Equity adjustment for minimum pension liability -- -- -- -- -------- -------- -------- -------- Comprehensive income -- -- 125,906 -- -------- -------- -------- -------- Balance at December 31, 2002 95,441 737,421 498,856 (23,471) Dividends paid ($0.09 per share) -- -- (8,876) - Stock acquired for benefit plans -- - -- (157) Issuance of common stock 6,469 172,305 -- -- Stock issued in connection with acquisition 79 2,921 -- -- Exercise of stock options 2,208 46,793 -- (17,326) Stock awards, net of amortization 854 26,612 -- (5,133) Other -- 86 -- -- -------- -------- -------- -------- Subtotal 105,051 986,138 489,980 (46,087) -------- -------- -------- -------- Net income -- -- 194,368 -- Other comprehensive income (loss), net of tax: Cumulative translation adjustment -- -- -- -- Unrealized appreciation in fair value of investments -- -- -- -- Equity adjustment for minimum pension liability -- -- -- -- -------- -------- -------- -------- Comprehensive income -- -- 194,368 -- -------- -------- -------- -------- Balance at December 31, 2003 $105,051 $986,138 $684,348 $(46,087) ======== ======== ======== ======== (In thousands, except per share data) Accumulated Other Total Deferred Comprehensive Stockholders' Compensation Income Equity ------------ ------------- ------------- Balance at January 1, 2001 $(18,915) $(2,918) $1,068,423 Dividends paid ($0.09 per share) -- -- (8,468) Stock acquired for benefit plans -- -- (83) Exercise of stock options -- -- 15,507 Stock awards, net of amortization (5,358) -- 2,581 Other -- -- (432) -------- ------- ---------- Subtotal (24,273) (2,918) 1,077,528 -------- ------- ---------- Net income -- -- 74,271 Other comprehensive income (loss), net of tax: Cumulative translation adjustment -- 59 59 Unrealized appreciation in fair value of investments -- 208 208 Equity adjustment for minimum pension liability -- (2,283) (2,283) -------- ------- ---------- Comprehensive income (loss) -- (2,016) 72,255 -------- ------- ---------- Balance at December 31, 2001 (24,273) (4,934) 1,149,783 Dividends paid ($0.09 per share) -- -- (8,491) Stock acquired for benefit plans -- -- (112) Exercise of stock options -- -- 3,971 Stock awards, net of amortization (4,745) -- 3,380 Other -- -- (142) -------- ------- ---------- Subtotal (29,018) (4,934) 1,148,389 -------- ------- ---------- Net income -- -- 125,906 Other comprehensive income (loss), net of tax: Cumulative translation adjustment -- 781 781 Unrealized appreciation in fair value of investments -- 1,274 1,274 Equity adjustment for minimum pension liability -- (1,288) (1,288) -------- ------- ---------- Comprehensive income -- 767 126,673 -------- ------- ---------- Balance at December 31, 2002 (29,018) (4,167) 1,275,062 Dividends paid ($0.09 per share) -- -- (8,876) Stock acquired for benefit plans -- -- (157) Issuance of common stock -- -- 178,774 Stock issued in connection with acquisition -- -- 3,000 Exercise of stock options -- -- 31,675 Stock awards, net of amortization (20,510) -- 1,823 Other -- -- 86 -------- ------- ---------- Subtotal (49,528) (4,167) 1,481,387 -------- ------- ---------- Net income -- -- 194,368 Other comprehensive income (loss), net of tax: Cumulative translation adjustment -- 3,882 3,882 Unrealized appreciation in fair value of investments -- (895) (895) Equity adjustment for minimum pension liability -- (2,718) (2,718) -------- ------- ---------- Comprehensive income -- 269 194,637 -------- ------- ---------- Balance at December 31, 2003 $(49,528) $(3,898) $1,676,024 ======== ======= ==========
The Notes to Consolidated Financial Statements are an integral part of these statements. 64 Notes to Consolidated Financial Statements Note 1 - Description of Business and Summary of Significant Accounting Policies Description of Business Omnicare, Inc. and its subsidiaries ("Omnicare" or the "Company") provide geriatric pharmaceutical care and clinical research services. At December 31, 2003, Omnicare served long-term care facilities comprising approximately 1,003,000 beds in 47 states and the District of Columbia, making Omnicare the nation's largest provider of professional pharmacy, related consulting and data management services for skilled nursing, assisted living and other institutional healthcare providers. The Company also provided clinical research services for the pharmaceutical and biotechnology industries in 29 countries worldwide at December 31, 2003. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Translation of Foreign Financial Statements Assets and liabilities of the Company's foreign operations are translated at the year-end rate of exchange, and the income statements are translated at the average rate of exchange for the year. Gains or losses from translating foreign currency financial statements are accumulated in a separate component of stockholders' equity. Cash Equivalents Cash equivalents include all investments in highly liquid instruments with original maturities of three months or less. Restricted Cash Restricted cash represents cash transferred to separate irrevocable trusts for settlement of employee health and severance costs. Fair Value of Financial Instruments For cash and cash equivalents, restricted cash, accounts receivable and unbilled receivables, the carrying value of these items approximates their fair value. The fair value of restricted funds held in trust for settlement of the Company's employee benefit obligations is based on quoted market prices of the investments held by the trustee. For accounts payable, the carrying value approximates fair value. The fair value of the Company's $750.0 million credit facility approximates its carrying value, as the effective interest rate fluctuates with changes in market rates. The fair value of the 8.125% senior subordinated notes, 6.125% senior subordinated notes 65 and 4.0% contingent convertible notes, respectively, was $409.7 million, $250.6 million and $439.9 million at December 31, 2003, as determined by quoted market rates on that date. During 2003, the Company entered into an interest rate swap agreement on all $250.0 million of its aggregate principal amount of the 6.125% senior subordinated notes. The fair value of the interest rate swap agreement reduced the carrying value of the 6.125% senior subordinated notes by $23.2 million as of December 31, 2003. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist principally of interest-bearing cash and cash equivalents and accounts receivable. The Company is exposed to credit risk in the event of default by the financial institutions or issuers of cash and cash equivalents to the extent recorded on the balance sheet. At any given point in time, the Company has cash on deposit with financial institutions, and cash invested in high quality short-term money market funds and U.S. government-backed repurchase agreements, generally having original maturities of three months or less, in order to minimize its credit risk. The Company establishes allowances for doubtful accounts based on historical credit losses and specifically identified credit risks. Management reviews this allowance on an ongoing basis for appropriateness, and such losses have been within management's expectations. For the years ended December 31, 2003, 2002 and 2001, no single customer accounted for 10% or more of revenues. The Company generally does not require collateral. Approximately one-half of Omnicare's pharmacy services billings are directly reimbursed by government-sponsored programs. These programs include state Medicaid and, to a lesser extent, the federal Medicare programs. The remainder of Omnicare's billings are paid or reimbursed by individual residents, long-term care facilities and other third-party payors, including private insurers. A portion of these revenues also is indirectly dependent on government programs. The table below represents the Company's approximated payor mix for the last three years:
2003 2002 2001 ---- ---- ---- State Medicaid programs 47% 46% 44% Private pay and long-term care facilities(a) 45% 44% 44% Federal Medicare programs(b) 2% 2% 3% Other private sources(c) 6% 8% 9% --- --- --- Totals 100% 100% 100% === === ===
(a) Includes payments from skilled nursing facilities on behalf of their federal Medicare program-eligible residents. (b) Includes direct billing for medical supplies. (c) Includes the Company's contract research organization revenues. 66 Inventories Inventories consist primarily of purchased pharmaceuticals and medical supplies held for sale to customers and are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. Omnicare uses a periodic inventory system. Physical inventories are typically performed on a monthly basis at all pharmacy sites, and in all cases at least once a quarter. Cost of goods sold is recorded based on the actual results of the physical inventory counts, and is estimated when a physical inventory is not performed in a particular month. The Company evaluates various criteria in developing estimated cost of goods sold during non-inventory months, including the historical cost of goods sold trends based on prior physical inventory results; a review of cost of goods sold information reflecting current customer contract terms; and consideration and analysis of changes in customer base, product mix, payor mix, state Medicaid and third-party insurance reimbursement levels or other issues that may impact cost of goods sold. Actual cost of goods sold has not varied significantly from estimated amounts in non-inventory months. Properties and Equipment Properties and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance, repairs, renewals and betterments that do not materially prolong the useful lives of the assets are charged to expense as incurred. Depreciation of properties and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from five to 10 years for computer equipment and software, machinery and equipment, and furniture and fixtures. Buildings and building improvements are depreciated over 40 years, and leasehold improvements are amortized over the lesser of the lease terms or their useful lives. The Company capitalizes certain costs that are directly associated with the development of internally developed software, representing the historical cost of these assets. Once the software is completed and placed into service, such costs are amortized over the estimated useful lives, ranging from five to 10 years. Leases Leases that substantially transfer all of the benefits and risks of ownership of property to Omnicare or otherwise meet the criteria for capitalization under U.S. Generally Accepted Accounting Principles ("U.S. GAAP") are accounted for as capital leases. An asset is recorded at the time a capital lease is entered into together with its related long-term obligation to reflect its purchase and financing. Property and equipment recorded under capital leases are depreciated on the same basis as previously described. Rental payments under operating leases are expensed as incurred. Valuation of Long-Lived Assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived assets such as property and equipment, software (acquired and internally developed) and investments are 67 reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Goodwill, Intangibles and Other Assets Intangible assets are comprised primarily of goodwill, customer relationship assets, noncompete agreements and technology assets, all originating from business combinations accounted for as purchase transactions. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In accordance with SFAS 142, goodwill is no longer amortized but is instead reviewed for impairment at least annually and upon the occurrence of an event that indicates impairment may have occurred. Intangible assets that will continue to be amortized under SFAS 142 are amortized using the straight-line method over their useful lives, ranging from three to 13 years. Debt issuance costs are included in other assets and are amortized using the effective interest method over the life of the related debt. Insurance Accruals The Company is self-insured for certain health, property and casualty insurance claims, with a stop-loss umbrella policy to limit the maximum potential liability for both individual and aggregate claims for a plan year. Claims are paid as they are submitted to the respective plan administrators. The Company records monthly expense for the self-insurance plans in its financial statements for incurred claims, based on historical claims experience and input from third-party insurance professionals in order to determine the appropriate accrual level. The accrual gives consideration to claims that have been incurred but not yet paid and/or reported to the plan administrator. The Company establishes the accruals based on the historical claim lag periods and current payment trends for insurance claims. Revenue Recognition Pharmacy Services Revenue is recognized when products or services are delivered or provided to the customer. A significant portion of the Company's revenues from sales of pharmaceutical and medical products is reimbursable from state Medicaid and, to a lesser extent, the federal Medicare programs. The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and records an estimated contractual allowance for certain sales and receivable balances. Accordingly, the total net sales and receivables reported in the Company's financial statements are recorded at the amount ultimately expected to be received from these payors. Contractual allowances are adjusted to actual as cash is received and claims are settled. The Company evaluates several criteria in developing the estimated contractual allowances on a monthly basis, including historical trends based on actual claims paid, current contract and reimbursement terms, and changes in customer base and payor/product mix. 68 Contract Research Services A portion of the Company's revenues are earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and diagnostics companies, based on contract terms. Most of the contracts provide for services to be performed on a units of service basis. These contracts specifically identify the units of service and unit pricing. Under these contracts, revenue is generally recognized upon completion of the units of service, unless the units of service are performed over an extended period of time. For extended units of service, revenue is recognized based on labor hours expended as a percentage of total labor hours expected to be expended. For time-and-materials contracts, revenue is recognized at contractual hourly rates, and for fixed-price contracts, revenue is recognized using a method similar to that used for extended units of service. The Company's contracts provide for additional service fees for scope of work changes. The Company recognizes revenue related to these scope changes when underlying services are performed and realization is assured. In a number of cases, clients are required to make termination payments in addition to payments for services already rendered. Any anticipated losses resulting from contract performance are charged to earnings in the period identified. Billings and payments are specified in each contract. Revenue recognized in excess of billings is classified as unbilled receivables, while billings in excess of revenue are classified as deferred revenue on the accompanying consolidated balance sheets. In accordance with Emerging Issues Task Force ("EITF") Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred" ("EITF No. 01-14"), the Company has recorded reimbursements received for "out-of-pocket" expenses on a grossed-up basis in the income statement as revenues and expenses. Stock-Based Employee Compensation At December 31, 2003, the Company had three stock-based employee compensation plans, which are described more fully in Note 8 of the Notes to Consolidated Financial Statements. As permitted under U.S. GAAP, the Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations. No stock-based employee compensation cost for stock options is reflected in net income, as all options granted under the plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. 69 The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), for stock options (in thousands, except per share data):
For the years ended December 31, 2003 2002 2001 -------------------------------- Net income, as reported $194,368 $125,906 $74,271 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 6,147 5,949 3,778 Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects (15,149) (13,784) (7,306) -------- -------- ------- Pro forma net income $185,366 $118,071 $70,743 ======== ======== ======= Earnings per share: Basic - as reported $ 1.97 $ 1.34 $ 0.80 ======== ======== ======= Basic - pro forma $ 1.88 $ 1.25 $ 0.76 ======== ======== ======= Diluted - as reported $ 1.93 $ 1.33 $ 0.79 ======== ======== ======= Diluted - pro forma $ 1.84 $ 1.24 $ 0.75 ======== ======== =======
The fair value of each option at the grant date is estimated using the Black-Scholes option-pricing model, with the following weighted average assumptions used for grants in 2003, 2002 and 2001:
2003 2002 2001 ------ ------ ------ Volatility 59% 63% 64% Risk-free interest rate 3.4% 3.1% 3.75% Dividend yield 0.2% 0.4% 0.4% Expected term of options (in years) 5.1 5.5 4.9 Weighted average fair value per option $17.97 $14.80 $10.97
The above pro forma information is based on the circumstances and assumptions in effect for each of the respective periods and, therefore, is not necessarily representative of the actual effect of SFAS 123 on net income or earnings per share in future years. Income Taxes The Company accounts for income taxes using the asset and liability method under which deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates to differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. 70 Comprehensive Income The accumulated aftertax other comprehensive income (loss) adjustments at December 31, 2003 and 2002, net of aggregate applicable tax benefits of $3.2 million and $1.0 million, respectively, by component and in the aggregate, follow (in thousands):
December 31, 2003 2002 ----------------- Cumulative foreign currency translation adjustments $ 1,311 $(2,571) Unrealized appreciation in fair value of investments 1,080 1,975 Equity adjustment for minimum pension liability (6,289) (3,571) ------- ------- Total accumulated other comprehensive loss adjustments, net $(3,898) $(4,167) ======= =======
Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and amounts reported in the accompanying notes. Significant estimates underlying the accompanying consolidated financial statements include the allowance for doubtful accounts; the net carrying value of inventories; the goodwill impairment assessment; accruals pursuant to the Company's restructuring initiatives; employee benefit plan assumptions and reserves; current and deferred income tax assets, liabilities and provisions; and various other operating allowances and accruals (including health, property and casualty insurance accruals). Actual results could differ from those estimates depending upon certain risks and uncertainties. Potential risks and uncertainties, many of which are beyond the control of Omnicare, include, but are not necessarily limited to, such factors as overall economic, financial and business conditions; delays and reductions in reimbursement by the government and other payors to Omnicare and/or its customers; the overall financial condition of Omnicare's customers; the effect of new government regulations, executive orders and/or legislative initiatives, including those relating to reimbursement and drug pricing policies and changes in the interpretation and application of such policies; efforts by payors to control costs; the outcome of litigation; other contingent liabilities; loss or delay of contracts pertaining to the Company's Contract Research Organization ("CRO" or "CRO Services") segment for regulatory or other reasons; currency fluctuations between the U.S. dollar and other currencies; changes in interest rates; changes in the valuation of the Company's financial instruments, including the swap agreement and other derivative instruments; changes in tax laws and regulations; access to capital and financing; the demand for Omnicare's products and services; pricing and other competitive factors in the industry; variations in costs or expenses; and changes in accounting rules and standards. Recently Issued Accounting Standards In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). This Statement includes new disclosure requirements related to a company's 71 pensions. The annual disclosure provisions of SFAS 132 are effective for fiscal years ending after December 15, 2003. The new interim disclosure provisions are effective for the first interim period beginning after December 15, 2003. The required disclosure provisions of SFAS 132 have been incorporated into the notes to consolidated financial statements. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R"). The statement clarifies some of the provisions of the initial FASB Interpretation No. 46 ("FIN 46"), issued in January 2003. FIN 46-R is effective for the Company for financial statements initially issued after December 31, 2003. The adoption of FIN 46 did not have, and FIN 46-R is not expected to have, a material impact on the Company's consolidated financial position, results of operations or cash flows. In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB 104"), which supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The guidance of EITF 00-21 was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of SAB 104 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Reclassifications Certain reclassifications of prior-year amounts have been made to conform with the current-year presentation. Note 2 - Acquisitions Since 1989, the Company has been involved in a program to acquire providers of pharmaceutical products and related pharmacy management services and medical supplies to long-term care facilities and their residents. The Company's strategy has included the acquisition of freestanding institutional pharmacy businesses as well as other assets, generally insignificant in size, which have been combined with existing pharmacy operations to augment their internal growth. From time to time the Company may acquire other businesses, such as long-term care software companies, contract research organizations, pharmacy consulting companies, specialty pharmacy companies and medical supply companies, which complement the Company's core business. During the years ended December 31, 2003 and 2002, the Company completed two and one significant acquisitions, respectively, all of which were institutional pharmacy businesses that were accounted for using the purchase method. No acquisitions of businesses were completed during the year ended December 31, 2001. In accordance with U.S. GAAP, all business combinations entered into after July 1, 2001 are accounted for using the purchase method, which requires that the purchase price paid for each 72 acquisition be allocated to the fair value of the assets acquired and liabilities assumed. Purchase price allocations are subject to final determination within one year after the acquisition date. On July 15, 2003, Omnicare acquired the SunScript pharmacy services business from Sun Healthcare Group, Inc. The acquisition, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $82 million. The Company funded the acquisition of SunScript from existing cash balances. Up to an additional $15.0 million may become payable post-closing, subject to adjustment. The Company is using an independent valuation firm to assist with the completion of the purchase price allocation, including the identification of goodwill and other identifiable intangible assets. At the time of the acquisition, SunScript provided pharmaceutical products and related consulting services to skilled nursing and assisted living facilities comprised of approximately 43,000 beds located in 19 states (excluding beds in Sun Healthcare facilities that Sun Healthcare is divesting). SunScript served these facilities through its network of 31 long-term care pharmacies. Omnicare expects to achieve certain economies of scale and operational efficiencies from the acquisition. The net assets and operating results of SunScript have been included from the date of acquisition in the Company's financial statements. The following table summarizes the estimated fair values of the net assets acquired at the date of the SunScript acquisition (in thousands): Current assets $ 34,699 Property and equipment 4,771 Noncurrent assets, including intangible assets and goodwill 63,575 Current liabilities (21,331) -------- Total net assets acquired $ 81,714 ========
On January 15, 2003, Omnicare closed its $5.50 per share cash tender offer for all of the issued and outstanding shares of Class A common stock and Class B common stock of NCS HealthCare, Inc. ("NCS"). Omnicare accepted, on January 15, 2003, all validly tendered shares for payment (totaling 17,510,126 shares of Class A common stock, representing approximately 94% of the then-outstanding Class A common stock, and 5,038,996 shares of Class B common stock, representing 100% of the then-outstanding Class B common stock). Omnicare subsequently acquired the remaining shares of Class A common stock of NCS. The acquisition of NCS, accounted for as a purchase business combination, included cash consideration and transaction costs of approximately $500 million. The cash consideration included the payoff of certain NCS debt totaling approximately $325.5 million, which was retired by Omnicare immediately following the acquisition. The Company initially financed the acquisition with available cash, working capital and borrowings under its three-year, $500.0 million revolving credit facility. The Company later refinanced the borrowings under its three-year, $500.0 million revolving credit facility, as described further in Note 7 of the Notes to Consolidated Financial Statements. 73 At the time of the acquisition, NCS provided professional pharmacy and related services to long-term care facilities, including skilled nursing and assisted living facilities in 33 states and managed hospital pharmacies in 10 states. NCS added approximately 182,000 beds served in the first quarter of 2003. In addition to broadening its geographic reach, Omnicare achieved certain economies of scale and operational efficiencies from the acquisition. The net assets and operating results of NCS have been included from the date of acquisition in the Company's financial statements. The Company has completed its purchase price allocation, including the identification of goodwill, deferred tax assets, and other intangible assets based on an appraisal performed by an independent valuation firm. The following table summarizes the fair values of the net assets acquired at the date of the NCS acquisition (in thousands): Current assets $ 95,845 Deferred tax assets 108,921 Property and equipment 18,275 Intangible assets 53,906 Goodwill 366,916 Other assets 9,650 Current liabilities (130,336) Other liabilities (23,636) --------- Total net assets acquired $ 499,541 =========
In connection with the purchase of NCS, the Company acquired amortizable intangible assets comprised of customer relationship, developed technology and non-compete agreement assets totaling $46.2 million, $6.0 million and $1.7 million, respectively. Amortization periods for customer relationship, developed technology and non-compete agreement assets are 13.0 years, 8.0 years and 3.0 years, respectively, and 12.3 years on a weighted-average basis. The Company has also recorded goodwill totaling approximately $367 million (of which approximately $280 million is tax deductible) in connection with the acquisition. Further discussion of goodwill and other intangible assets is included in Note 5 of the Notes to Consolidated Financial Statements. On January 7, 2002, Omnicare completed the acquisition of the assets comprising the pharmaceutical business of American Pharmaceutical Services, Inc. and related entities (collectively, "APS"). The acquisition, accounted for as a purchase business combination, included cash consideration and transaction costs which aggregated approximately $132 million (including an adjustment based on the closing balance sheet review and $18.0 million in deferred payments made in 2003, satisfying all future contingent payments under the acquisition agreement). At the time of the acquisition, APS provided professional pharmacy-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. With the acquisition, Omnicare has achieved certain economies of scale and operational efficiencies, as well as expanded its geographic reach. 74 The following table summarizes the fair values of the net assets acquired at the date of the APS acquisition (in thousands): Current assets $ 40,934 Property and equipment 8,358 Intangible assets 4,400 Goodwill 78,072 -------- Total net assets acquired $131,764 ========
In connection with the purchase of APS, the Company acquired amortizable intangible assets comprised of customer relationship and non-compete agreement assets totaling $3.1 million and $1.3 million, respectively. Amortization periods for the customer relationship and non-compete agreement assets are 4.7 years and 10.0 years, respectively, and 6.3 years on a weighted-average basis. The Company has also recorded goodwill totaling approximately $78 million (all of which is tax deductible) in connection with the acquisition. Further discussion of goodwill and other intangible assets is included in Note 5 of the Notes to Consolidated Financial Statements. Pro forma information for NCS and SunScript is not presented for the year ended December 31, 2003, as the results of NCS are included in those of the Company from the closing date of January 15, 2003, and the difference from the beginning of the period is not significant, and the impact of SunScript is not presented due to the lack of significance on the pro forma combined results. Unaudited pro forma combined results of operations of the Company, NCS and SunScript for the year ended December 31, 2002, are presented below. Such pro forma presentation has been prepared assuming that the NCS and SunScript acquisitions had been made as of January 1, 2002. Pro forma information for APS is not presented for the year ended December 31, 2002, as the results of APS are included in those of the Company from the closing date of January 7, 2002, and the difference from the beginning of the period is not significant. The unaudited pro forma combined financial information follows (in thousands, except per share data):
For the year ended December 31, 2002 ------------------ Net sales $3,444,463 Net income $ 103,208 Earnings per share: Basic $ 1.10 Diluted $ 1.09
Warrants outstanding as of December 31, 2003, issued in connection with acquisitions, represent the right to purchase 1.8 million shares of Omnicare common stock. These warrants can be 75 exercised at any time through 2006 at prices ranging from $29.70 to $48.00 per share. There were no warrants to purchase shares of common stock exercised in 2003. The purchase agreements for acquisitions generally include clauses whereby the seller will or may be paid additional consideration at a future date depending on the passage of time and/or whether certain future events occur. The agreements also include provisions containing a number of representations and covenants by the seller and provide that if those representations are found not to have been true or if those covenants are violated, Omnicare may offset any payments required to be made at a future date against any claims it may have under indemnity provisions in the related agreement. There are no significant anticipated future offsets against acquisition-related payables and/or contingencies under indemnity provisions as of December 31, 2003 and 2002. Amounts contingently payable through 2006, primarily representing payments originating from earnout provisions, total approximately $31.1 million as of December 31, 2003 and, if paid, will be recorded as additional purchase price, serving to increase goodwill in the period in which the contingencies are resolved and payment is made. The amount of cash paid for acquisitions of businesses in the Consolidated Statements of Cash Flows represents acquisition- related payments made in each of the years of acquisition, as well as acquisition-related payments made during each of the years pursuant to acquisition transactions entered into in prior years. Note 3 - Cash and Cash Equivalents A summary of cash and cash equivalents follows (in thousands):
December 31, 2003 2002 ------------------- Cash (including restricted cash) $ 75,376 $ 58,751 Money market funds -- 20,334 U.S. government-backed repurchase agreements 112,751 61,998 -------- -------- $188,127 $141,083 ======== ========
Repurchase agreements represent investments in U.S. government-backed securities (treasury issues and government agency issues at December 31, 2003 and 2002, respectively) under agreements to resell the securities to the counterparty. The term of the agreement usually spans overnight, but in no case is longer than 30 days. The Company has a collateralized interest in the underlying securities of repurchase agreements, which are segregated in the accounts of the bank counterparty. 76 Note 4 - Properties and Equipment A summary of properties and equipment follows (in thousands):
December 31, 2003 2002 --------------------- Land $ 1,624 $ 1,553 Buildings and building improvements 7,526 5,256 Computer equipment and software 189,367 172,605 Machinery and equipment 86,780 79,804 Furniture, fixtures and leasehold improvements 63,508 58,560 --------- --------- 348,805 317,778 Accumulated depreciation (200,498) (177,870) --------- --------- $ 148,307 $ 139,908 ========= =========
Note 5 - Goodwill and Other Intangible Assets In accordance with SFAS 142, the Company discontinued the amortization of goodwill effective January 1, 2002. A reconciliation of the previously reported net income and earnings per share adjusted for the exclusion of goodwill amortization, net of tax, follows (in thousands, except per share data):
For the year ended December 31, 2001 ------------------ Net income, as reported $74,271 Goodwill amortization, net of tax 20,583 ------- Adjusted net income $94,854 ======= Basic earnings per share: Net income, as reported $ 0.80 Goodwill amortization, net of tax 0.22 ------- Adjusted net income $ 1.02 ======= Diluted earnings per share: Net income, as reported $ 0.79 Goodwill amortization, net of tax 0.22 ------- Adjusted net income $ 1.01 =======
During the third quarters of 2003 and 2002, the Company completed its annual goodwill impairment assessment based on an evaluation of estimated future cash flows and determined that goodwill was not impaired. 77 Changes in the carrying amount of goodwill for the years ended December 31, 2002 and 2003, 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 year ended December 31, 2002 61,272 -- 61,272 Other 2,729 1,106 3,835 ---------- ------- ---------- Balance as of December 31, 2002 1,149,939 38,968 1,188,907 Goodwill acquired in the year ended December 31, 2003 473,160 -- 473,160 Other 26,505 1,986 28,491 ---------- ------- ---------- Balance as of December 31, 2003 $1,649,604 $40,954 $1,690,558 ========== ======= ==========
The "Other" caption above includes the settlement of acquisition matters relating to prior-year 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, which relate solely to CRO Services. The table below presents the Company's other intangible assets at December 31, 2003 and 2002, all of which are subject to amortization (in thousands):
December 31, 2003 ---------------------------------- Gross Net Carrying Accumulated Carrying Amount Amortization Amount -------- ------------ -------- Customer relationship assets $49,382 $ (4,711) $44,671 Non-compete agreements 11,357 (8,159) 3,198 Technology assets 5,990 (719) 5,271 Other 378 (247) 131 ------- -------- ------- Total $67,107 $(13,836) $53,271 ======= ======== =======
December 31, 2002 ---------------------------------- Gross Net Carrying Accumulated Carrying Amount Amortization Amount -------- ------------ -------- Customer relationship assets $ 3,100 $ (660) $2,440 Non-compete agreements 10,106 (6,500) 3,606 Other 373 (230) 143 ------- ------- ------ Total $13,579 $(7,390) $6,189 ======= ======= ======
Pretax amortization expense related to intangible assets was $6.4 million, $1.5 million and $1.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. 78 Estimated annual amortization expense for intangible assets subject to amortization at December 31, 2003 for the next five fiscal years is as follows (in thousands):
Year Ended Amortization December 31, Expense - ------------ ------------ 2004 $6,292 2005 5,510 2006 5,101 2007 4,661 2008 4,661
Note 6 - Leasing Arrangements The Company has operating leases that cover various operating and administrative facilities and certain operating equipment. In most cases, the Company expects that these leases will be renewed or replaced by other leases in the normal course of business. There are no significant contingent rentals in the Company's operating leases. The following is a schedule of future minimum rental payments required under operating leases that have initial or remaining noncancellable terms in excess of one year as of December 31, 2003 (in thousands): 2004 $ 26,950 2005 22,997 2006 19,222 2007 14,766 2008 10,616 Later years 16,669 -------- Total minimum payments required $111,220 ========
Total rent expense under operating leases for the years ended December 31, 2003, 2002 and 2001 were $37.5 million, $31.8 million and $27.1 million, respectively. 79 Note 7 - Long-Term Debt A summary of long-term debt follows (in thousands):
December 31, 2003 2002 --------------------- Term A loan, due in installments through 2007 $ 155,897 $ -- 5.0% convertible subordinated debentures, due 2007 -- 345,000 8.125% senior subordinated notes, due 2011 375,000 375,000 6.125% senior subordinated notes, due 2013 250,000 -- 4.0% contingent convertible notes, due 2033 345,000 -- Capitalized lease obligations 667 297 ---------- -------- 1,126,564 720,297 Less interest rate swap agreement (23,178) -- Less current portion (20,709) (110) ---------- -------- Total long-term debt $1,082,677 $720,187 ========== ========
The following is a schedule of required long-term debt payments due during each of the next five years and thereafter, as of December 31, 2003 (in thousands): 2004 $ 20,709 2005 24,763 2006 45,201 2007 65,685 2008 45 Later years 970,161 ---------- $1,126,564 ==========
Total interest payments made for the years ended December 31, 2003, 2002 and 2001 were $71.4 million (which includes the $8.9 million call premium related to the early redemption of the Company's 5.0% convertible subordinated debentures, as discussed below), $51.8 million and $44.1 million, respectively. As of December 31, 2003, the Company had approximately $10.5 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals. As discussed further below, during the second quarter of 2003, the Company completed its offering of $250.0 million aggregate principal amount of 6.125% senior subordinated notes due 2013 ("6.125% Senior Notes"), issued at par, and 6,468,750 shares of common stock, $1 par value, at $29.16 per share, for gross proceeds of $189 million, and the offering, through Omnicare Capital Trust I, a statutory trust formed by the Company (the "Trust"), of $345 million aggregate principal amount of convertible trust preferred securities due 2033 ("trust PIERS" or "Preferred Income Equity Redeemable Securities"). 80 Revolving Credit Facilities and Term A Loan In early 2001, the Company entered into a three-year syndicated $500.0 million revolving line of credit facility (the "Revolving Credit Facility"), including a $25.0 million letter of credit subfacility, with various lenders. The three-year Revolving Credit Facility had no outstanding loans as of December 31, 2002. In January 2003, the Company borrowed $499.0 million under the Revolving Credit Facility to finance its acquisition of NCS (see Note 2 of the Notes to Consolidated Financial Statements). In connection with the 2003 financings (described above), the Company entered into a new, four-year $750.0 million credit facility ("Credit Facility"), consisting of a $250 million term A loan commitment and a $500 million revolving credit commitment. The new Credit Facility bears interest at the Company's option at a rate equal to either: (i) the London Interbank Offered Rate ("LIBOR") plus a margin that varies depending on certain ratings on the Company's senior long-term debt; or (ii) the higher of (a) the prime rate or (b) the sum of the federal funds effective rate plus 0.50%. Additionally, the Company is charged a commitment fee on the unused portion of the revolving credit portion of the Credit Facility, which also varies depending on such ratings. At December 31, 2003, the interest rate was LIBOR plus 1.375% and the commitment fee was 0.375%. There is no utilization fee associated with the Credit Facility. The Credit Facility agreement contains financial covenants, which include a fixed charge coverage ratio and minimum consolidated net worth levels as well as certain representations and warranties, affirmative and negative covenants, and events of default customary for such a facility. The Company was in compliance with these covenants as of December 31, 2003. The Company used the net proceeds from the 6.125% Senior Notes offering and borrowings of $250.0 million under the term A loan portion of the new Credit Facility to repay the balance of the Company's existing Revolving Credit Facility of $474 million, with remaining proceeds being used for general corporate purposes. The Company paid down $94.1 million on the term A loan during 2003. The $155.9 million outstanding at December 31, 2003 under the term A loan is due in quarterly installments, in varying amounts, through 2007, with approximately $20.5 million due within one year. There are no amounts outstanding as of December 31, 2003 under the revolving credit commitment of the Credit Facility. Upon the issuance of the Credit Facility, the Company had deferred debt issuance costs of $9.6 million. During 2003, 2002 and 2001, respectively, the Company amortized approximately $2.1 million, $2.0 million and $1.9 million of deferred debt issuance costs related to its revolving credit facilities. 5.0% Convertible Subordinated Debentures In December 1997, the Company issued $345.0 million of 5.0% convertible subordinated debentures due 2007 ("5% Convertible Debentures"). In connection with the issuance of the 5% Convertible Debentures, the Company deferred $8.5 million in debt issuance costs, of which approximately $0.4 million was amortized in the year ended December 31, 2003, and approximately $0.9 million was amortized in each of the two years ended December 31, 2002. The Company used a portion of the net proceeds from the common stock offering and the net proceeds from the trust PIERS offering to redeem the entire outstanding $345 million aggregate 81 principal amount of the Company's 5% Convertible Debentures, with remaining proceeds being used for general corporate purposes. The total redemption price, including the call premium, was approximately $353.9 million. Accordingly, a $12.7 million pretax charge ($7.9 million aftertax, or $0.08 per diluted share) was recognized in interest expense during the year ended December 31, 2003 for the call premium and the write-off of remaining unamortized debt issuance costs associated with the redemption of the 5% Convertible Debentures. 8.125% Senior Subordinated Notes Concurrent with the issuance of the 2001 Revolving Credit Facility, the Company completed the issuance, at par value, of $375.0 million of 8.125% senior subordinated notes due 2011 ("8.125% Senior Notes"). In connection with the issuance of the 8.125% Senior Notes, the Company deferred $11.1 million in debt issuance costs, of which approximately $1.1 million was amortized in each of the two years ended December 31, 2003, and $0.8 million was amortized in 2001. The 8.125% Senior Notes contain certain affirmative and negative covenants and events of default customary for such instruments. The 8.125% Senior Notes were subsequently exchanged for replacement notes with identical terms, which were registered with the Securities and Exchange Commission. 6.125% Senior Subordinated Notes As described above, the Company completed, during the second quarter of 2003, its offering of $250.0 million of 6.125% Senior Notes due 2013. In connection with the issuance of the 6.125% Senior Notes, the Company deferred $6.6 million in debt issuance costs, of which approximately $0.4 million was amortized during 2003. The 6.125% Senior Notes contain certain affirmative and negative covenants and events of default customary for such instruments. During the second quarter of 2003, the Company entered into an interest rate swap agreement ("Swap Agreement") on all $250.0 million of its aggregate principal amount of the 6.125% Senior Notes. Under the Swap Agreement, which hedges against exposure to long-term U.S. dollar interest rates, the Company will receive a fixed rate of 6.125% and pay a floating rate based on LIBOR with a maturity of six months plus a spread of 2.27%. The floating rate is determined semi-annually, in arrears, two London Banking Days prior to the first of each December and June, commencing December 1, 2003. The Company records interest expense on the 6.125% Senior Notes at the floating rate. The estimated LIBOR-based floating rate was 3.50% at December 31, 2003. The Swap Agreement, which matches the terms of the 6.125% Senior Notes, is designated and accounted for as a fair value hedge. The Company is accounting for the Swap Agreement in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, so changes in fair value of the Swap Agreement are offset by changes in the recorded carrying value of the related 6.125% Senior Notes. The fair value of the Swap Agreement is recorded as a noncurrent liability and reduced the carrying value of the related 6.125% Senior Notes by approximately $23.2 million as of December 31, 2003. 4.0% Contingent Convertible Notes In connection with the offering of the trust PIERS in the second quarter of 2003, the Company issued a corresponding amount of contingent convertible notes due 2033 to the Trust. The Trust is a 100%-owned finance subsidiary of the Company. The Company has fully and unconditionally guaranteed the securities of the Trust. The trust PIERS offer fixed cash 82 distributions at a rate of 4.0% per annum payable quarterly, and a fixed conversion price of $40.82 under a contingent conversion feature whereby the holders may convert their trust PIERS if the closing sales price of Omnicare common stock for a predetermined period, beginning with the quarter ending September 30, 2003, is more than 130% of the then-applicable conversion price or, during a predetermined period, if the daily average of the trading prices for the trust PIERS is less than 105% of the average of the conversion values for the trust PIERS through 2028 (98% for any period thereafter through maturity). The trust PIERS also will pay contingent distributions, commencing with the quarterly distribution period beginning June 15, 2009, if the average trading prices of the trust PIERS for a predetermined period equals 115% or more of the stated liquidation amount of the trust PIERS. Embedded in the trust PIERS are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision. The embedded derivatives are periodically valued by a third-party advisor, and at December 31, 2003, the values of both derivatives were not material. However, the values are subject to change, based on market conditions, which could affect the Company's future results of operations. Omnicare irrevocably and unconditionally guarantees, on a subordinated basis, certain payments to be made by the Trust in connection with the trust PIERS. In connection with the issuance of the 4% Contingent Convertible Notes, the Company deferred $10.8 million in debt issuance costs, of which approximately $0.2 million was amortized in the year ended December 31, 2003. Note 8 - Stock Incentive Plans At December 31, 2003, the Company had three stock incentive plans under which it may grant stock-based incentives to key employees. Under these plans, stock options generally become exercisable beginning one year following the date of grant and vest in four equal annual installments of 25%, or become exercisable beginning four years following the date of grant and vest in one installment of 100%. Under the 1992 Long-Term Stock Incentive Plan, the Company may grant stock awards, stock appreciation rights and stock options at not less than the fair market value of the Company's common stock on the date of grant. As of December 31, 2003, approximately 0.7 million shares were available for grant under this plan. During 1995, the Company's Board of Directors and stockholders approved the 1995 Premium-Priced Stock Option Plan, providing options to purchase 2.5 million shares of Company common stock available for grant at an exercise price of 125% of the stock's fair market value at the date of grant. As of December 31, 2003, an insignificant amount of shares were available for grant under this plan. During 1998, the Company's Board of Directors approved the 1998 Long-Term Employee Incentive Plan (the "1998 Plan"), under which the Company was authorized to grant stock-based incentives to a broad base of employees (excluding executive officers and directors of the Company) in an amount initially aggregating up to 1.0 million shares of Company common stock for non-qualified options, stock awards and stock appreciation rights. In March 2000 and November 2002, the Company's Board of Directors amended the 1998 Plan to increase the 83 shares available for granting to 3.5 million and 6.3 million, respectively. As of December 31, 2003, approximately 2.8 million shares were available for grant under this plan. The Company also has a Director Stock Plan, which allows for stock options and stock awards to be granted to certain non-employee directors. As of December 31, 2003, approximately 0.1 million shares were available for grant under this plan. Summary information for stock options is presented below (in thousands, except exercise price data):
2003 2002 2001 - -------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - -------------------------------------------------------------------------------------------------- Options outstanding, beginning of year 9,508 $20.78 7,913 $19.31 7,796 $18.06 Options granted 816 39.78 2,074 26.38 1,760 19.98 Options exercised (2,208) 15.85 (230) 15.30 (1,429) 11.79 Options forfeited (118) 23.37 (249) 25.47 (214) 22.35 - -------------------------------------------------------------------------------------------------- Options outstanding, end of year 7,998 $24.03 9,508 $20.78 7,913 $19.31 - -------------------------------------------------------------------------------------------------- Options exercisable, end of year 4,379 $21.85 4,518 $20.45 3,082 $21.80 - --------------------------------------------------------------------------------------------------
The following summarizes information about stock options outstanding and exercisable as of December 31, 2003 (in thousands, except exercise price and remaining life data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------- ------------------------- Weighted Number Average Weighted Number Weighted Outstanding at Remaining Average Exercisable at Average Range of December 31, Contractual Exercise December 31, Exercise Exercise Prices 2003 Life (in years) Price 2003 Price - ------------------------------------------------------------- ------------------------- $ 4.11-$12.34 311 5.5 $11.97 259 $12.27 12.35- 15.42 1,420 5.5 15.42 1,420 15.42 15.43- 18.32 891 6.4 16.57 529 16.57 18.33- 24.86 1,646 7.8 20.14 602 19.99 24.87- 35.00 2,344 7.2 27.36 902 27.86 35.01- 55.08 1,386 7.3 39.34 667 37.03 - ----------------------------------------------------------------------------------------- $ 4.11-$55.08 7,998 6.9 $24.03 4,379 $21.85 - -----------------------------------------------------------------------------------------
Nonvested stock awards that are granted to key employees at the discretion of the Compensation and Incentive Committee of the Board of Directors are restricted as to the transfer of ownership and generally vest over a seven-year period, with a greater proportion vesting in the latter years. Unrestricted stock awards are granted annually to all members of the Board of Directors, and non-employee directors also receive nonvested stock awards that generally vest on the third 84 anniversary of the date of grant. The fair value of a stock award is equal to the fair market value of a share of Company stock at the grant date. Summary information relating to stock award grants is presented below:
For the years ended December 31, 2003 2002 2001 -------------------------------- Nonvested shares 861,183 538,529 512,364 Unrestricted shares 4,000 4,800 4,800 Weighted average grant date fair value $ 30.97 $ 21.32 $ 20.35
When granted, the cost of nonvested stock awards is deferred and amortized over the vesting period. Unrestricted stock awards are expensed during the year granted. During 2003, 2002 and 2001, the amount of compensation expense related to stock awards was $6.1 million, $5.9 million and $3.8 million, respectively. Note 9 - Employee Benefit Plans The Company has various defined contribution savings plans under which eligible employees can participate by contributing a portion of their salary for investment, at the direction of each employee, in one or more investment funds. Several of the plans were adopted in connection with certain of the Company's acquisitions. The plans are primarily tax-deferred arrangements pursuant to Internal Revenue Code ("IRC") Section 401(k) and are subject to the provisions of the Employee Retirement Income Security Act ("ERISA"). The Company matches employee contributions in varying degrees (either in shares of the Company's common stock or cash, in accordance with the applicable plan provisions) based on the contribution levels of the employees, as specified in the respective plan documents. Expense relating to the Company's defined contribution plans for the years ended December 31, 2003, 2002 and 2001 was $3.9 million, $3.8 million and $3.9 million, respectively. The Company has a non-contributory, defined benefit pension plan covering certain corporate headquarters employees and the employees of several companies sold by the Company in 1992, for which benefits ceased accruing upon the sale (the "Qualified Plan"). Benefits accruing under this plan to corporate headquarters employees were fully vested and frozen as of January 1, 1994. Obligations under the plan of $3.1 million were fully funded at December 31, 2003. The Company also has an excess benefit plan which provides retirement payments to participants in amounts consistent with what they would have received under the Qualified Plan if payments to them under the Qualified Plan were not limited by the IRC and other restrictions. Retirement benefits are based primarily on an employee's years of service and compensation near retirement and are calculated on a basis consistent with the Qualified Plan. The Company has established rabbi trusts, which are invested primarily in a mutual fund holding U.S. Treasury obligations, to provide for obligations under the excess benefit plan. The Company's policy is to fund pension costs in accordance with the funding provisions of ERISA. Expense relating to the Company's excess benefit plan totaled $4.0 million for each of the years ended December 31, 2003 and 85 2002. Expense relating to the Company's excess benefit plan totaled $3.2 million for the year ended December 31, 2001. The Company uses a December 31 measurement date for the Qualified Plan and the excess benefit plan. Actuarial assumptions used to calculate the benefit obligations and expenses include the following:
------------------- 2003 2002 2001 ------------------- Discount rate used for benefit obligations 6.00% 6.75% 7.25% Discount rate used for benefit expenses 6.75% 7.25% 7.75% Expected long-term rate of return on assets 8.00% 8.00% 8.00% Rate of increase in compensation levels 6.00% 6.00% 6.00%
The expected long-term rate of return on assets was estimated based on the historical long-term rate of return on intermediate-term U.S. Government securities. The aggregate assets invested for settlement of the Company's pension obligations, including rabbi trust assets, ("plan assets") as of December 31, 2003 and 2002 are greater than the aggregate Accumulated Benefit Obligation ("ABO") by $2.9 million and $3.2 million, respectively. Since rabbi trust assets do not serve to offset the Company's pension obligation in accordance with U.S. GAAP, an additional minimum pension liability has been recorded, as a component of other comprehensive income, for the difference between the ABO and the recorded liability for the excess benefit plan. The plan assets as of December 31, 2003 and 2002 are less than the aggregate Projected Benefit Obligation ("PBO") by $5.4 million and $2.3 million, respectively (collectively referred to as "net PBO"). The decrease in the net PBO from the prior year of $3.1 million primarily relates to an increase in plan assets of $8.0 million, more than offset by an actuarial loss of $5.7 million, interest expense (including the change in the discount rate) of $4.6 million and service costs of $0.8 million. Plan assets amounted to $33.1 million and $25.1 million at December 31, 2003 and 2002, respectively, and are held in Vanguard Intermediate Term Treasury Fund Admiral Shares. The Company's investment strategy generally targets investing in intermediate U.S. Government securities, seeking a high level of interest income while investing in intermediate-term U.S. Treasury bonds and other securities with an average maturity of between five and 10 years. The estimated aggregate contributions expected to be paid to the excess benefit plan during the year ended December 31, 2004 total approximately $13 million. In addition, the Company also has supplemental pension plans ("SPPs") in which certain of its officers participate. Retirement benefits under the SPPs are calculated on the basis of a specified percentage of the officers' covered compensation, years of credited service and a vesting schedule, as specified in the plan documents. Expense relating to the SPPs was $0.8 million in 86 each of the years ended December 31, 2003, 2002 and 2001. Obligations of the SPPs of $3.0 million were fully funded at December 31, 2003. In November 1999, the Company's Board of Directors adopted the Omnicare StockPlus Program, a non-compensatory employee stock purchase plan (the "ESPP"). Under the ESPP, employees and non-employee directors of the Company who elect to participate may contribute up to 6% of eligible compensation (or an amount not to exceed $20,000 for non-employee directors) to purchase shares of the Company's common stock. For each share of stock purchased, the participant also receives two options to purchase additional shares of the Company's stock. The options are subject to a four-year vesting period and are generally subject to forfeiture in the event the related shares are not held by the participant for a minimum of two years. The options have a 10-year life from the date of issuance. Amounts contributed to the ESPP are used by the plan administrator to purchase the Company's stock on the open market. Options awarded under the ESPP are issued out of the 1992 Long-Term Stock Incentive Plan and the 1998 Long-Term Employee Incentive Plan, and are included in the option activity presented in Note 8 of the Notes to Consolidated Financial Statements. Note 10 - Income Taxes The provision for income taxes is comprised of the following (in thousands):
For the years ended December 31, 2003 2002 2001 -------------------------------- Current provision: Federal $ 66,224 $55,898 $26,440 State and local 5,255 5,145 1,709 Foreign 917 674 60 -------- ------- ------- 72,396 61,717 28,209 -------- ------- ------- Deferred provision: Federal 36,888 12,881 16,314 State 6,797 2,547 991 -------- ------- ------- 43,685 15,428 17,305 -------- ------- ------- Total income tax provision $116,081 $77,145 $45,514 ======== ======= =======
Tax benefits related to the exercise of stock options and stock awards have been credited to paid-in capital in amounts of $14.7 million, $0.6 million and $5.3 million for 2003, 2002 and 2001, respectively. 87 The difference between the Company's reported income tax expense and the federal income tax expense computed at the statutory rate of 35% is explained in the following table (in thousands):
For the years ended December 31, 2003 2002 2001 ------------------------------------------------- Federal income tax at the statutory rate $108,657 35.0% $71,068 35.0% $41,925 35.0% State and local income taxes, net of federal income tax benefit 7,871 2.5 4,999 2.5 1,712 1.4 Amortization of nondeductible intangible assets -- -- -- -- 3,177 2.7 Nondeductible pooling-of-interests/merger and acquisition costs -- -- -- -- (401) (0.3) Other, net (including tax accrual adjustments) (447) (0.1) 1,078 0.5 (899) (0.8) -------- ---- ------- ---- ------- ---- Total income tax provision $116,081 37.4% $77,145 38.0% $45,514 38.0% ======== ==== ======= ==== ======= ====
Income tax payments, net, amounted to $43.3 million, $64.2 million and $16.0 million in 2003, 2002 and 2001, respectively. A summary of deferred tax assets and liabilities follows (in thousands):
December 31, 2003 2002 ------------------- Accrued liabilities $ 77,417 $ 34,821 Net operating loss carryforwards 72,464 -- Accounts receivable reserves 35,376 16,691 Other 11,457 11,879 -------- -------- Gross deferred tax assets $196,714 $ 63,391 ======== ======== Amortization of intangibles $173,079 $111,384 Fixed assets and depreciation methods 10,015 7,963 Current and noncurrent assets 6,993 7,041 Other 4,316 2,453 -------- -------- Gross deferred tax liabilities $194,403 $128,841 ======== ========
In 2003, the Company, as a result of its acquisition of NCS, acquired federal net operating loss carryforwards totaling, as of December 31, 2003, $204.5 million pretax and $71.5 million tax-effected. In addition, the Company acquired NCS state net operating loss carryforwards totaling $14.2 million tax-effected and net of the federal tax benefit as of December 31, 2003. Both the federal and state net operating losses will expire, in varying amounts, from 2010 through 2022. The acquired net operating loss carryforwards are subject to an annual limitation under IRC Section 382 and other statutory regulations. The Company has recorded a $13.2 million valuation allowance for those carryforwards expected to expire unutilized as a result of federal and state regulations, any portion of which, if subsequently realized, would serve to reduce goodwill. 88 Note 11 - Earnings Per Share Data Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share include the dilutive effect of stock options and warrants, as well as the 5% Convertible Debentures. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share ("EPS") computations (in thousands, except per share data):
For the year ended December 31, 2003 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amounts ----------- ------------- --------- Basic EPS Net income $194,368 98,800 $1.97 ===== Effect of Dilutive Securities 5% Convertible Debentures 4,870 3,630 Stock options and stock warrants -- 813 -------- ------- Diluted EPS Net income plus assumed conversions $199,238 103,243 $1.93 ======== ======= =====
For the year ended December 31, 2002 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amounts ----------- ------------- --------- Basic EPS Net income $125,906 94,168 $1.34 ===== Effect of Dilutive Securities Stock options and stock warrants -- 737 -------- ------ Diluted EPS Net income plus assumed conversions $125,906 94,905 $1.33 ======== ====== =====
For the year ended December 31, 2001 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amounts ----------- ------------- --------- Basic EPS Net income $74,271 93,124 $0.80 ===== Effect of Dilutive Securities Stock options and stock warrants -- 634 ------- ------ Diluted EPS Net income plus assumed conversions $74,271 93,758 $0.79 ======= ====== =====
During the years ended December 31, 2003, 2002 and 2001, the anti-dilutive effect associated with selected options and warrants was excluded from the computation of diluted earnings per 89 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 those years totaled 3.4 million, 4.5 million and 3.8 million, respectively. The $345.0 million of 4.0% convertible trust preferred securities due 2033, which are convertible at $40.82 per share (under a contingent conversion feature described in Note 7 of the Notes to Consolidated Financial Statements), were outstanding during the year ended December 31, 2003, but were not included in the computation of diluted EPS because the impact was anti-dilutive. The year ended December 31, 2003 includes the dilutive effect of the $345.0 million of 5% Convertible Debentures, which assumes conversion using the "if converted" method. Under that method, the 5% Convertible Debentures are assumed to be converted to common shares (weighted for the number of days assumed to be outstanding during the period) and interest expense, net of taxes, related to the 5% Convertible Debentures is added back to net income. In July 2003, the Company completed the early redemption of the entire $345.0 million aggregate principal amount of the outstanding 5% Convertible Debentures. The 5% Convertible Debentures, which were convertible at $39.60 per share, were outstanding during the years ended December 31, 2002 and 2001, but were not included in the computation of diluted EPS during the years ended December 31, 2002 and 2001 because the impact was anti-dilutive. Note 12 - Restructuring Charges Phase I Program In 2000, the Company completed its previously disclosed productivity and consolidation program (the "Phase I Program"). In connection with the Phase I Program, the Company had liabilities of $0.6 million at December 31, 2002, of which $0.3 million was utilized during the year ended December 31, 2003. The remaining liabilities at December 31, 2003 of $0.3 million represent amounts not yet paid relating to actions taken (consisting of remaining lease payments), and will be adjusted as these matters are settled. Phase II Program In 2001, the Company announced the implementation of a second phase of the productivity and consolidation initiative (the "Phase II Program"). 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 10 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 a total of $18.3 million pretax ($11.4 million aftertax, or $0.12 per diluted share) for restructuring charges during the year 90 ended December 31, 2001. Further, approximately $23.2 million pretax ($14.4 million aftertax, or $0.15 per diluted share) was recorded during the year ended December 31, 2002, when the amounts were required to be recognized in accordance with U.S. GAAP. 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. Details of the pretax restructuring charges relating to the Phase II Program follow (in thousands):
2001 Utilized Balance at 2002 Provision/ during December 31, Provision/ Accrual 2001 2001 Accrual ---------- -------- ------------ ---------- Restructuring charges: Employee severance $ 4,256 $ (2,614) $1,642 $ 2,177 Employment agreement buy-outs 2,086 (1,578) 508 -- Lease terminations 2,711 (2,105) 606 5,862 Other assets, fees and facility exit costs 9,291 (6,264) 3,027 15,156 ------- -------- ------ ------- Total restructuring charges $18,344 $(12,561) $5,783 $23,195 ======= ======== ====== =======
Utilized Balance at Utilized Balance at during December 31, during December 31, 2002 2002 2003 2003 -------- ------------ -------- ------------ Restructuring charges: Employee severance $ (2,655) $1,164 $(1,164) $ -- Employment agreement buy-outs (214) 294 (294) -- Lease terminations (1,846) 4,622 (1,155) 3,467 Other assets, fees and facility exit costs (14,690) 3,493 (2,878) 615 -------- ------ ------- ------ Total restructuring charges $(19,405) $9,573 $(5,491) $4,082 ======== ====== ======= ======
As of December 31, 2003, the Company had paid approximately $8.5 million of severance and other employee-related costs relating to the reduction of approximately 460 employees. The remaining liabilities recorded at December 31, 2003 represent amounts not yet paid or settled relating to actions taken (primarily consisting of remaining lease payments), and will be adjusted in future periods as these matters are finalized. Note 13 - Other Expense Included in the 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 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 (now known as the Centers for Medicare & Medicaid Services) for review and 91 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. Note 14 - Shareholders' Rights Plan In May 1999, the Company's Board of Directors declared a dividend, payable on June 2, 1999, of one preferred share purchase right (a "Right") for each outstanding share of the Company's $1.00 per share par value common stock, that, when exercisable, entitles the registered holder to purchase from the Company one ten-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, without par value, at a price of $135 per one ten-thousandth of a share, subject to adjustment. Upon certain events relating to the acquisition of, commencement or announcement of, or announcement of an intention to make a tender offer or exchange offer that would result in the beneficial ownership of 15% or more of the Company's outstanding common stock by an individual or group of individuals (the "Distribution Date"), the Rights not owned by the 15% stockholder will entitle its holder to purchase, at the Right's then current exercise price, common shares having a market value of twice such exercise price. Additionally, if after any person has become a 15% stockholder, the Company is involved in a merger or other business combination with any other person, each Right will entitle its holder (other than the 15% stockholder) to purchase, at the Right's then current exercise price, common shares of the acquiring company having a value of twice the Right's then current exercise price. The Rights will expire on May 17, 2009, unless redeemed earlier by the Company at $0.01 per Right until the Distribution Date. Note 15 - Commitments and Contingencies The Company continuously evaluates contingencies based upon the best available evidence. Management believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from management's estimates, future earnings will be charged or credited accordingly. As part of its ongoing operations, the Company is subject to various inspections, audits, reviews, inquiries and similar actions by governmental/ regulatory authorities responsible for enforcing the laws and regulations to which the Company is subject. The Company is also involved in various legal actions arising in the normal course of business. Although occasional adverse outcomes (or settlements) may occur, the Company believes that the final disposition of such matters will not have a material adverse affect on the financial position or results of operations of the Company. Note 16 - 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 operating business segments. The Company's largest segment is Pharmacy Services. Pharmacy Services provides distribution of pharmaceuticals, related pharmacy consulting, data management services and medical supplies to long-term care facilities in 47 states in the United States of America ("USA") 92 and the District of Columbia at December 31, 2003. The Company's other reportable segment is CRO Services, which provides comprehensive product development services to client companies in pharmaceutical, biotechnology, medical devices and diagnostics industries in 29 countries around the world at December 31, 2003, including the USA. The table below presents information about the reportable segments as of and for the years ended December 31, 2003, 2002 and 2001, and should be read in connection with the paragraphs that follow (in thousands):
Corporate Pharmacy CRO and Consolidated 2003: Services Services Consolidating Totals - ------------------------------------------------------------------------------------ Net sales $3,345,301 $153,873 $ -- $3,499,174 Depreciation and amortization 48,915 1,770 2,335 53,020 Operating income (expense) 412,986 12,562 (37,965) 387,583 Total assets 3,007,405 99,693 287,923 3,395,021 Capital expenditures 15,325 990 800 17,115 =================================================================================== 2002: - ----------------------------------------------------------------------------------- Net sales $2,467,237 $165,517 $ -- $2,632,754 Depreciation and amortization 40,389 2,237 2,637 45,263 Restructuring charges (6,769) (16,426) -- (23,195) Operating income (expense) 288,196 4,610 (36,220) 256,586 Total assets 2,126,718 120,155 180,712 2,427,585 Capital expenditures 22,900 776 972 24,648 =================================================================================== 2001: - ----------------------------------------------------------------------------------- Net sales $2,033,752 $149,284 $ -- $2,183,036 Depreciation and amortization 68,390 3,881 1,799 74,070 Restructuring charges (8,504) (9,840) -- (18,344) Other (expense) (4,817) -- -- (4,817) Operating income (expense) 200,780 2,540 (29,826) 173,494 Total assets 1,953,243 133,371 203,662 2,290,276 Capital expenditures 23,571 1,504 1,147 26,222 ===================================================================================
In accordance with EITF No. 01-14, the Company included in its reported CRO segment net sales amounts, reimbursable out-of-pockets totaling $24.8 million, $26.3 million and $23.9 million pretax for the years ended December 31, 2003, 2002 and 2001, respectively. Additionally, in accordance with Omnicare's adoption of SFAS No. 142, the Company discontinued amortization of goodwill as of January 1, 2002. Accordingly, no goodwill amortization was recorded during the years ended December 31, 2003 and 2002. Pretax goodwill amortization for the year ended December 31, 2001 totaled $32.1 million for the Pharmacy Services segment and $1.1 million for the CRO Services segment. 93 The following summarizes sales and long-lived assets by geographic area as of and for the years ended December 31, 2003, 2002 and 2001 (in thousands):
Net Sales Long-Lived Assets - ---------------------------------------------------- ------------------------------ 2003 2002 2001 2003 2002 2001 - ---------------------------------------------------- ------------------------------ United States $3,456,806 $2,596,605 $2,147,537 $146,858 $138,516 $153,562 Foreign 42,368 36,149 35,499 1,449 1,392 1,511 - ---------------------------------------------------- ------------------------------ Total $3,499,174 $2,632,754 $2,183,036 $148,307 $139,908 $155,073 ==================================================== ==============================
The determination of foreign sales is based on the country in which the sales originate. No individual foreign country's sales were material to the consolidated sales of Omnicare. In accordance with EITF No. 01-14, Omnicare included in its net sales, during the years ended December 31, 2003, 2002 and 2001, reimbursable out-of-pockets totaling $15.2 million, $18.6 million and $17.2 million, respectively, for the United States geographic area; $9.6 million, $7.7 million and $6.7 million, respectively, for the foreign geographic area; and $24.8 million, $26.3 million and $23.9 million, respectively, for the total net sales. 94 Note 17 - Summary of Quarterly Results (Unaudited) The following table presents the Company's quarterly financial information for 2003 and 2002 (in thousands, except per share data):
First Second Third Fourth Full Quarter Quarter Quarter Quarter Year -------- -------- -------- -------- ---------- 2003 Total net sales(a) $805,861 $844,033 $901,654 $947,626 $3,499,174 Total direct costs(a) 597,900 623,056 674,399 706,259 2,601,614 -------- -------- -------- -------- ---------- Gross profit 207,961 220,977 227,255 241,367 897,560 Selling, general and administrative expenses 126,928 130,090 123,592 129,367 509,977 -------- -------- -------- -------- ---------- Operating income 81,033 90,887 103,663 112,000 387,583 Investment income 588 1,166 880 1,532 4,166 Interest expense (Note 7) (16,456) (21,875) (26,316) (16,653) (81,300) -------- -------- -------- -------- ---------- Income before income taxes 65,165 70,178 78,227 96,879 310,449 Income taxes 24,742 26,677 29,397 35,265 116,081 -------- -------- -------- -------- ---------- Net income $ 40,423 $ 43,501 $ 48,830 $ 61,614 $ 194,368 ======== ======== ======== ======== ========== Earnings per share:(b) Basic $ 0.43 $ 0.45 $ 0.48 $ 0.60 $ 1.97 ======== ======== ======== ======== ========== Diluted(c) $ 0.42 $ 0.44 $ 0.47 $ 0.59 $ 1.93 ======== ======== ======== ======== ========== Weighted average number of common shares outstanding: Basic 94,386 96,034 101,965 102,688 98,800 ======== ======== ======== ======== ========== Diluted(c) 104,029 102,925 102,944 103,744 103,243 ======== ======== ======== ======== ==========
95 Note 17 - Summary of Quarterly Results (Unaudited) - Continued
First Second Third Fourth Full Quarter Quarter Quarter Quarter Year --------- -------- -------- -------- ---------- 2002 Total net sales(a) $638,314 $654,155 $664,718 $675,567 $2,632,754 Total direct costs(a) 474,110 483,225 489,151 495,215 1,941,701 -------- -------- -------- -------- ---------- Gross profit 164,204 170,930 175,567 180,352 691,053 Selling, general and administrative expenses 99,618 102,501 103,888 105,265 411,272 Restructuring charges (Note 12) 4,797 7,302 11,096 -- 23,195 -------- -------- -------- -------- ---------- Operating income 59,789 61,127 60,583 75,087 256,586 Investment income 798 667 651 1,160 3,276 Interest expense (14,176) (14,475) (14,339) (13,821) (56,811) -------- -------- -------- -------- ---------- Income before income taxes 46,411 47,319 46,895 62,426 203,051 Income taxes 17,635 17,961 17,829 23,720 77,145 -------- -------- -------- -------- ---------- Net income $ 28,776 $ 29,358 $ 29,066 $ 38,706 $ 125,906 ======== ======== ======== ======== ========== Earnings per share:(b) Basic $ 0.31 $ 0.31 $ 0.31 $ 0.41 $ 1.34 ======== ======== ======== ======== ========== Diluted(c) $ 0.30 $ 0.31 $ 0.31 $ 0.41 $ 1.33 ======== ======== ======== ======== ========== Weighted average number of common shares outstanding: Basic 93,963 94,175 94,245 94,286 94,168 ======== ======== ======== ======== ========== Diluted(c) 94,598 95,292 94,710 97,684 94,905 ======== ======== ======== ======== ==========
Notes to Summary of Quarterly Results: (a) In accordance with EITF No. 01-14, Omnicare has recorded reimbursements received for "out-of-pocket" expenses on a grossed-up basis in total net sales and total direct costs for both the 2003 and 2002 periods. EITF No. 01-14 relates solely to the Company's CRO Services business. (b) Earnings per share is calculated independently for each separately reported quarterly and full year period. Accordingly, the sum of the separately reported quarters may not necessarily be equal to the per share amount for the corresponding full year period, as independently calculated. (c) The first quarter, second quarter and full year of 2003 periods, as well as the fourth quarter of 2002, include the dilutive effect of the $345.0 million, 5% Convertible Debentures, which assumes conversion using the "if converted" method. Under that method, the 5% Convertible Debentures are assumed to be converted to common shares (weighted for the number of days assumed to be outstanding during the period) and interest expense, net of taxes, related to the 5% Convertible Debentures is added back to net income. 96 Note 18 - Guarantor Subsidiaries The Company's 8.125% Senior Notes due 2011 and the 6.125% Senior Notes are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain wholly owned subsidiaries of the Company (the "Guarantor Subsidiaries"). The following condensed consolidating financial data illustrates the composition of Omnicare, Inc. ("Parent"), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of December 31, 2003 and 2002 for the balance sheets, as well as the statements of income and cash flows for each of the three years ended December 31, 2003, 2002 and 2001. Separate complete financial statements of the respective Guarantor Subsidiaries would not provide additional information that would be useful in assessing the financial condition of the Guarantor Subsidiaries and thus are not presented. No eliminations column is presented for the condensed consolidating statements of cash flows since there were no significant eliminating amounts during the periods presented. 97 Note 18 - Guarantor Subsidiaries - Continued Summary Consolidating Statements of Income
(In thousands) For the years ended December 31, --------------------------------------------------------------------------- Guarantor Non-Guarantor Omnicare, Inc. and 2003: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries - ---------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $3,372,657 $126,517 $ -- $3,499,174 Total direct costs -- 2,498,805 102,809 -- 2,601,614 -------- ---------- -------- --------- ---------- Gross profit -- 873,852 23,708 -- 897,560 Selling, general and administrative expenses 7,086 481,185 21,706 -- 509,977 -------- ---------- -------- --------- ---------- Operating income (loss) (7,086) 392,667 2,002 -- 387,583 Investment income 2,832 1,216 118 -- 4,166 Interest expense (79,133) (1,671) (496) -- (81,300) -------- ---------- -------- --------- ---------- Income (loss) before income taxes (83,387) 392,212 1,624 -- 310,449 Income tax (benefit) expense (31,687) 147,151 617 -- 116,081 Equity in net income of subsidiaries 246,068 -- -- (246,068) -- -------- ---------- -------- --------- ---------- Net income (loss) $194,368 $ 245,061 $ 1,007 $(246,068) $ 194,368 ============================================================================================================================ 2002: - ---------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $2,521,682 $111,072 $ -- $2,632,754 Total direct costs -- 1,850,455 91,246 -- 1,941,701 -------- ---------- -------- --------- ---------- Gross profit -- 671,227 19,826 -- 691,053 Selling, general and administrative expenses 29,585 360,245 21,442 -- 411,272 Restructuring charges -- 22,397 798 -- 23,195 -------- ---------- -------- --------- ---------- Operating income (loss) (29,585) 288,585 (2,414) -- 256,586 Investment income 1,755 1,288 233 -- 3,276 Interest expense (56,082) (547) (182) -- (56,811) -------- ---------- -------- --------- ---------- Income (loss) before income taxes (83,912) 289,326 (2,363) -- 203,051 Income tax (benefit) expense (31,887) 109,930 (898) -- 77,145 Equity in net income of subsidiaries 177,931 -- -- (177,931) -- -------- ---------- -------- --------- ---------- Net income (loss) $125,906 $ 179,396 $ (1,465) $(177,931) $ 125,906 ============================================================================================================================ 2001: - ---------------------------------------------------------------------------------------------------------------------------- Total net sales $ -- $2,084,844 $148,489 $ (50,297) $2,183,036 Total direct costs -- 1,524,989 128,945 (50,297) 1,603,637 -------- ---------- -------- --------- ---------- Gross profit -- 559,855 19,544 -- 579,399 Selling, general and administrative expenses 17,026 343,389 22,329 -- 382,744 Restructuring charges -- 18,344 -- -- 18,344 Other expense -- 4,817 -- -- 4,817 -------- ---------- -------- --------- ---------- Operating income (loss) (17,026) 193,305 (2,785) -- 173,494 Investment income 1,767 613 235 -- 2,615 Interest expense (53,956) (798) (1,570) -- (56,324) -------- ---------- -------- --------- ---------- Income (loss) before income taxes (69,215) 193,120 (4,120) -- 119,785 Income tax (benefit) expense (26,302) 73,509 (1,693) -- 45,514 Equity in net income of subsidiaries 117,184 -- -- (117,184) -- -------- ---------- -------- --------- ---------- Net income (loss) $ 74,271 $ 119,611 $ (2,427) $(117,184) $ 74,271 ============================================================================================================================
98 Note 18 - Guarantor Subsidiaries - Continued Condensed Consolidating Balance Sheets
(In thousands) December 31, ----------------------------------------------------------------------------- Guarantor Non-Guarantor Omnicare, Inc. and 2003: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 134,513 $ 48,940 $ 3,960 $ -- $ 187,413 Restricted cash -- 714 -- -- 714 Accounts receivable, net (including intercompany) -- 672,315 13,708 (7,768) 678,255 Inventories -- 321,465 5,085 -- 326,550 Other current assets 954 187,363 1,839 -- 190,156 ---------- ---------- -------- ----------- ---------- Total current assets 135,467 1,230,797 24,592 (7,768) 1,383,088 ---------- ---------- -------- ----------- ---------- Properties and equipment, net -- 139,108 9,199 -- 148,307 Goodwill -- 1,621,645 68,913 -- 1,690,558 Other noncurrent assets 33,390 128,147 11,531 -- 173,068 Investment in subsidiaries 2,627,756 -- -- (2,627,756) -- ---------- ---------- -------- ----------- ---------- Total assets $2,796,613 $3,119,697 $114,235 $(2,635,524) $3,395,021 ========== ========== ======== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) 38,383 $ 422,566 $ 9,579 $ (7,768) $ 462,760 Long-term debt 135,384 471 -- -- 135,855 8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000 6.125% senior subordinated notes, net, due 2013 226,822 -- -- -- 226,822 4.0% contingent convertible notes, due 2033 345,000 -- -- -- 345,000 Other noncurrent liabilities -- 173,246 314 -- 173,560 Stockholders' equity 1,676,024 2,523,414 104,342 (2,627,756) 1,676,024 ---------- ---------- -------- ----------- ---------- Total liabilities and stockholders' equity $2,796,613 $3,119,697 $114,235 $(2,635,524) $3,395,021 ============================================================================================================================ 2002: - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 95,693 $ 36,191 $ 6,052 $ -- $ 137,936 Restricted cash -- 3,147 -- -- 3,147 Accounts receivable, net (including intercompany) -- 524,290 13,610 (15,043) 522,857 Inventories -- 185,521 4,943 -- 190,464 Other current assets 1,399 144,399 1,356 -- 147,154 ---------- ---------- -------- ----------- ---------- Total current assets 97,092 893,548 25,961 (15,043) 1,001,558 ---------- ---------- -------- ----------- ---------- Properties and equipment, net 2,931 126,452 10,525 -- 139,908 Goodwill -- 1,121,728 67,179 -- 1,188,907 Other noncurrent assets 31,234 65,029 949 -- 97,212 Investment in subsidiaries 1,903,357 -- -- (1,903,357) -- ---------- ---------- -------- ----------- ---------- Total assets $2,034,614 $2,206,757 $104,614 $(1,918,400) $2,427,585 ========== ========== ======== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities (including intercompany) $ 37,363 $ 255,691 $ 18,639 $ (15,043) $ 296,650 Long-term debt -- 187 -- -- 187 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 2,189 132,577 920 -- 135,686 Stockholders' equity 1,275,062 1,818,302 85,055 (1,903,357) 1,275,062 ---------- ---------- -------- ----------- ---------- Total liabilities and stockholders' equity $2,034,614 $2,206,757 $104,614 $(1,918,400) $2,427,585 ============================================================================================================================
99 Note 18 - Guarantor Subsidiaries - Continued Condensed Consolidating Statements of Cash Flows
(In thousands) For the year ended December 31, ------------------------------------------------------------ Guarantor Non-Guarantor Omnicare, Inc. and 2003: Parent Subsidiaries Subsidiaries Subsidiaries - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Provision for doubtful accounts $ -- $ 43,795 $ 885 $ 44,680 Other (47,610) 171,578 836 124,804 --------- --------- ------- --------- Net cash flows from operating activities (47,610) 215,373 1,721 169,484 --------- --------- ------- --------- Cash flows from investing activities: Acquisition of businesses -- (656,435) (6,976) (663,411) Capital expenditures -- (16,978) (137) (17,115) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust -- 2,433 -- 2,433 Other -- 29 15 44 --------- --------- ------- --------- Net cash flows from investing activities -- (670,951) (7,098) (678,049) --------- --------- ------- --------- Cash flows from financing activities: Borrowings on line of credit facilities and term A loan 749,000 -- -- 749,000 Payments on line of credit facilities and term A loan (593,103) -- -- (593,103) Proceeds from long-term borrowings 595,000 -- -- 595,000 Payments on long-term borrowings and obligations (354,167) -- -- (354,167) Fees paid for financing arrangements (24,541) -- -- (24,541) Proceeds from stock offering, net of issuance costs 178,774 -- -- 178,774 Proceeds from stock awards and exercise of stock options, net of stock tendered in payment 12,275 -- -- 12,275 Dividends (8,876) -- -- (8,876) Other (467,932) 468,327 (273) 122 --------- --------- ------- --------- Net cash flows from financing activities 86,430 468,327 (273) 554,484 --------- --------- ------- --------- Effect of exchange rate changes on cash -- -- 3,558 3,558 --------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents 38,820 12,749 (2,092) 49,477 Cash and cash equivalents at beginning of year - unrestricted 95,693 36,191 6,052 137,936 --------- --------- ------- --------- Cash and cash equivalents at end of year - unrestricted $ 134,513 $ 48,940 $ 3,960 $ 187,413 =============================================================================================================
100 Note 18 - Guarantor Subsidiaries - Continued Condensed Consolidating Statements of Cash Flows - Continued
(In thousands) For the year ended December 31, ----------------------------------------------------------- Guarantor Non-Guarantor Omnicare, Inc. 2002: Parent Subsidiaries Subsidiaries and Subsidiaries - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Provision for doubtful accounts $ -- $ 30,269 $ 894 $ 31,163 Other (29,513) 155,544 1,915 127,946 --------- --------- ------- --------- Net cash flows from operating activities (29,513) 185,813 2,809 159,109 --------- --------- ------- --------- Cash flows from investing activities: Acquisition of businesses -- (126,533) (1,250) (127,783) Capital expenditures -- (24,378) (270) (24,648) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust -- (225) -- (225) Other -- 272 1 273 --------- --------- ------- --------- Net cash flows from investing activities -- (150,864) (1,519) (152,383) --------- --------- ------- --------- Cash flows from financing activities: Borrowings on line of credit facilities 90,000 -- -- 90,000 Payments on line of credit facilities (120,000) -- -- (120,000) Payments on long-term borrowings and obligations -- (214) -- (214) Proceeds from stock awards and exercise of stock options, net of stock tendered in payment -- 667 -- 667 Dividends -- (8,491) -- (8,491) Other 28,096 (28,024) -- 72 --------- --------- ------- --------- Net cash flows from financing activities (1,904) (36,062) -- (37,966) --------- --------- ------- --------- Effect of exchange rate changes on cash -- -- 780 780 --------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents (31,417) (1,113) 2,070 (30,460) Cash and cash equivalents at beginning of year - unrestricted 127,110 37,304 3,982 168,396 --------- --------- ------- --------- Cash and cash equivalents at end of year - unrestricted $ 95,693 $ 36,191 $ 6,052 $ 137,936 ==========================================================================================================================
101 Note 18 - Guarantor Subsidiaries - Continued Condensed Consolidating Statements of Cash Flows - Continued
(In thousands) For the year ended December 31, ----------------------------------------------------------- Guarantor Non-Guarantor Omnicare, Inc. 2001: Parent Subsidiaries Subsidiaries and Subsidiaries - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Provision for doubtful accounts $ -- $ 24,201 $ 1,289 $ 25,490 Other (65,203) 190,247 2,553 127,597 --------- --------- ------- --------- Net cash flows from operating activities (65,203) 214,448 3,842 153,087 --------- --------- ------- --------- Cash flows from investing activities: Acquisition of businesses -- (20,263) -- (20,263) Capital expenditures (703) (21,546) (3,973) (26,222) Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust -- (622) -- (622) Other -- 135 170 305 --------- --------- ------- --------- Net cash flows from investing activities (703) (42,296) (3,803) (46,802) --------- --------- ------- --------- Cash flows from financing activities: Borrowings on line of credit facilities 70,000 -- -- 70,000 Proceeds from long-term borrowings 375,000 -- -- 375,000 Payments on line of credit facilities (475,000) -- -- (475,000) Fees paid for financing arrangements (16,254) -- -- (16,254) Other 190,607 (194,122) 214 (3,301) --------- --------- ------- --------- Net cash flows from financing activities 144,353 (194,122) 214 (49,555) --------- --------- ------- --------- Effect of exchange rate changes on cash -- -- 59 59 --------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents 78,447 (21,970) 312 56,789 Cash and cash equivalents at beginning of year - unrestricted 48,663 59,274 3,670 111,607 --------- --------- ------- --------- Cash and cash equivalents at end of year - unrestricted $ 127,110 $ 37,304 $ 3,982 $ 168,396 ===========================================================================================================================
102 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A - CONTROLS AND PROCEDURES (a) Based on a recent evaluation, as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 or submitted under the Securities Exchange Act of 1934. (b) There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 regarding our directors and executive officers, our audit committee, and Section 16(a) compliance is included under the captions "Election of Directors," "Governance of the Company and Board Matters," and "Section 16(A) Beneficial Ownership Reporting Compliance" in our proxy statement for our 2004 annual meeting of stockholders and is incorporated herein by reference. Information concerning our executive officers is also included under the caption "Executive Officers of the Company" in Part I of this Report. Audit Committee Financial Expert. The information required by this Item 10 disclosure requirement is included in our proxy statement for our 2004 annual meeting of stockholders and is incorporated herein by reference. Codes of Ethics. We expect all of our employees to act in accordance with and to abide by the Omnicare "Corporate Compliance Program - Its About Integrity" (the "Omnicare Integrity Code"). The Omnicare Integrity Code is a set of business values and procedures that provides guidance to Omnicare employees with respect to compliance with the law in all of their business dealings and decisions on behalf of Omnicare and with respect to the maintenance of ethical standards, which are a vital and integral part of Omnicare's business. The Omnicare Integrity Code applies to all employees including the Chief Executive Officer, the Chief Financial Officer, the Principal Accounting Officer and other senior financial officers (the "Covered Officers"). In addition to being bound by the Omnicare Integrity Code's provisions about ethical conduct, conflicts of interest and compliance with law, Omnicare has adopted a Code of Ethics for the Covered Officers. The Company will furnish any person, without charge, 103 a copy of the Code of Ethics for the Covered Officers upon written request addressed to Omnicare, Inc., 1600 RiverCenter II, 100 East RiverCenter Boulevard, Covington, KY 41011, Attn.: Corporate Secretary. Any waiver of any provision of the Code granted to a Covered Officer may only be granted by our Board of Directors or its Audit Committee. If a waiver is granted, information concerning the waiver will be posted on our Web site at http://www.omnicare.com for a period of 12 months. ITEM 11 - EXECUTIVE COMPENSATION The information required by this Item 11 is included in our proxy statement for our 2004 annual meeting of stockholders and is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is included in our proxy statement for our 2004 annual meeting of stockholders and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is included in our proxy statement for our 2004 annual meeting of stockholders and is incorporated herein by reference. ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 is included in our proxy statement for our 2004 annual meeting of stockholders and is incorporated herein by reference. 104 PART IV ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements Our 2003 Consolidated Financial Statements are included in Part II, Item 8, of this Filing. (a)(2) Financial Statement Schedule See Index to Financial Statements and Financial Statement Schedule at Part II, Item 8, of this Filing. (a)(3) Exhibits See Index of Exhibits. (b) Reports on Form 8-K During the quarter ended December 31, 2003, we submitted, on October 30, 2003, a Report on Form 8-K reporting that we had issued a press release announcing our financial results for the third quarter of 2003. 105 SIGNATURES Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on this 15th day of March 2004. OMNICARE, INC. /s/ David W. Froesel, Jr. ---------------------------------------- David W. Froesel, Jr. Senior Vice President and Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of l934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Joel F. Gemunder President, Chief Executive Officer and Director - --------------------------- (Principal Executive Officer) Joel F. Gemunder /s/ David W. Froesel, Jr. Senior Vice President and - --------------------------- Chief Financial Officer and Director David W. Froesel, Jr. (Principal Financial and Accounting Officer) Edward L. Hutton, Chairman of the Board and Director* Charles H. Erhart, Jr., Director* Patrick E. Keefe, Director* Sandra E. Laney, Director* March 15, 2004 Andrea R. Lindell, DNSc, RN, Director* Sheldon Margen, M.D., Director* John H. Timoney, Director*
* Cheryl D. Hodges, by signing her name hereto, signs this document on behalf of herself as a director and on behalf of each person indicated above pursuant to a power of attorney duly executed by such person and filed with the Securities and Exchange Commission. /s/ Cheryl D. Hodges ---------------------------------------- Cheryl D. Hodges (Attorney-in-Fact) 106 Schedule II OMNICARE, INC. AND SUBSIDIARY COMPANIES Valuation and Qualifying Accounts (in thousands)
Additions Balance at charged Write-offs, Balance Year ended beginning of to cost net of at end December 31, period and expenses Acquisitions recoveries of period - ------------ ------------ ------------ ------------ ----------- --------- Allowance for uncollectible accounts receivable: 2003 $68,593 $44,680 $28,651 $(33,111) $108,813 2002 45,573 31,163 20,182 (28,325) 68,593 2001 40,497 25,490 -- (20,414) 45,573
S-1 INDEX OF EXHIBITS
Document Incorporated by Reference from a Previous Number and Description of Exhibit Filing, Filed Herewith, or Furnished Herewith as (Numbers Coincide with Item 601 of Regulation S-K) Indicated Below - -------------------------------------------------- -------------------------------------------------- (2) Agreement and Plan of Merger, by and Exhibit (d)(2) to NCS Acquisition Corp's among Omnicare, Inc., NCS Acquisition Schedule TO-T, as amended and filed Corp. and NCS HealthCare, Inc., dated with the Securities and Exchange Commission as of December 17, 2002 on December 18, 2002 (3.1) Restated Certificate of Incorporation Form 10-K of Omnicare, Inc. (as amended) March 27, 2003 (3.2) Certificate of Designations of Series Form 10-K A Junior Participating Preferred March 27, 2003 Stock of Omnicare, Inc. dated as of May 18, 1999 (3.3) Second Amended and Restated By-Laws Form 10-Q of Omnicare, Inc. November 14, 2003 (4.1) Indenture dated as of March 20, 2001, Form 8-K by and among Omnicare, Inc., the March 23, 2001 Guarantors named therein and SunTrust Bank, as trustee, relating to the Company's $375.0 million 8.125% Senior Subordinated Notes due 2011 (4.2) Rights Agreement, and related Form 8-K Exhibits, dated as of May 17, 1999 May 18, 1999 between Omnicare, Inc. and First Chicago Trust Company of New York, as Rights Agent (4.3) $750.0 million Credit Agreement, Form 10-Q dated as of June 13, 2003, by and August 14, 2003 among Omnicare, Inc., as Borrower, the lenders from time to time parties thereto, as Lenders, JP Morgan Chase Bank, as a Joint Syndication Agent, Wachovia Bank, National Association, as a Joint Documentation Agent, Lehman Commercial Paper Inc., as Joint Syndication Agent, UBS Securities LLC, as a Joint Documentation Agent, and SunTrust Bank as the Administrative Agent
E-1 INDEX OF EXHIBITS
Document Incorporated by Reference from a Previous Number and Description of Exhibit Filing, Filed Herewith, or Furnished Herewith as (Numbers Coincide with Item 601 of Regulation S-K) Indicated Below - -------------------------------------------------- -------------------------------------------------- (4.4) Subordinated Debt Securities Form 8-K Indenture, dated as of June 13, 2003 Filed June 16, 2003 between Omnicare, Inc. and SunTrust Bank, as Trustee (4.5) First Supplemental Indenture, dated Form 8-K as of June 13, 2003, between Filed June 16, 2003 Omnicare, Inc. and SunTrust Bank, as Trustee (4.6) Second Supplemental Indenture, dated Form 8-K as of June 13, 2003, between Filed June 16, 2003 Omnicare, Inc. and SunTrust Bank, as Trustee (4.7) Amended and Restated Trust Agreement Form 8-K of Omnicare Capital Trust, dated as Filed June 16, 2003 of June 13, 2003 (4.8) Guarantee Agreement of Omnicare, Inc. Form 8-K relating to the Trust Preferred Filed June 16, 2003 Income Equity Redeemable Securities, dated as of June 13, 2003 (10.1) Executive Salary Protection Plan, as Form 10-K amended, May 22, 1981* March 25, 1996 (10.2) Annual Incentive Plan for Senior Proxy Statement for Executive Officers* 2001 Annual Meeting of Shareholders dated April 10, 2001 (10.3) 1992 Long-Term Stock Incentive Plan* Proxy Statement for 2002 Annual Meeting of Stockholders dated April 10, 2002 (10.4) 1995 Premium-Priced Stock Option Plan* Proxy Statement for 1995 Annual Meeting of Stockholders dated April 10, 1995 (10.5) 1998 Long-Term Employee Incentive Plan* Form 10-K March 30, 1999
E-2 INDEX OF EXHIBITS
Document Incorporated by Reference from a Previous Number and Description of Exhibit Filing, Filed Herewith, or Furnished Herewith as (Numbers Coincide with Item 601 of Regulation S-K) Indicated Below - -------------------------------------------------- -------------------------------------------------- (10.6) Amendment to 1998 Long-Term Employee Form 10-K Incentive Plan effective November March 27, 2003 26, 2002* (10.7) Director Stock Plan for Members of Form S-8 the Compensation and Incentive December 14, 2001 Committee* (10.8) Form of Indemnification Agreement Form 10-K with Directors and Officers* March 30, 1999 (10.9) Employment Agreement with J.F. Form 10-K Gemunder dated August 4, 1988* March 27, 2003 (10.10) Employment Agreement with C.D. Hodges Form 10-K dated August 4, 1988* March 27, 2003 (10.11) Employment Agreement with P.E. Keefe Form 10-K dated March 4, 1993* March 25, 1994 (10.12) Split Dollar Agreement with Form 10-K E.L. Hutton dated June 1, 1995 March 25, 1996 (Agreement in the same form exists with J.F. Gemunder)* (10.13) Split Dollar Agreement dated June 1, Form 10-K 1995 (Agreements in the same form March 25, 1996 exist with the following Executive Officers: T.E. Bien, C.D. Hodges and P.E. Keefe)* (10.14) Retirement Plan for E.L. Hutton* Form 10-K March 30, 2001 (10.15) Omnicare, Inc. Excess Benefit Plan* Filed Herewith (10.16) Description of 2002 Supplemental Filed Herewith Benefit Plan*
E-3 INDEX OF EXHIBITS
Document Incorporated by Reference from a Previous Number and Description of Exhibit Filing, Filed Herewith, or Furnished Herewith as (Numbers Coincide with Item 601 of Regulation S-K) Indicated Below - -------------------------------------------------- -------------------------------------------------- (10.17) Employment Agreement with T.E. Bien Form 10-K dated January 1, 1994* March 31, 1997 (10.18) Employment Agreement with D.W. Form 10-K Froesel, Jr. dated February 17, March 31, 1997 1996* (10.19) Form of Amendment to Employment Form 10-K Agreements with J.F. Gemunder, P.E. March 30, 2000 Keefe and C.D. Hodges dated as of February 25, 2000* (10.20) Amendment to Employment Agreement Form 10-K with J.F. Gemunder dated as of March 27, 2003 September 25, 2002* (10.21) Amendment to Employment Agreement Filed Herewith with J.F. Gemunder dated as of March 11, 2004* (10.22) Amendment to Employment Agreement Filed Herewith with P.E. Keefe dated as of March 11, 2004* (10.23) Amendment to Employment Agreement Filed Herewith with C.D. Hodges dated as of March 11, 2004* (10.24) Form of Amendment to Employment Form 10-K Agreements with T.E. Bien and D.W. March 30, 2000 Froesel, Jr., dated as of February 25, 2000* (10.25) Prime Vendor Agreement for Filed Herewith Pharmaceuticals dated as of December 23, 2003** (12) Statement of Computation of Ratio of Filed Herewith Earnings to Fixed Charges
E-4 INDEX OF EXHIBITS
Document Incorporated by Reference from a Previous Number and Description of Exhibit Filing, Filed Herewith, or Furnished Herewith as (Numbers Coincide with Item 601 of Regulation S-K) Indicated Below - -------------------------------------------------- -------------------------------------------------- (21) Subsidiaries of Omnicare, Inc. Filed Herewith (23) Consent of PricewaterhouseCoopers LLP Filed Herewith (24) Powers of Attorney Filed Herewith (31.1) Rule 13a-14(a) Certification of Filed Herewith Chief Executive Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (31.2) Rule 13a-14(a) Certification of Filed Herewith Chief Financial Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (32.1) Section 1350 Certification of Chief Furnished Herewith Executive Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002*** (32.2) Section 1350 Certification of Chief Furnished Herewith Financial Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002***
* Indicates management contract or compensatory arrangement. ** Confidential treatment requested as to certain portions, which portions have been filed separately with the Securities and Exchange Commission. *** A signed original of this written statement required by Section 906 has been provided to Omnicare, Inc. and will be retained by Omnicare, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. E-5 STATEMENT OF DIFFERENCES The registered trademark symbol shall be expressed as.................... 'r' The section symbol shall be expressed as................................. 'SS' EX-10 3 ex10-15.txt EXHIBIT 10.15 EXHIBIT 10.15 OMNICARE, INC. EXCESS BENEFIT PLAN INTRODUCTION The purpose of the Omnicare, Inc. Excess Benefit Plan (the "Plan") is to provide supplemental pension benefits to a select group of executive employees of Omnicare, Inc. and its designated affiliates. The Plan provides a defined benefit pension and a defined contribution pension to designated participants, by reference to the benefits provided by certain tax-qualified pension plans of Omnicare, Inc. This Plan amends and restates in its entirety the Plan as originally effective January 1, 1987, as amended, and incorporates certain administrative actions that have been taken from time to time by Omnicare, Inc. with respect to the Plan. It is intended that the effective dates of any prior amendments and administrative action taken with respect to the Plan be incorporated into this amended and restated Plan. The Plan is intended to be an unfunded arrangement that provides deferred compensation to a select group of management and highly compensated employees, within the scope of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended. SECTION 1. DEFINITIONS 1.1. "Account" means the book entry account maintained for a Participant with respect to certain benefits under the Plan. 1.2. "Beneficiary" means the person or entity designated by a Participant to be entitled to any Excess Benefits payable to a Participant following death. 1.3. "Board" or "Board of Directors" means the Board of Directors of the Company. 1.4. "Change in Control" shall have the meaning set forth in Appendix A hereof. 1.5. "Code" means the Internal Revenue Code of 1986, as amended. 1.6. "Committee" means the Compensation and Incentive Committee of the Board, or such other committee of the Board appointed by the Board to administer the Plan. 1.7. "Company" means Omnicare, Inc., a Delaware corporation. 1.8. "Compensation" means the amount of compensation determined in accordance with the applicable definition of "Compensation" as set forth in the General Pension Plan, the ESOP or the S&I Plan, depending upon the respective plan to which such Excess Benefits apply. 1.9. "Excess Benefits" means the benefits described in this Plan. 1.10. "Eligible Employee" means a management or highly compensated employee of an Employer, who may be designated by the Committee to participate in the Plan or a portion thereof. 1.11. "Employer" means the Company, Omnicare Management Company and any other affiliate of the Company that has adopted this Plan with the authorization of the Board with respect to its Eligible Employees. 1.12. "Entry Date" means the first day of the Plan Year or any other date as may be determined by the Committee on which an Eligible Employee becomes a Participant in the Plan. 1.13. "ESOP" means the Omnicare, Inc. Employee Stock Ownership Plan, originally effective as of August 1, 1988, as amended and restated from time to time. 1.14. "General Pension Plan" means the Omnicare, Inc. General Pension Plan, originally effective as of January 1, 1986, as amended and restated from time to time, and as to which all additional benefit accruals ceased as of December 31, 1993. The General Pension Plan represents a reestablishment of the Omnicare, Inc. General Pension Plan adopted effective as of July 1, 1981 and terminated effective October 31, 1985. 1.15. "Omnicare Stock" means the common stock of the Company, par value $.01 per share. 1.16. "Participant" means each Eligible Employee who has been designated as a participant in the Plan and whose participation has not been terminated. 1.17. "Permanent Disability" means suffering from bodily injury or mental or physical disease which, in the opinion of the Committee, would permanently prevent the Participant from performing the customary duties of his regular job with the Employer. 1.18. "Plan" means this Omnicare, Inc. Excess Benefit Plan, as amended from time to time. 1.19. "Plan Year" means the twelve-month period ending on December 31. 1.20. "Retirement" means normal retirement from employment with the Employer at or beyond age 65. 1.21. "S&I Plan" means the Omnicare, Inc. Employees' Savings and Investment Plan, originally effective as of July 1, 1981, as amended and restated from time to time. 1.22. "Valuation Date" means, for purposes of Excess Benefits related to the ESOP and the S&I plan, the last day of each calendar quarter. SECTION 2. ADMINISTRATION 2.1. Authority of Committee. In addition to all implied powers and responsibilities necessary to carry out the objectives of the Plan, the Committee shall have the discretionary authority to construe the Plan and to determine all questions arising in the administration, interpretation and operation of the Plan. The Committee may adopt such rules and regulations, not inconsistent with the provisions of the Plan, as it may find necessary for the proper administration, interpretation and operation of the Plan, and may amend or revoke any rule or regulations so established. Subject to the claims procedure set forth in Section 8 hereof, all such rules, regulations, determinations and interpretations shall be binding and conclusive upon the Company, each Employer, Eligible Employees, Participants, and upon their respective legal representatives, beneficiaries, successors and assigns and upon all other persons claiming under or through any of them. The Committee shall also have all the discretionary authority as may be necessary to make benefit determinations, to resolve any disputes which arise under the Plan and to make any factual determinations that may be necessary. 2.2. Delegation of Duties. The Committee shall have the authority, except as may be limited by the Board of Directors, to delegate certain administrative functions to be carried out on its behalf to the Benefits Plan Committee of the Company, or to such other committee or individuals as may be appropriate, in the discretion of the Committee. 2.3. Indemnification. The Company will indemnify the Board of Directors, the Committee and its designees hereunder against any claims, losses, expenses, damages or liabilities arising out of the Plan, except for acts of gross negligence or willful misconduct. SECTION 3. PARTICIPATION 3.1. General. Each Eligible Employee who is designated by the Committee shall become a Participant in the Plan or a portion thereof, and shall be eligible to receive Excess Benefits on the basis established by the Committee. All Eligible Employees who were designated as Participants immediately prior to the date of this amendment and restatement of the Plan shall continue to be Participants in the Plan, subject to the terms hereof. The Committee may revoke the participation of a Participant on a prospective basis at any time. 3.2. Participation Date. Each Eligible Employee becomes a Participant on the Entry Date that coincides with or immediately follows the date he is designated to participate in the Plan by the Committee. 3.3. Cessation of Participation. Each Participant's participation in the Plan shall continue until the first to occur of the following events: (i) Retirement; (ii) death; (iii) Permanent Disability; (iv) other separation from service; (v) termination of participation by the Committee; or (vi) termination of the Plan. SECTION 4. SOURCE OF BENEFITS All Excess Benefits shall be an obligation of each respective Employer hereunder and shall be payable from its general assets. Each Employer shall establish on its books an account equal to the value of all Plan benefits accrued for their respective Participants. The Employer shall not be obligated to fund payment of the benefits hereunder; provided that the Employer may, in its sole discretion, establish or cause to be established a separate trust or trusts to fund the Excess Benefits payable to each Participant. Neither the Plan nor any Participant or Beneficiary shall have any preferred claim on, or any beneficial ownership interest in, the assets of the Company or any Employer. No liability for the payment of benefits under the Plan shall be imposed upon any officer, director, employee, or stockholder of the Company or any Employer. SECTION 5. PARTICIPANT ACCOUNTS 5.1. Participant Accounts. The Committee will establish and maintain a separate Account for each Participant with respect to the Excess Benefits related to the ESOP and to the S&I Plan. Unless otherwise determined by the Committee, each Participant's Account shall be credited with the applicable Excess Benefit amount described in Section 6.1 hereof, which shall be expressed, at the discretion of the Committee, as either a cash amount or as shares of Omnicare Stock. Any Account established for purposes of the applicable Excess Benefit amount described in Section 6.2 hereof shall be for informational purposes or for purposes of Section 4 hereof. 5.2. Statement of Accounts. The Committee shall cause to be delivered or mailed to each Participant a statement setting forth the status of the Participant's Accounts at such intervals as shall be determined by the Committee. 5.3. Investment Crediting for ESOP and S&I Plan Excess Benefits. In addition to crediting each Participant's Account with the applicable Excess Benefit amounts described in Section 6.1 hereof, each such Account shall be adjusted as of each Valuation Date to reflect the fair market value of the Omnicare Stock or the other assets credited to the Participant's Account as of the Valuation Date, as determined by the Committee. 5.4. Reinvestment of Dividends. The deemed amount of cash dividends attributable to Omnicare Stock shall be allocated to a Participant's Account based on the number of shares allocated to his Account as of the date on which such dividend was paid. All such dividends shall be deemed reinvested in Omnicare Stock based on the most recent closing trading price of the Omnicare Stock prior to the date of reinvestment. 5.5. Diversification of Investments. Unless otherwise provided by the Committee, a Participant shall not have the authority to direct the investment of his Excess Benefits with respect to the ESOP or the S&I Plan. Notwithstanding the foregoing, upon a Change in Control, a Participant shall have the right to diversify that portion of his account invested in Omnicare Stock or any stock that is exchanged for Omnicare Stock in the Change in Control transaction. In such case, the Participant may make an investment election in the manner and form prescribed by the Committee prior to the Change in Control. SECTION 6. EXCESS BENEFIT AMOUNTS 6.1. Excess Benefits Related to the ESOP and S&I Plan. (a) The Participant's Account shall be credited with the following amounts: (i) ESOP Allocation. As of the last day of each Plan Year beginning prior to January 1, 1999, the Account of each Participant described in subsection (b) shall have been credited with an amount or, if applicable, the number of shares of Omnicare Stock, equal to the difference between (1) Employer contributions allocated to the Participant's accounts under the ESOP as of the corresponding allocation date(s) under such plan, and (2) the amount, or if applicable, the number of shares of Omnicare Stock, that would have been so allocated under such plan without regard to (i) the annual contribution limitations as set forth in Section 415 of the Code, and (ii) the limitations on compensation as set forth in Section 401(a)(17) of the Code. A Participant's Account shall not have been credited with any amounts paid directly to a Participant in order for the ESOP to meet the contribution percentage requirement as set forth in Section 401(m) of the Code. (ii) S&I Plan Allocation. As of the last day of each calendar quarter of each Plan Year beginning on or after January 1, 1999, (or more frequently as determined by the Committee), the Account of each Participant described in subsection (b) shall be credited with an amount or, if applicable, the number of shares of Omnicare Stock, equal to the difference between (1) Employer contributions allocated to the Participant's accounts under the S&I Plan as of the corresponding allocation date(s) under such plan, and (2) the amount, or if applicable, the number of shares of Omnicare Stock, that would have been so allocated under such plan without regard to (i) the annual contribution limitations as set forth in Section 415 of the Code, and (ii) the limitations on compensation as set forth in Section 401(a)(17) of the Code. A Participant's Account shall not be credited with any amounts paid directly to a Participant in order for the S&I Plan to meet the contribution percentage requirement as set forth in Section 401(m) of the Code. (b) A Participant is eligible to receive the allocations described in subsection (a) if (i) the Participant was otherwise eligible to receive an allocation of an Employer contribution under the ESOP or is now eligible to receive an allocation of an Employer contribution under the S&I Plan, whichever is applicable, as of the applicable allocation date(s) under such plans and this Plan and (ii) the Participant remains an active Participant in the Plan in accordance with Section 3 hereof as of the applicable allocation date(s) hereunder. 6.2. Excess Benefits Related to the General Pension Plan. (a) The Excess Benefit payable for a Participant who is a participant in the General Pension Plan shall be an amount equal to the excess, if any, of: (i) the accrued benefit of the Participant calculated under the provisions of the General Pension Plan, calculated as of the date determined in Section 7.1(b) hereof, but without regard to (i) the annual contribution and/or benefit limitations as set forth in Section 415 of the Code, and (ii) the limitations on compensation as set forth in Section 401(a)(17) of the Code; over (ii) the accrued benefit payable to or on behalf of the Participant pursuant to the terms of the General Pension Plan as of the date determined in Section 7.1(b) hereof. (b) To the extent the accrued benefit to which a Participant would be entitled under the General Pension Plan is offset by an amount calculated with reference to the Participant's accrued benefit under the terminated General Pension Plan as of October 31, 1985, then the offset as so calculated shall also be applied in determining the benefit described in Section 6.2(a) hereof. (c) For purposes of calculating the Excess Benefit under Section 6.2(a) hereof, the following special rules shall apply: (i) The accrued benefit of a Participant who was a participant in the General Pension Plan as of January 1, 1994, shall be determined without regard to the cessation of additional benefit accruals under the General Pension Plan as of December 31, 1993. (ii) Such calculation shall be made without regard to any limitation on years of Credited Service prescribed in Section 1.12 of the General Pension Plan. (iii) The lump-sum present value of the Excess Benefit payable to any Participant holding a position of senior vice president or higher who is a participant in the General Pension Plan shall increase by an amount, for each year of Credited Service (or portion thereof) that the Participant renders for an Employer after attaining age 65, that is not less than an amount specified by the Committee for each such Participant on a case-by-case basis. The lump-sum present value of such annual accrual of benefits shall be determined on the same basis as specified in Section 7.4 hereof. (iv) Such calculation shall be made without regard to the 50% of average compensation limit on benefits prescribed in Section 5.1(2)(ii) of the General Pension Plan. (v) "Average Compensation" under the General Pension Plan shall include the amount of any bonus that is determinable under the Employer's annual incentive program for the full Plan Year prior to the date determined in Section 7.1(b) hereof, regardless of whether such bonus has been paid prior to such date; provided, that such bonus amount shall not be included if it would reduce the amount of Average Compensation. In addition, no more than five annual bonus amounts shall be included in any consecutive 60-month period for purposes of determining Average Compensation. (vi) The Committee, in its sole discretion, may grant a Participant additional years of "Credited Service" under the General Pension Plan for services performed by a Participant for any affiliate of the Company, a predecessor entity to the Company or one of its affiliates, or an entity that has been acquired by the Company. 6.3. Vesting of Excess Benefits. (a) General Pension Plan. Effective as of the date hereof, all Participants have become 100% vested in the accrued benefit provided under Section 6.2 hereof. (b) ESOP. Effective as of the date hereof, all amounts credited to a Participant's Accounts under Section 6.1(a) hereof prior to July 1, 1995 have become 100% vested. (c) ESOP and S&I Plan. (i) Notwithstanding any applicable vesting provision of the ESOP or the S&I Plan, on and after July 1, 1995, a Participant shall become vested with respect to allocations made pursuant to Section 6.1 hereof attributable to the ESOP or the S&I Plan, whichever is applicable, at the rate of 20 percent per year over a five-year period, beginning with the first anniversary of the Valuation Date with respect to which the allocation is made. In addition, all such allocations shall become fully vested and non-forfeitable upon the occurrence of one of the following events: (i) the date the Participant attains age 65; (ii) the Participant's death; (iii) the Participant's Permanent Disability; (iv) a Change in Control of the Company; (v) involuntary termination of the Participant's employment with the Company without Cause; or (vi) approval within the sole discretion of the Committee. (ii) For purposes of this Section 6.3, "Cause" shall mean cause as defined in the applicable Employment Agreement of a Participant with the Employer. If no definition is so provided or is not applicable, "cause" shall mean fraud, misappropriation, embezzlement, illegal or immoral conduct that is prejudicial to the best interest of the Company, intentional and material damage to the property of the Company, attempting to obtain any personal profit from any transaction in which the Participant has an interest adverse to the interest of the Company (unless the Participant shall first have obtained the written consent of the Company), or unreasonable failure or refusal to substantially perform the Participant's duties as an employee of the Company after having received prior written notice of and an opportunity to cure such failure or refusal. (iii) Upon a Participant's termination of employment for reasons other than as provided in this Section 6.3(c), all unvested benefits shall be forfeited and shall revert to the credit of the Company. SECTION 7. DISTRIBUTION OF BENEFITS 7.1. Determination of Benefits. (a) Excess Benefits Related to the ESOP and the S&I Plan. Any Excess Benefit that a Participant is entitled to under Section 6.1 hereof shall be based upon the fair market value of assets attributable to such Participant's Account on the date such distribution occurs. (b) Excess Benefits Related to the General Pension Plan. Any benefit that a Participant is entitled to under Section 6.2 hereof shall be based upon the Participant's accrued benefit determined pursuant to Section 6.2 hereof as of the date of termination of employment due to Retirement, Permanent Disability, separation from service or death. 7.2. Time of Payment. Upon termination (due to Retirement, Permanent Disability, separation from service or death) of a Participant's employment with the Employer, the Participant or his Beneficiary, if applicable, shall be entitled to receive the vested portion of the Participant's Account established pursuant to Section 6.1 hereof and the vested portion of his accrued benefit in accordance with Section 6.2 hereof determined pursuant to Sections 7.1(a) and (b) hereof, respectively. Such distribution shall be made as soon as administratively feasible. 7.3. Beneficiary Designation. A Participant shall designate a person or entity as a Beneficiary in the manner prescribed by the Committee for the Plan. A Beneficiary may include the Participant's estate or a trust. A Participant may at any time change the designation of a Beneficiary by filing a new designation in the manner prescribed by the Committee. If a Participant has not made an effective designation, or if a Beneficiary does not survive the Participant, then the Beneficiary shall be the Participant's estate. In the event the Committee has any doubt as to the proper person or entity entitled to receive payments under the Plan, then the Committee may cause payments to be withheld until the matter is decided by a court of competent jurisdiction. 7.4. Form of Payments. All Excess Benefits under the Plan shall be paid in a single lump sum payment. All such payments shall be made in cash, except that the Committee, in its sole discretion, may make payment of a Participant's Excess Benefit pursuant to Section 6.1 hereof payable in shares of Omnicare Stock. In determining the lump sum amount of benefits payable with respect to the General Pension Plan pursuant to Sections 6.2 and 7.1(b) hereof, all actuarial assumptions and methods of determining actuarial equivalencies of lump sum benefits as provided in Section 1.3 of the General Pension Plan shall be utilized. 7.5. Hardship Withdrawals. Notwithstanding the foregoing, a Participant may, during his employment with the Employer, apply in the form and manner determined by the Committee to withdraw any portion of his vested Account as determined pursuant to Section 6.1 hereof, as well as any investment experience thereon, by reason of an unforeseeable emergency. An unforeseeable emergency is a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Internal Revenue Code of 1986, as amended) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Withdrawals hereunder shall not be made to the extent that such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant's assets, or to the extent the liquidation of such assets would not itself cause severe financial hardship. Withdrawals of amounts because of an unforeseeable emergency must only be permitted to the extent reasonably needed to satisfy the emergency need. SECTION 8. CLAIMS PROCEDURE The Committee shall have the discretionary authority as may be necessary to make benefit determinations, to resolve any disputes which arise under the Plan and to make any factual determinations as may be necessary. Whenever there is denied, whether in whole or in part, a claim for benefits under the Plan filed by any person (herein referred to as the "Claimant"), the Committee shall transmit a written notice of such decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which he receives such notice, he may obtain review of such decision in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his authorized representative may request that the claim denial be reviewed by the Employer by filing with the Committee a written request therefore, which request shall contain the following information: (a) the date on which the Claimant's request was filed with the Committee; provided, however, that the date on which the Claimant's request for review was in fact filed with the Committee shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph; (b) the specific portions of the denial of his claim which the Claimant requests the Employer to review; (c) a statement by the Claimant setting forth the basis upon which he believes the Committee should reverse the previous denial of his claim for benefits and accept his claim as made; and (d) any written material (offered as exhibits) which the Claimant desires the Employer to examine in its consideration of his position as stated pursuant to (c) above. Within 60 days of the date determined pursuant to (a) above, the Committee shall conduct a full and fair review of the decision denying the Claimant's claim for benefits. Within 60 days of the date of such hearing, the Committee shall render its written decision on review, written in a manner calculated to be understood by the Claimant, specifying the reasons and Plan provisions upon which its decision was based. SECTION 9. GENERAL PROVISIONS 9.1. No Guarantee of Employment. Nothing in this Plan shall confer upon any Employees any right to continue in the employ of the Employer, or shall affect the right of the Employer to terminate the employment of any Employee with or without cause. 9.2. Non-Exclusivity. Nothing in the Plan is intended to be a substitute for, or shall preclude or limit the establishment or continuation of, any other plan, practice or arrangement for the payment of compensation or fringe benefits to Employees generally, or to any class or group of Employees, which the Employer now has or may hereafter lawfully put into effect, including, without limitation, any retirement, pension, thrift, group insurance, stock purchase, stock bonus or stock option plan. 9.3. Tax Withholding. The Employer may make such provisions as it may deem appropriate for the withholding of any taxes that the Employer determines it is required to withhold in connection with any Excess Benefit, including any amounts required to be withheld from a Participant's Account at the time of vesting pursuant to Section 3121(v) of the Code. 9.4. Nonalienation of Excess Benefits. No Participant or Beneficiary may encumber or dispose of his right to receive any Excess Benefit. 9.5. Interest of Participant. The obligation to pay Excess Benefits merely constitutes the unsecured promise of an Employer to make payments when due. No Participant or Beneficiary has any security interest in, or a lien or prior claim upon, any Account or assets of an Employer. No Plan provisions shall be construed so as to place any Account or other asset in trust with an Employer for the benefit of a Participant, his Beneficiary, or his estate. 9.6. Claims of Other Persons. The provisions of the Plan shall not be construed as giving any person, firm or corporation any legal or equitable right as against the Employer, its officers, employees, or directors, except any rights specifically provided for in the Plan or created in accordance with the terms of the Plan. 9.7. Severability. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other Plan provision. The Plan shall be construed in all respects as if the invalid or unenforceable provision were omitted. 9.8. Gender and Number. Masculine pronouns and similar words shall be read as the feminine gender where appropriate. The singular form of words shall be read as plural where appropriate. 9.9. Governing Law. The Plan shall be governed and construed in accordance with the laws of the State of Delaware. 9.10. Expenses. The Employer may pay all fees and expenses of the Plan and any associated trust. To the extent not paid by the Employer, in its sole and absolute discretion, all such fees and expenses shall be paid from assets held in any trust and shall serve to reduce the Participant's Accounts on a pro-rata basis accordingly. SECTION 10. AMENDMENT AND TERMINATION The Plan may be amended or terminated at any time and in any manner, in whole or in part, at the discretion of the Board. Notwithstanding the foregoing, no such amendment or termination shall reduce the amount of the Excess Benefits of any Participant that have become vested in accordance with the Plan. Upon termination of the Plan, each Participant will be entitled to the Excess Benefit to which the Participant would be entitled had he been eligible for and retired on the date the Plan terminated, and all such benefits shall be paid in a lump-sum promptly following such termination. APPENDIX A CHANGE IN CONTROL For purposes of the Plan, "Change in Control" shall mean any of the following events: (1) any person becomes a beneficial owner, directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of the Company's then outstanding securities; (2) the merger or consolidation of the Company with or into another entity (or other similar reorganization), whether or not the Company is the surviving corporation, in which the stockholders of the Company immediately prior to the effective date of such transaction own less than 50% of the voting power in the surviving entity; (3) the sale or other disposition of all or substantially all of the assets of the Company or a complete liquidation or dissolution of the Company; or (4) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority of such Board of Directors, unless the nomination for the election by the Company's stockholders of each new director was approved by a vote of at least one-half of the persons who were directors at the beginning of the two-year period. For purposes of this definition, a "Person" shall mean any individual, firm, company, partnership, other entity or group, but excluding the Company, its affiliates, any employee benefit plan maintained by the Company, or an underwriter temporarily holding securities pursuant to an offering of such securities. For purposes of this definition, a Person shall be deemed the "beneficial owner" of any securities (i) which such Person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (ii) which such Person or any of its Affiliates or Associates, has directly or indirectly, (1) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (2) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any securities. For purposes of this definition, the terms "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as in effect on May 17, 1999. EX-10 4 ex10-16.txt EXHIBIT 10.16 EXHIBIT 10.16 OMNICARE, INC. Description of 2002 Supplemental Benefit Plan 1. Administration - Compensation and Incentive Committee of the Board of Directors. 2. Participants - A total of 14 members of Omnicare's senior management are active participants in the Plan. 3. Normal Form of Benefit - An Annual Benefit payable monthly for the life of the employee with 120 monthly payments guaranteed beginning on the employee's Normal Retirement Date. 4. Alternate Forms of Payment - Lump sum, or guaranteed payments for 5 or 10 years, determined on an actuarial equivalent basis. 5. Amount of Benefit - The Annual Benefit is based on a formula set forth for each participant under the Plan. The Annual Benefit payable to the following executive officers commencing as of the Normal Retirement Date in the normal form of benefit, assuming full vesting is: Joel F. Gemunder - $287,298; Patrick E. Keefe - $91,415; David W. Froesel, Jr. - $160,113; Timothy E. Bien - $28,072; and Cheryl D. Hodges - $100,940. 6. Normal Retirement Date - The first of the month coincident with or next following the later of the employee's 65th birthday or completion of 7 years of service after January 1, 2001. 7. Early Retirement Date - Any date after completion of 7 years of service after January 1, 2001. 8. Amount of Early Retirement Benefit - Actuarial equivalent of the employee's Normal Retirement Benefit payable in a lump sum or periodic payments. 9. Vesting - 14.29% per year of service after January 1, 2001. An employee will be 100% vested in the event of death, disability, change in control, or termination without cause. 10. Termination Benefits - An employee who terminates employment prior to completing 7 years of service after January 1, 2001 will be paid the lump sum value of his vested accrued benefit. 11. Death Benefits - 100% vesting and full accrual of Normal Retirement Benefit in event of death before retirement, in which case lump sum value payable to employee's beneficiary. In event of death after retirement, the lump sum value of any remaining payments due under the applicable form of payment will be paid to the employee's beneficiary. In lieu of a lump sum, the employee may elect to have any payments due to the beneficiary under the applicable form of payment continued. 12. Miscellaneous. The plan is treated as an unfunded plan for a "select group of management or highly compensated employees" for purposes of ERISA and federal tax law. Assets in respect of current plan liabilities are held by Omnicare under "rabbi trusts" for plan participants. EX-10 5 ex10-21.txt EXHIBIT 10.21 EXHIBIT 10.21 NINETEENTH AMENDMENT TO EMPLOYMENT AGREEMENT JOEL F. GEMUNDER ("Employee"), and OMNICARE MANAGEMENT COMPANY, a Delaware corporation with its principal place of business in Covington, Kentucky (the "Company"), hereby agree as follows: 1. Recitals (a) The Company is an indirect subsidiary of Omnicare, Inc. as a result of a corporate restructuring of Omnicare, Inc. and its affiliates; (b) In connection with such restructuring certain assets and liabilities of Omnicare, Inc. have been transferred to the Company, effective December 31, 1988, including the employment agreement between the Employee and Omnicare, Inc., dated August 4, 1988 (the "Employment Agreement"); (c) The Company, as assignee, and Employee amended the Employment Agreement by mutual written agreement on December 31, 1988, May 23, 1989, May 22, 1990, May 21, 1991, May 19, 1992, May 17, 1993, May 16, 1994, May 15, 1995, May 20, 1996, May 19, 1997, May 18, 1998, March 3, 1999, February 25, 2000, March 1, 2000, March 1, 2001, February 6, 2002, September 25, 2002 and March 6, 2003 (the "Prior Amendments"); and (d) The Company and the Employee wish to amend the Employment Agreement as set forth below. 2. Amendments (a) Section 1.2 of the Employment Agreement is amended by deleting the year "2008" from the third line of Section 1.2 and substituting the year "2009" therefor. (b) The amount of unrestricted stock award recognized in lieu of incentive compensation in 2003 is $3,137,994. 3. General Except as previously changed by the Prior Amendments and as specifically amended herein, the Employment Agreement will remain in full force and effect in accordance with its original terms, conditions and provisions. IN WITNESS WHEREOF, the parties have duly executed this amendatory agreement as of March 11, 2004. EMPLOYEE OMNICARE MANAGEMENT COMPANY /s/ Joel F. Gemunder /s/ Cheryl D. Hodges - -------------------- ----------------------- Joel F. Gemunder By: Cheryl D. Hodges Title: Vice President EX-10 6 ex10-22.txt EXHIBIT 10.22 EXHIBIT 10.22 TWELFTH AMENDMENT TO EMPLOYMENT AGREEMENT PATRICK E. KEEFE ("Employee"), and OMNICARE MANAGEMENT COMPANY, a Delaware corporation (the "Company"), hereby agree as follows: 1. Recitals (a) The Company is an indirect subsidiary of Omnicare, Inc. as a result of a corporate restructuring of Omnicare, Inc. and its affiliates; (b) In connection with such restructuring certain assets and liabilities of Omnicare, Inc. have been transferred to the Company, effective December 31, 1988. The employment agreement between the Employee and Omnicare, Inc., dated March 4, 1993 (the "Employment Agreement") was transferred to the Company pursuant to the Assignment and Assumption Agreement, dated May 16, 1994, among the Company, the Employee and Omnicare, Inc. (the "Assignment and Assumption Agreement); (c) The Company, as assignee, and Employee amended the Employment Agreement by mutual written agreement on May 16, 1994, May 15, 1995, May 20, 1996, May 19, 1997, May 18, 1998, March 3, 1999, February 25, 2000, March 1, 2000, March 1, 2001, February 6, 2002 and March 6, 2003 (the "Prior Amendments"); and (d) The Company and the Employee wish to amend the Employment Agreement as set forth below. 2. Amendments (a) Section 1.2 of the Employment Agreement is amended by deleting the year "2008" from the third line of Section 1.2 and substituting the year "2009" therefor. (b) The amount of unrestricted stock award recognized in lieu of incentive compensation in 2003 is $935,489. 3. General Except as previously changed by the Prior Amendments and as specifically amended herein, the Employment Agreement will remain in full force and effect in accordance with its original terms, conditions and provisions and those of the Assignment and Assumption Agreement. IN WITNESS WHEREOF, the parties have duly executed this amendatory agreement as of March 11, 2004. EMPLOYEE OMNICARE MANAGEMENT COMPANY /s/ Patrick E. Keefe /s/ Cheryl D. Hodges - -------------------- ------------------------ Patrick E. Keefe By: Cheryl D. Hodges Title: Vice President EX-10 7 ex10-23.txt EXHIBIT 10.23 EXHIBIT 10.23 EIGHTEENTH AMENDMENT TO EMPLOYMENT AGREEMENT CHERYL D. HODGES ("Employee"), and OMNICARE MANAGEMENT COMPANY, a Delaware corporation (the "Company"), hereby agree as follows: 1. Recitals (a) The Company is an indirect subsidiary of Omnicare, Inc. as a result of a corporate restructuring of Omnicare, Inc. and its affiliates; (b) In connection with such restructuring certain assets and liabilities of Omnicare, Inc. have been transferred to the Company, effective December 31, 1988, including the employment agreement between the Employee and Omnicare, Inc., dated August 4, 1988 (the "Employment Agreement"); (c) The Company, as assignee, and Employee amended the Employment Agreement by mutual written agreement on December 31, 1988, May 23, 1989, May 22, 1990, May 21, 1991, May 19, 1992, May 17, 1993, May 16, 1994, May 15, 1995, May 20, 1996, May 19, 1997, May 18, 1998, March 3, 1999, February 25, 2000, March 1, 2000, March 1, 2001, February 6, 2002 and March 6, 2003 (the "Prior Amendments"); and (d) The Company and the Employee wish to amend the Employment Agreement as set forth below. 2. Amendments (a) Section 1.2 of the Employment Agreement is amended by deleting the year "2008" from the third line of Section 1.2 and substituting the year "2009" therefor. (b) The amount of unrestricted stock award recognized in lieu of incentive compensation in 2003 is $709,626. (c) Section 1.1(b) of the Employment Agreement is deleted in its entirety. 3. General Except as previously changed by the Prior Amendments and as specifically amended herein, the Employment Agreement will remain in full force and effect in accordance with its original terms, conditions and provisions. IN WITNESS WHEREOF, the parties have duly executed this amendatory agreement as of March 11, 2004. EMPLOYEE OMNICARE MANAGEMENT COMPANY /s/ Cheryl D. Hodges /s/ Joel F. Gemunder - -------------------- ----------------------- Cheryl D. Hodges By: Joel F. Gemunder Title: President EX-10 8 ex10-25.txt EXHIBIT 10.25 EXHIBIT 10.25 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. PRIME VENDOR AGREEMENT FOR PHARMACEUTICALS THIS AGREEMENT made December 23, 2003 and effective as of January 1, 2004 (the "Effective Date"), is between McKesson Corporation ("McKesson"), a Delaware corporation with its principal place of business at One Post Street, San Francisco, California 94104, and Omnicare, Inc. ("Omnicare"), a Delaware corporation with its principal place of business at 1600 RiverCenter 100 East RiverCenter Blvd. Covington, Kentucky 41011. McKesson Health Systems ("MHS") is a division of McKesson. WHEREAS, MHS is engaged in the business of wholesale distribution of pharmaceuticals and the provision of related goods and services. Omnicare provides healthcare services to its communities. Omnicare desires to avail itself on behalf of its owned and managed facilities of MHS' distribution and other services upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein, the parties agree as follows: 1. DEFINITIONS Except as otherwise stated herein, capitalized terms used in this Agreement will have the meanings set forth in Exhibit A hereto. 2. APPOINTMENT AND COMMITMENT 2.1 Appointment of Prime Vendor. Omnicare agrees to purchase from MHS at least [ ** ] of the requirements for Pharmaceutical Products of Omnicare and the Omnicare Facilities, net of Permitted Purchases, as hereinafter defined ("Volume Net Purchase Percentage Requirement"). 2.1.1 The term "Pharmaceutical Products" shall mean [ ** ] (subject to clause (vi), below), [ ** ]. The term "Permitted Purchases" shall mean (i) purchases of [ ** ] pursuant to Section 5.1; (ii) purchases for [ ** ], but only if such purchase is pursuant to a contractual commitment of such [ ** ]; (iii) direct purchases of [ ** ], not to reduce overall compliance to below [ ** ]; (iv) purchases from [ ** ]; (v) purchases of [ ** ] that, as of the Effective Date, does not fall within the definition of Pharmaceutical Products (for example, [ ** ]), but which during the term of this Agreement [ ** ], but only to the extent [ ** ]; and (vi) purchases of [ ** ]. For the removal of doubt, nothing in this Agreement shall obligate Omnicare to purchase products or services now or hereafter offered by divisions of McKesson other than MHS that are not Pharmaceutical Products (e.g., robotics, medical surgical supplies, healthcare information systems.) 2.1.2 To fulfill the Volume Net Purchase Percentage Requirement, Omnicare agrees: (i) to purchase [ ** ] and (ii) to purchase [**]. 2.2 Omnicare Facilities. The term "Omnicare Facility" shall be defined as a facility now or hereafter owned or controlled by Omnicare that orders, dispenses, handles, packages, repackages, stores or otherwise use pharmaceutical products, including, but not limited to, a pharmacy, repackaging operation and/or warehouse location, and Omnicare Purchasing Company, L.P.; provided that (i) any such facility that is controlled but not owned by Omnicare shall not be included as an "Omnicare Facility" under this Agreement unless such facility meets MHS's reasonable credit requirements and (ii) any such facility, whether owned or controlled by Omnicare, shall not be included as an "Omnicare Facility" under this Agreement without the prior written consent of McKesson if the addition of such facility would materially alter the average cost to serve Omnicare's then existing Omnicare Facilities. A list of all current Omnicare Facilities, including their respective addresses and estimated monthly purchasing volume, is attached to this Agreement as Exhibit B and incorporated herein by this reference. Upon the addition of any such Omnicare Facility, Exhibit B will be amended. 3. TERM AND TERMINATION 3.1 This Agreement shall supersede the Restated MHS Health Systems Agreement to Serve Omnicare, Inc. as Primary Supplier of Pharmaceuticals (dated March 23, 1998), as amended, and shall expire on October 31, 2010, unless sooner terminated in accordance with its terms. 3.2 This Agreement may be terminated prior to expiration only as follows: 3.2.1 Omnicare may terminate this Agreement (i) upon McKesson changing its pricing schedule to Omnicare except in accordance with the terms hereof, (ii) upon the Omnicare group service level falling below 90% for a quarter, or (iii) upon the failure of McKesson's order management systems to perform the ordering functions for a consecutive fifteen (15) days or more or (iv) in accordance with Section 13.1. McKesson may terminate this Agreement in accordance with Sections 4.1.3 and 13.1. Either party may terminate this Agreement upon (i) the other party's failure to make any payment due hereunder within fifteen (15) days following written notice of such failure or (ii) any other material breach of the Agreement by either party which remains uncured forty-five (45) days following written notice thereof. 3.2.2 Upon the occurrence of any of the following events to a party, the other party may, without prejudice to its other rights, terminate this Agreement upon written notice: 3.2.2.1 If such party shall wind up, liquidate, or dissolve itself; or 3.2.2.2 If such party shall file any petition under any bankruptcy, reorganization, insolvency or moratorium laws, or any other law or laws for the relief of or in relation to the relief of debtors; or 3.2.2.3 If such party shall file any involuntary petition under any bankruptcy statute or a receiver or trustee shall be appointed to take possession of all or a substantial part of its assets which has not been dismissed or terminated within sixty (60) days of the date of such filing or appointment; or 3.2.2.4 If such party shall make a general assignment for the benefit of creditors or shall become unable or admit in writing its inability to meet its obligations as they mature; or 3.2.2.5 If such party shall institute any proceedings for liquidation or the winding up of its business other than for purposes of reorganization, consolidation or merger. 3.2.3 Omnicare shall have the right to terminate this Agreement immediately if McKesson sells all or substantially all of its assets to a person who is not controlling, controlled by, or under common control with McKesson, or there is a change in control of McKesson. For the purposes of this Agreement, a "Change In Control" shall mean a merger, consolidation or other corporate reorganization following which 50% or more of the outstanding McKesson stock or voting power is owned by a person or persons other than the owners immediately prior to such event. 2 3.2.4 Omnicare shall have the right to terminate this Agreement on [ ** ] days' prior written notice if McKesson shall [ ** ]. 3.3 Continuing Obligations. In the event of a termination hereunder: 3.3.1 Obligations Incurred Prior to Termination. The liability of Omnicare Facilities for obligations incurred prior to the effective termination date, for finance charges and for all costs of collection, including reasonable attorneys' fees, shall survive termination. 3.3.2 Obligation for Additional Products. Omnicare shall be obligated to purchase from MHS all Additional Products that (i) have been purchased by MHS exclusively for Omnicare as of the date of such termination or notice of termination and (ii) cannot be returned by MHS to the vendor for a full refund. Omnicare shall pay the original invoice price charged to MHS by the vendor of such Additional Products or the contract price in effect at the time of purchase by Omnicare, if lower, less any cash discount received by MHS. Any such Additional Product will be saleable, undamaged, have at least six months dating (with the exception of private label items) and will be delivered in one shipment to Omnicare or to a destination designated by Omnicare. Omnicare shall also be liable for all shipping charges that would otherwise be charged pursuant to the terms of this Agreement. 3.3.3 The following provisions of this Agreement will survive termination or expiration of this Agreement in accordance with their terms: Section 4.6.6 (Late Payment Fees), Section 4.6.7 (Right to Change Payment Terms), Section 3.3 (Continuing Obligations), Section 12 (Confidential Information), 13.13 (Special Indemnity), 13.15 (Governing Law) and 13.16 (Entire Agreement). 4. PRICING AND PAYMENT 4.1 [ ** ]. From the date of this Agreement through [ ** ], sale of Products to Omnicare shall be [ ** ]. Beginning [ ** ], subject to Section 4.2 below, McKesson agrees to distribute and sell Products to Omnicare Facilities [ ** ], as set forth in the following Pricing Matrix. Omnicare may elect to change its payment terms among those set forth in Section 4.6.3, subject to credit approval, [ ** ]. In the event of such change the pricing set forth in the applicable Pricing Matrix will be adjusted in accordance with the following table:
Terms Adjustment - ----- ---------- [ ** ] [ ** ] [ ** ] [ ** ] [ ** ] [ ** ] [ ** ] [ ** ]
PRICING MATRIX FOR NON-RETAIL OMNICARE FACILITIES** - ------------------------ [ ** ] [ ** ] [ ** ] - ------------------------ [ ** ] [ ** ] [ ** ] - ------------------------
3 - ------------------------ [ ** ] [ ** ] [ ** ] - ------------------------ [ ** ] [ ** ] [ ** ] - ------------------------ [ ** ] [ ** ] [ ** ] - ------------------------ [ ** ] [ ** ] [ ** ] - ------------------------ [ ** ] [ ** ] [ ** ] - ------------------------ [ ** ] [ ** ] [ ** ] - ------------------------
PRICING MATRIX FOR RETAIL OMNICARE FACILITIES***
- ------------------------------------ 7 Day Average Monthly Payment Retail Volume Per Facility Terms - ------------------------------------ [ ** ] [ ** ] - ------------------------------------ [ ** ] [ ** ] - ------------------------------------ [ ** ] [ ** ] - ------------------------------------ [ ** ] [ ** ] - ------------------------------------ [ ** ] [ ** ] - ------------------------------------ [ ** ] [ ** ] - ------------------------------------ [ ** ] [ ** ] - ------------------------------------ - ------------------------------------
**Pricing incorporates the elimination of [ ** ]. Omnicare reserves the right to review[ ** ]. ***Retail Facilities will receive [ ** ]. 4.1.1 For purchases of Contract Products "Cost" shall mean the Contract Price. 4.1.2 For purchases of Products that are not Contract Products, "Cost" shall mean manufacturer's published wholesale acquisition cost (exclusive of cash discounts) on the date invoice to an Omnicare Facility, adjusted for selected bonus goods, manufacturers' off-invoice allowances and special manufacturer's deal prices to be made available to an Omnicare Facility in accordance with MHS' established policies. 4.1.3 The pricing matrix is based on Omnicare [ ** ]. If the actual [ ** ] falls below [ ** ]. If within [ ** ] the parties are unable to agree on appropriate [ ** ] prior written notice. 4.1.4 "[ ** ]" will be determined by [ ** ] the most recent [ ** ]. Pricing will be evaluated each [ ** ] based upon the [ ** ]. Should the total [ ** ] purchases. This [ ** ] will result in one [ ** ]. This [ ** ] together with [ ** ] under this agreement that are stated to be payable in accordance with this Section 4.1.4, shall be applied within [ ** ] of the end of a [ ** ]. [ ** ] on all such [ ** ] at an [ ** ], starting with the [ ** ] in which the [ ** ]. References in this Agreement to "[ ** ]," "[ ** ]" or "[ ** ]" or similar terms other than "[ ** ]" shall mean the [ ** ]. 4.1.5 Pricing in this Agreement is based upon [ ** ]. In the event of any [ ** ] from any manufacturer [ ** ], Omnicare and MHS will [ ** ], as the case may be. Should Omnicare and MHS [ ** ], provided that [ ** ] after reasonable written notice thereof, and such purchase [ ** ], provided that nothing in this Section 4.1.5 shall [ ** ]. 4 4.2 Specially Priced Product. The purchase price for selected Products, including, without limitation, generic products sold under MHS proprietary generics programs (e.g., OneStop, Network Net), repackaged pharmaceuticals, private label products, health and beauty care products, medical surgical supplies, home health care/durable medical equipment, Products acquired by MHS from vendors not offering customary cash discounts or other terms, and other specialty; slow moving; non-pharmaceutical; and/or net-billed Products will not be based upon the [**] described in Section 4.1 above, but will instead be billed in accordance with the terms and conditions established by MHS (including applicable markup) for such Products. Products described in this paragraph are sometimes referred to as "Specially Priced Products." Exhibit C sets forth, for illustration purposes only, a representative sampling of the principal types of Specially Priced Product and their prices as of the dates indicated. 4.3 Taxes. The foregoing pricing does not include any applicable sales, use, business and occupation, or other taxes on the sale of Products hereunder (other than taxes on McKesson's net income), which will be added to the pricing of Products sold to Omnicare Facilities. 4.4 [ ** ]. The foregoing pricing [ ** ]. No [ ** ] or a [ ** ] in which [ ** ]. 4.5 Cost Verification. Upon prior written notification, invoices reflecting MHS' acquisition cost shall be made available for audit by a representative of Omnicare during business hours. 4.6 Credit and Payment 4.6.1 MHS will invoice direct to Omnicare for all Products ordered and shipped. Omnicare shall be responsible for payment of goods and services provided by MHS to Omnicare. 4.6.2 Invoices shall be in one of MHS's standard forms selected by the Omnicare. 4.6.3 Payment Terms: The following payment terms options for Products covered by this Agreement are available to Omnicare, on at least thirty (30) days' prior notice, effective beginning in the quarter following such notice; unless, at the time of any election by Omnicare to change its payment terms, its financial condition is not, in the reasonable opinion of MHS, adequate to support such new terms. 4.6.3.1 7-Day Prepayment Terms: The prepayment is a one-time payment equivalent to seven (7) days worth of purchases (based on the most recent three-month purchase history) which is held as a deposit by MHS. The amount of the required deposit will be adjusted quarterly, and may be adjusted as often as monthly, to cover increases or decreases in purchase volume. Following such one time payment, all purchases are payable as set forth below under 15 Day Payment Terms. Payment is required via ACH or other EFT acceptable to MHS. 4.6.3.2 7-Day Payment Terms: Invoices dated from Monday through Friday are due and payable by Tuesday of the following week. Payment is required once a week via ACH or other EFT acceptable to MHS Payment is required via ACH or other EFT acceptable to MHS. 4.6.3.3 15-Day Payment Terms: Invoices dated from the 1st to the 15th of the month are due and payable on the 22nd day of the same month. Invoices dated from the 16th to the end of the month are due and payable on the 7th of the following month. Payment is required via ACH or other EFT acceptable to MHS. 4.6.3.4 30-Day Payment Terms: Invoices dated from the 1st to the end of the month are due and payable on the 15th of the following month. Payment is required via ACH or other EFT acceptable to MHS. 5 4.6.3.5 Other Payment Terms: As mutually agreed by the parties. 4.6.4 For purposes of this Agreement, "due and payable" means that Omnicare shall make any payments due hereunder on such earlier date as shall be required to provide MHS with good funds in hand on each of the designated due dates specified in the Payment Term section of this Agreement. Omnicare may defer payment with respect to any shortage in a shipment, but only to the extent of such shortage and only if Omnicare has notified MHS of such shortage within three (3) business days of receipt of the shipment. 4.6.5 If Omnicare continues to elect 7 Day Payment Terms, if the payment due date is a holiday, payment is due and payable on the following day. If Omnicare elects any other Payment Terms, if the due date falls on a weekend day or holiday, payment is due and payable on the preceding business day. 4.6.6 Late Payment Fees. Payment by either party other than as stated will result in a late payment fee equal to [ ** ]. The late payment fee shall be calculated on the basis of [ ** ]. The late payment fee shall be payable in arrears on the 10th and 25th of each month. 4.6.7 Right to Change Payment Terms. Without limiting MHS's rights under this Agreement or applicable law, which rights are hereby expressly reserved, MHS reserves the right to change a payment term (including imposing the requirement of cash payment upon delivery with an adjustment in pricing consistent with the pricing matrix in Section 4.1 plus associated additional handling charges) or limit total credit, if Omnicare fails to make any payment in accordance with the terms of this Agreement, except for Excluded Late Payments. "Excluded Late Payments" shall mean (i) payments made during the [ ** ] and at a time when [ ** ] and (ii) payments made during the [ ** ] at a time when [ ** ]; provided that the payments described in clauses (i) and (ii) occur during the [ ** ]; provided further that the payments described in clauses (i) and (ii) are [ ** ]. 4.6.8 [ ** ]. Omnicare shall have the right, on a quarterly basis, effective for the following quarter, to elect to have part of its [ ** ]. Until the first such election, Omnicare's [ ** ] will reflect a [ ** ]. This [ ** ] will be reported and disclosed consistent with Section 13.11. 4.6.9 [ ** ]. Every [ ** ] that is not [ ** ] will be entitled to receive a [ ** ], payable at [ ** ]. This [ ** ] will be reported and disclosed consistent with Section 13.11. 4.6.10 [ ** ]. Omnicare's pricing will be [ ** ]. [ ** ] will be determined by [ ** ], provided that if the inclusion of any Omnicare [ ** ]. [ ** ] [ ** ] o [ ** ] o [ ** ] [ ** ] o [ ** ] [ ** ]
4.6.11 [ ** ]. If an Omnicare facility elects to [ ** ], the appropriate pricing schedule [ ** ]. Omnicare or any Omnicare Facility may elect to [ ** ]. McKesson reserves the right to disallow a [ ** ]. 5. DISTRIBUTION SERVICES 5.1.1 Agreement to Distribute. Subject to the pricing and other terms and conditions of this Agreement, MHS agrees to sell and distribute all pharmaceutical products (whether over- 6 the-counter, prescription, or scheduled pharmaceuticals) and related healthcare products normally stocked by a wholesale pharmaceutical distributor ("Pharmaceutical Products") to eligible Omnicare Facilities. An Omnicare Facility may from time to time request that additional products ("Additional Products") be stocked by MHS to satisfy such Omnicare Facility's reasonable needs. Such request shall be in writing, shall be accompanied by a utilization estimate of the Additional Products meeting the manufacturer's minimum order requirements. All manufacturers of Additional Products must offer industry standard trade terms and must meet MHS' standard indemnification, insurance and other requirements to become an approved vendor. Subject to Section 2.1.2, sales and distribution may be on a Direct Store Sales or Dock-to-Dock basis. 5.1.1.1 "Direct Store Delivery" shall mean sales from McKesson's inventory to non-warehouse Omnicare Facilities. 5.1.1.2 "Dock-to-Dock" sales shall mean sales of products pursuant to orders which are outside of normal direct store delivery to Omnicare Facilities supported by MHS' forward distribution centers and which are not received into MHS' inventory system, but are either shipped directly to Omnicare Facilities by the manufacturer or are manually received by McKesson and sent to Heartland/Vanguard, Dock-to-Dock sales shall include, without limitation, drop shipments, 5.1.2 Ordinary course orders for products to be shipped to Omnicare non-warehouse facilities in normal volumes and regular purchase velocity will be handled as Direct Store Delivery. For purposes of certainty, notwithstanding anything in this Agreement to the contrary, [ ** ]. Orders that are in excess of [ ** ], except that the following categories of sales [ ** ]: 5.1.3 Sales of [ ** ], orders which are (i) consistent with [ ** ] made at least [ ** ]; (ii) repeated in [ ** ]; (iii) from vendors that have approved such [ ** ]; (iv) as to which Omnicare agrees to purchase [ ** ]. 5.1.4 [ ** ], upon such prior notice as is reasonably required for the parties to obtain [ ** ], which shall initially be no less than [ ** ], and which shall be adjusted by good faith agreement of the parties based on their joint experience in obtaining such approval. 5.2 Ordering. 5.2.1 Electronic Transmission. All Omnicare Facilities purchasing Products hereunder are required to transmit their orders electronically via MHS's toll-free order entry system. 5.3 Delivery. 5.3.1 Scheduled Deliveries. MHS will make one (1) delivery per day, Monday through Friday (excluding holidays), to each of the Omnicare Facilities. MHS will make all Monday - Friday regular deliveries to Omnicare no later than 10:00 am. MHS will pay the individual Omnicare location [ ** ] for any delivery that is delivered later than [ ** ]. 5.3.2 Order Transmission Times. Orders transmitted to MHS by the local distribution center's order transmission deadline shall be delivered on the next business day. Order cut off time for transmissions Sunday through Thursday shall be no earlier than 7:00 pm. 5.3.3 F.O.B. All deliveries of Products will be F.O.B. destination to the Omnicare Facilities within the United States at their respective addresses set forth on Exhibit B, except in the states of Hawaii and Alaska in which delivery fees may apply. 7 5.3.4 Transportation. MHS may make deliveries to Omnicare Facilities by MHS's trucks, common carriers or other means selected by MHS. 5.3.6 Emergency Service. MHS provides emergency service twenty-four (24) hours per day, seven (7) days per week. MHS will make available to each Omnicare Facility emergency telephone and pager numbers for primary and secondary contacts at each distribution center which services such Omnicare Facility. Extraordinary delivery costs (e.g., air freight shipments and after hours delivery services) will be at the expense of the Omnicare Facility. Each Omnicare Facility will be allowed [ ** ]. Each [ ** ] will be subject to the fee table below:
------------------ Via: Fee: ------------------ Will Call [ ** ] ------------------ Ground [ ** ] ------------------ Two Day [ ** ] ------------------ Overnight [ ** ] ------------------
*Note: There are restrictions on hazardous items (which are shipped via ground courier) and controlled substances (which must be filled by the primary Distribution Center). 5.3.7 Disaster Plan. MHS has a plan to provide for delivery in the event of a natural disaster. MHS's local distribution center will assist the Omnicare Facility in developing and implementing a custom procurement plan to respond to natural disasters which affect such Omnicare Facility and/or such distribution center. 5.3.8 Alternate Sourcing of Product. In the event a distribution center is out of a particular product, MHS can ship shorted product(s) from another MHS distribution center and the product will be delivered within 48 hours. When requested by an Omnicare Facility before 1:00 pm, MHS will make reasonable efforts to have the required product alternate sourced and delivered within 24 hours of the request. 5.3.9 Shipments will be in accordance with all applicable regulations and packaging requirements. Cytotoxic agents are shipped in special plastic wrapped bags with special oncology logo attached for identification purposes. All products that are temperature sensitive will be shipped with the appropriate protective packaging. 5.3.10 Order Separation by Department or Cost Center. MHS agrees to deliver Product to an Omnicare facility sorted by the designated departments if Omnicare transmits orders separated by department via McKesson's electronic ordering system. 5.3.11 Material Safety Data Sheet. When requested by an Omnicare Facility, MHS will provide Material Safety Data Sheets. 5.4 Returned Goods. Subject to applicable law, MHS will process returned goods for items purchased by Omnicare from MHS, in accordance with this Return Goods Policy (which is subject to change by MHS under the circumstances described in Section 5.4.6, effective upon thirty (30) days' prior notice to Omnicare), as follows: 5.4.1 Definitions 5.4.1.1 Saleable Products shall include the following: 8 o Products are determined saleable by MHS based upon the ability to resale the item without special handling, refurbishing or other expense; or o Saleable Products must have dating of the then current month plus six (6) months remaining until expiration. Exceptions to this dating policy are: i) Refrigerated and other temperature-controlled Products; or ii) Products deemed permanently short-dated by MHS and manufacturers. In the above-specified instances as set forth in Subsections 5.4.1.1(i) and (ii), the Omnicare Facility shall be permitted to return the Products within the then current month plus three (3) months remaining until expiration. 5.4.1.2 Unsaleable Products shall include the following: o Products with less than the then current month plus six (6) months remaining until expiration; o Products with torn or damaged packaging; o Products without labels attached (prescription or price sticker); o Products that are soiled, stained or worn; o Products that fail to have a safety or security seal intact; and o Products requiring special handling (i.e. biological or other temperature-controlled products) and that do not require Omnicare Facility's signature to assure that the Product has been stored and protected under proper conditions specified by the manufacturer. 5.4.1.3 MHS reserves the right to determine whether a Product is saleable or unsaleable upon inspection of the returned item. 5.4.2 Products Authorized For Return to MHS: 5.4.2.1 Saleable Product and Unsaleable Product purchased from MHS, unless otherwise blocked for return by a manufacturer or by MHS; 5.4.2.2 Unsaleable Products purchased from MHS which can be returned by MHS to the manufacturer according to their policy; 5.4.2.3 McKesson Private Label Products (Value-Rite(R), Health Mart(R), SunMark(R); and 5.4.2.4 Products recalled by a manufacturer or in the case of a manufacturer withdrawing the Product from market. 5.4.2.5 Products not eligible for return shall include the following: o Products that were not purchased from MHS; o Products that are not physically carried by MHS; o Expired Products that go beyond a manufacturer's acceptable return period; o Saleable Products that have been improperly stored; o Unsaleable returns on Customer's private label Products; 9 o Repackaged Products (includes RxPak, overbag or "Robot-ready" products); o Products discontinued by manufacturer and no longer stocked by MHS; o Partial bottles, liquids and other containers (except in the instance of recall of a Product); o Schedule II Controlled Substances (as evaluated on individual return requests); and o Products damaged or defaced at the Omnicare Facility's location or on the shelf. 5.4.3 [ ** ]. MHS will provide the following [ ** ] as calculated from the date of [ ** ]: --------------- [ ** ] [ ** ] [ ** ] [ ** ] --------------- [ ** ] [ ** ] [ ** ] --------------- [ ** ] [ ** ] --------------- [ ** ] [ ** ] ---------------
5.4.4 Omnicare Facility Eligibility Any existing or future owned or managed Omnicare Facility shall be eligible for returns and percentage of credit provided under this Agreement. 5.4.5 Pricing Determination on Returned Goods MHS will use the invoice price when an Omnicare Facility provides a valid invoice number. If no invoice number is provided, the following pricing rules will apply: o For Products which are Contract Products on the date the return authorization is created, an Omnicare Facility will be credited the contract price. o For non-Contract Products, an Omnicare Facility will be credited a weighted average price based on such Omnicare Facility's past 12 month purchase history. o For non-Contract, Generic Products, an Omnicare Facility will be credited the lowest price paid by such Omnicare Facility over the past 12 months. o For non-Contract Products purchased more than 12 months prior to the date the return authorization is created, an Omnicare Facility will be credited the manufacturer's published acquisition cost (exclusive of cash discounts) on the date of the of the return authorization. Final credit issued is based upon the condition and timing of returned goods to MHS. 5.4.6 Notification of Changes MHS reserves the right to change the above stated Returned Goods Policy at any time with thirty (30) days' notification to Omnicare, provided such changes are in response to changes in applicable law or other governmental requirements or reflect changes in manufacturer return policies. 10 5.5 Product Warranty. McKesson warrants and guarantees to Omnicare that as of the date of delivery, the Products will not be adulterated, misbranded or counterfeit drugs within the meaning of the Federal Food, Drug and Cosmetic Act, 21 U.S.C. 301 et seq., as amended (the "Act") and in effect at the time of such delivery or within the meaning of any applicable state or municipal law and such Product is not, at the time of such delivery, merchandise which may not be introduced into interstate commerce under the provisions of Sections 404 or 405 of the Act (21 U.S.C. 344 and 355). 11 6. SERVICE LEVEL [ ** ]. For purposes of this Agreement, the following inventory management definitions and service level performance commitments are outlined below: 6.1 Definitions: 6.1.2 [ ** ] shall mean an MHS system that [ ** ]. Items [ ** ]. The [ ** ] are determined by [ ** ]. Specifically, the last [ ** ] are used to determine an [ ** ]. The last [ ** ] towards the most [ ** ]. [ ** ] are set at the account level. Items that are [ ** ]. For example, [ ** ]. Items with variability in actual or anticipated demand are typically [ ** ]. This program is not designed to restrict the customer's ability to do business effectively. If an Omnicare facility [ ** ]. MHS requires at least [ ** ]. If the [ ** ] exceeds [ ** ], MHS will require [ ** ]. A [ ** ] will also require [ ** ]. MHS will provide Omnicare on a [ ** ]. [ ** ] applied to Omnicare orders shall be [ ** ]. 6.1.3 Manufacturer Unable to Supply (MUS) items are items unable to be supplied due to the manufacturer's inability to meet market demand. These are shortages typically greater than 3-5 business days. Orders received partially complete, orders received after their scheduled delivery day, and orders not shipped to the distribution center leading to an omit are classified as a MUS. MHS will validate with the supplier the reason of the shortage and expected resolution. The reasons for MUS may include production delays, quality control issues, raw material shortages, discontinuation of product, and recalls. 6.1.4 Temporary outs shall mean short term outages that are not attributed to a manufacturer supply issue. The reasons for temporary outs may include: o Lead time variability o Demand variability o Cycle count discrepancies o Delays in receiving 6.2 MHS shall maintain a [ ** ]% line adjusted service level on Omnicare's top 200 dollar volume items and a [ ** ]% line adjusted service level on all of Omnicare's items. Service Level is defined as the total number of lines shipped divided by the total number of lines ordered, minus the following exclusions: o Manufacturer Unable to Supply (MUS) o Products not stocked by MHS o All discontinued items o Product reordered within 48 hours of an original shortage o Products whose usage exceed 150% of the most recent average without notice o Products supplied through alternate source or product substitution delivered by the following day Partial lines will be counted as the actual percentage of the line filled (e.g., 6 of 10 equal 60% of the line. 12 6.3 In the event MHS fails to maintain the [ ** ], MHS will credit such Omnicare Facility in an amount equal to [ ** ]. So long as MHS is current in the crediting of such amounts, such failure shall not in itself constitute a default hereunder. 6.4 MHS will provide Omnicare a monthly summary of all items omitted due to manufacturer unable to supply (MUS). This summary shall be in an electronic media format to be mutually agreed to by the parties within thirty (30) days of the start of this Agreement. 6.5 Implementation of New or Newly Acquired Omnicare Facilities. New or newly acquired Omnicare Facilities [ ** ] of (i) [ ** ] and (ii) such [ ** ]. 7. CONTRACT MANAGEMENT 7.1 MHS agrees to service all manufacturers' contracts negotiated by Omnicare, provided such manufacturers are approved suppliers of MHS that have satisfied its indemnification, insurance and other corporate requirements. Products will be supplied at Omnicare's negotiated contract price plus MHS' applicable markup or discount as described in the Cost of Goods section above. 7.2 MHS is able to [ ** ]. MHS will load [ ** ]. MHS will load the files electronically or manually depending on the medium in which the bid file data is furnished to MHS. All [ ** ]. As deemed eligible by manufacturers, for [ ** ], Omnicare will receive [ ** ], unless Omnicare notifies MHS otherwise. 7.3 MHS shall have up to forty-five (45) days to perform the initial loading of a group purchasing organization contract from receipt of the notification from the group purchasing organization. Thereafter, MHS will load vendor contract updates within five (5) business days after the applicable bid file data is furnished to MHS by Omnicare's group purchasing organization and confirmed by the vendor. 7.4 An Omnicare Facility's eligibility for participation under a vendor contract must be authorized by the vendor, Omnicare and/or Omnicare's group purchasing organization before the contract is loaded by MHS for such Omnicare Facility. Each Omnicare Facility and Omnicare shall be liable for unpaid chargebacks resulting from eligibility issues. Omnicare is also responsible for denied chargebacks do to the lack of proper notification of group membership. 7.5 In the event a vendor: (i) makes an assignment for the benefit of creditors, files a petition in bankruptcy, is adjudicated insolvent or bankrupt, or if a receiver or trustee is appointed with respect to a substantial part of the vendor's property or a proceeding is commenced against it which will substantially impair its ability to pay on chargebacks; or (ii) otherwise defaults in the payment of chargebacks to MHS, each Omnicare Facility shall be invoiced and become liable for the unpaid chargebacks allocable to its purchases from such vendor. 7.6 Price Discrepancy Process. The MHS contract pricing specialist assigned to Omnicare will [ ** ] to address price file accuracy. Omnicare will submit to MHS at [ ** ]. Omnicare will use [ ** ] to submit all claims for such credits and any other documentation related to the pricing discrepancy [ ** ]. With the data received from Omnicare, MHS will [ ** ]. All discrepancies between Omnicare's information and the MHS file information will be [ ** ]. 7.7 Should pricing information from Omnicare and the MHS contract pricing file conflict, the documentation from the manufacturer shall take precedence. Omnicare has the right to directly contact the manufacturer for verification of contract pricing. 7.8 As a result of MHS research, if credit is required to correct a contract pricing error, MHS will complete this process within fifteen (15) days of verification of the correct price. 13 7.9 MHS will credit Omnicare for all price errors that are validated during this fifteen (15) day period; in the event that MHS is unable to complete its research within the fifteen (15) day period, MHS will reimburse Omnicare for the reported price discrepancies. Such credit will be offset by researched and reconciled addbills from denied chargebacks by manufacturers, and approved for payment according to the then current payment terms if the dollar amount of addbills exceed credit and rebills. 7.10 Omnicare shall be responsible for notifying vendors and MHS of any change in membership. Each Omnicare Facility's membership must be authorized by the vendor and the group purchasing organization before contracts are loaded to the account. (Notification should be sent to the National Processing Center, McKesson Health Systems, 1220 Senlac, Carrollton, TX 75006.) The membership notification process can be set up for electronic transmission. 7.11 When requested by Omnicare, MHS will provide reasonable pricing verification and/or proof of delivery for shipments pursuant to a bona fide request by Omnicare. 8. ORDERING EQUIPMENT AND REPORTS 8.1 One (1) Telxon hand held electronic order entry unit with a bar code scanning wand will be supplied to each Omnicare Facility at no charge upon such Omnicare Facility's request. Additional Telxon units are available for Thirty-Five Dollars ($35.00) per month per Telxon. To accommodate annual physical inventories, a reasonable number of additional Telxon units will be loaned to Omnicare Facilities at no charge for a 3-week period, not to exceed four such requests per year. 8.2 MHS will provide each Omnicare Facility one (1) EconoLink system (hardware and software) at no charge. Additional EconoLink systems (software and hardware) are available for One Hundred Fifty Dollars ($150.00) per month per system. 8.3 MHS shall provide Omnicare Corporate Headquarters with three (3) Group EconoLink2000 Group Reporting systems for IHN and corporate office management reporting. 8.4 MHS shall retain title to all hardware provided hereunder and Omnicare Facilities shall return same to MHS upon the earlier of termination of this Agreement or termination of such Omnicare Facility's use of MHS as Prime Vendor. 8.5 As an alternative to the EconoLink system, Supply Management Online is offered to each Omnicare Facility at no additional charge. 8.6 In the event MHS discontinues use of Telxon, EconoLink2000 system, Group EconoLink2000 system and/or Supply Management Online during the term of this Agreement, and replaces it with another service offering, MHS will make such replacement offering available to Omnicare Facilities at no additional charge. 8.7 Shelf Labels & Price Stickers. MHS will supply each Omnicare Facility with bar-coded shelf labels and price stickers free of charge via the EconoLink or SMO functionality. 9. ACCOUNT MANAGEMENT 9.1 Account Manager. MHS shall furnish to all Omnicare Facilities a professional account manager knowledgeable in the various aspects of pharmacy purchasing to assist on an as-necessary basis in inventory control and management, ordering processes and problem solving. Routine visits shall be made monthly unless otherwise determined between MHS and the Omnicare Facility. Business Planning and Review Meetings will be scheduled quarterly. 14 9.2 Quarterly Business Reviews. Omnicare and MHS shall conduct quarterly business reviews to include appropriate management and maintain focus on the critical metrics of performance within the scope of this Agreement, and the key initiatives for the success of both organizations. Following execution of this Agreement, the parties will work together in good faith to develop a plan for achieving additional savings, based on automation, McKesson consulting services, supply chain management and other appropriate savings mechanisms, beyond those savings realized by Omnicare due to pricing and inventory turns under this Agreement and the prior supply agreement between the parties. 10. OMNICARE'S REPRESENTATION Omnicare represents that: 10.1 Omnicare understands that nothing herein shall restrict or limit MHS in any way with respect to the prices it may charge to Omnicare Facilities for products not covered under this program. 10.2 All purchases hereunder by Omnicare Facilities are for their "own use" as that term is defined in Abbott Laboratories et al. v. Portland Retail Druggists Association, Inc., et al., decided by the U.S. Supreme Court on March 24, 1976. 15 11. [ ** ] 11.1 [ ** ] 11.2 [ ** ] 11.3 [ ** ] 11.4 [ ** ] 11.5 [ ** ]
12. CONFIDENTIAL INFORMATION 12.1 Confidential Information. Except as specifically set forth in Section 12.2, neither party shall, without the prior written consent of the other party, provide, disclose, transfer or otherwise make available any Confidential Information, or any portion or copy thereof, to any third party. Each party shall take the same security precautions to protect against disclosure or unauthorized use of the Confidential Information that it takes with its own confidential information of a similar kind, which in no event shall be less than a reasonable standard of care to prevent any such disclosure or unauthorized use. For purposes of this Agreement, "Confidential Information" shall mean all non-public information relating to the other party's business, including (i) technical, marketing, financial, personnel, planning, medical records, (ii) other information that is marked confidential or which the receiving party should reasonably to know to be confidential given the nature of the information and the circumstance of disclosure, and (iii) this Agreement and the terms and conditions hereof; provided, however, that Confidential Information will not include any information: 12.1.1 lawfully obtained or created by either party independently of, and without use of, Confidential Information and without breach of any obligation of confidence; 12.1.2 that is in or enters the public domain without breach of any obligation of confidence; or 12.1.3 required to be disclosed by law, to the extent required to comply with that legal requirement, provided that the party making such disclosure will promptly notify the other party of such requirement and allow the other party a reasonable opportunity to request confidential treatment of such information. 12.2 Use and Disclosure. Notwithstanding the requirements of Section 12.1, each party may (i) disclose Confidential Information to its employees or contractors solely to the extent that they need to know such Confidential Information for the purposes of this Agreement, and who are bound by confidentiality terms with respect to that Confidential Information no less restrictive than those contained in Section 12.1; and (ii) use Confidential Information only for the purpose of performing its obligations under this Agreement. 12.3 Return of Confidential Information. Each party will return to the other party, and destroy or erase all of the other party's Confidential Information in tangible form, upon the expiration or termination of this Agreement, and each party will promptly certify in writing to the other party that it has done so. 16 12.4 Use of Purchase Information. Without limiting the generality of the foregoing provisions of this Section 12, McKesson will not distribute Omnicare purchase information for reasons other than the submission of chargeback requests to the manufacturer, without the express written authorization of an officer of Omnicare. 13. MISCELLANEOUS 13.1 External Event. 13.1.1 For purposes of this Section, an "External Event" shall mean an event or series of events [ ** ] that has or is likely to have a [ ** ]. By way of illustration and not of limitation, an External Event may include [ ** ]. In response to a [ ** ]. The [ ** ] shall identify the [ ** ]. As soon as practicable after receipt of such [ ** ], but in any event [ ** ]. Simultaneously with such receipt, [ ** ], which notice shall set forth the [ ** ]. If, [ ** ], the parties [ ** ]. If there [ ** ]. 13.1.2 Each party agrees that prior to filing any lawsuit or other legal action against the other party regarding any issue or dispute arising out of or otherwise relating to this Section 13.1, the parties will submit such issue or dispute to mediation pursuant to Section 11.5 of this Agreement. 13.2 Assignment. Neither party may assign its rights or obligations under this Agreement without the prior written consent of the other party, which consent will not be unreasonably withheld; provided, however, that Omnicare may assign its rights and obligations under this Agreement, without the prior written consent of McKesson, to a successor to Omnicare's business by reason of merger, sale of all or substantially all of Omnicare's assets or similar transaction; provided, further, however, that MHS may assign its rights and obligations under this Agreement, without the prior written consent of Omnicare, to a subsidiary or parent of MHS. 13.3 Severability. If all or part of a provision of this Agreement is found illegal or unenforceable, it will be enforced to the maximum extent permissible, and the legality and enforceability of the remainder of that provision and all other provisions of this Agreement will not be affected. 13.4 Notices. All notices directed to the parties' legal rights and remedies, under this Agreement will be provided in writing and will reference this Agreement. Such notices will be deemed given: (i) if sent by facsimile, when complete transmission to the recipient is confirmed by the sender's facsimile machine; (ii) if sent by postage prepaid registered or certified U.S. Post mail, then five (5) working days after sending; or (iii) if sent by commercial courier, then at the time of receipt confirmed by the recipient to the courier on delivery. All notices to a party will be sent to its address set forth below, or to such other address as may be designated by that party by notice to the sending party in accordance with this section: If to MHS: McKesson Health Systems One Post Street, 30th Floor San Francisco, California 94104 Attention: Director, Sales Proposals & Contract Development McKesson Pharmaceutical Fax: (415) 983-8430 With a copy to: Law Department 17 McKesson Corporation One Post Street, 34th Floor San Francisco, California 94104 Attention: Counsel McKesson Health Systems Fax: (415) 983-9369 If to Omnicare, Inc.: Omnicare, Inc. 1600 RiverCenter II 100 East RiverCenter Blvd. Covington, Kentucky 41011 Attention: Timothy Bien Senior Vice President, Professional Services and Purchasing Fax: (859) 392-3300 Phone: (859) 392-3360 13.5 Waiver. Any failure of a party to exercise or enforce any of its rights under this Agreement will not act as a waiver of such rights. 13.6 Force Majeure. A party will not be liable to the other party for any failure or delay in performance caused by fires, shortage of materials or transportation, government acts, acts of terrorism, or any other matters beyond the first party's reasonable control, and such failure or delay will not constitute a material breach of this Agreement. 13.7 Amendment. This Agreement may be modified, or any rights under it waived, only by a written document executed by both parties. 13.8 Publicity. Following the execution of this Agreement, the parties may issue a joint press release or other public announcement regarding the execution of this Agreement, in such form as mutually agreed by the parties. No other public announcement or press release regarding this Agreement or the activities performed under this Agreement shall be made by either party except as may be required, upon the advice of independent counsel to such party, in order to prevent liability to such party under applicable securities laws or otherwise with the prior written consent of the other party. 13.9 Counterparts. The parties may execute this Agreement and each Contract Supplement in one or more counterparts, each of which will be an original, and which together will constitute one instrument. 13.10 Relationship of Parties. Each party enters into and performs this Agreement as an independent contractor of the other party. This Agreement will not be construed as constituting a relationship of employment agency, partnership, joint venture or any other form of legal association, except as expressly set forth in this Agreement. Each party will have no power, and will not represent that it has any power, to bind the other party or to assume or to create any obligation or responsibility on behalf of the other party or in the other party's name. 13.11 Antikickback Compliance. IT IS THE INTENT OF THE PARTIES TO ESTABLISH A BUSINESS RELATIONSHIP WHICH COMPLIES WITH THE MEDICARE AND MEDICAID ANTI-KICKBACK STATUTE AS SET FORTH AT 42 U.S.C. Section 1320a-7b (b). IN CERTAIN INSTANCES, INVOICES MAY NOT ACCURATELY REFLECT THE NET COST OF PRODUCT TO OMNICARE. IN ACCORDANCE WITH 42 C.F.R. Section 1001.952(h), MHS (AS SELLER) WILL (A) FULLY AND ACCURATELY REPORT ANY DISCOUNT ON INVOICES, STATEMENTS, OR REPORTS SUBMITTED TO OMNICARE OR OMNICARE FACILITIES, OR (B) WHERE THE VALUE OF A 18 DISCOUNT IS NOT KNOWN AT THE TIME OF A SALE, FULLY AND ACCURATELY REPORT THE EXISTENCE OF A DISCOUNT PROGRAM ON THE INVOICE, STATEMENT, OR REPORTS SUBMITTED TO OMNICARE OR OMNICARE FACILITIES AND, WHEN THE VALUE OF THE DISCOUNT BECOMES KNOWN, PROVIDE OMNICARE AND OMNICARE FACILITIES WITH DOCUMENTATION OF THE CALCULATION IDENTIFYING THE SPECIFIC GOODS OR SERVICES PURCHASED TO WHICH THE DISCOUNT WILL BE APPLIED TO OMNICARE AS BUYER. WHERE A DISCOUNT OR OTHER REDUCTION IN PRICE IS APPLICABLE, THE PARTIES ALSO INTEND TO COMPLY WITH THE REQUIREMENTS OF 42 U.S.C. Section 1320a-7b (b) (3) (A) AND THE "SAFE HARBOR" REGULATIONS REGARDING DISCOUNTS OR OTHER REDUCTIONS IN PRICE SET FORTH AT 42 C.F.R. Section 1001.952(h). IN THIS REGARD, THE PARTIES ACKNOWLEDGE THAT MHS WILL SATISFY ANY AND ALL REQUIREMENTS IMPOSED ON SELLERS BY THE SAFE HARBOR AND OMNICARE AND/OR OMNICARE FACILITIES WILL SATISFY ANY AN ALL REQUIREMENTS IMPOSED ON BUYERS. THUS, OMNICARE AND/OR OMNICARE FACILITIES WILL ACCURATELY REPORT, UNDER ANY STATE OR FEDERAL PROGRAM WHICH PROVIDES COST OR CHARGE BASED REIMBURSEMENT FOR THE PRODUCTS AND SERVICES COVERED BY THIS AGREEMENT, THE NET COST ACTUALLY PAID BY A OMNICARE FACILITY. IN THE EVENT EITHER PARTY DETERMINES THAT THIS DISCOUNT PROGRAM MAY NOT COMPLY WITH SUCH STATUTES, THE PARTIES AGREE TO WORK TOGETHER TO ESTABLISH A DISCOUNT STRUCTURE THAT MEETS THE REQUIREMENTS OF SUCH STATUTES. TO THE EXTENT ANY APPLICABLE LAW, REGULATION, OR GOVERNMENTAL OR JUDICIAL ORDER REQUIRES DISCLOSURE TO ANY GOVERNMENTAL AGENCY OF ANY INFORMATION REGARDING MHS'S SALE OF PRODUCTS TO OMNICARE UNDER THIS AGREEMENT MHS WILL USE REASONABLE BEST EFFORTS TO PROVIDE OMNICARE PRIOR NOTICE BEFORE MAKING SUCH DISCLOSURE. 13.12 Construction of Agreement. This Agreement has been negotiated by the parties and its provisions will not be presumptively construed for or against either party. The headings and section titles in this Agreement are used for convenience only, and will not affect the construction or interpretation of this Agreement. 13.13 Special Indemnity 13.13.1 In addition to all other amounts to be paid to MHS in connection with this Agreement, Omnicare agrees to indemnify MHS as provided herein from [ ** ]. Specifically, Omnicare shall indemnify MHS for [ ** ] in which MHS has received the full benefit of this Agreement or the prior supply agreement between MHS and Omnicare [ ** ]. Omnicare agrees to pay any indemnified loss amount to MHS in immediately available [ ** ], and Omnicare guarantees that MHS will timely receive such a payment of that supplemental amount to cover such part of that loss. 13.13.2 "[ ** ]" shall mean any of the following occurring on or before [ ** ]: 13.13.2.1 [ ** ] and 13.13.2.2 any of the following by Omnicare: 13.13.2.2.1 If Omnicare shall [ ** ]; or 13.13.2.2.2 If Omnicare shall [ ** ]; or 13.13.2.2.3 If Omnicare shall [ ** ]; or 19 13.13.2.2.4 If Omnicare shall [ ** ]; or 13.13.2.2.5 If Omnicare shall [ ** ]. 13.14 [ ** ]. MHS shall use [ ** ] to provide Omnicare [ ** ]. 13.15 Governing Law. This Agreement and all rights and liabilities of the parties shall be subject to and governed by the substantive law (and not the choice of law rules) of the State of New York. 13.16 Entire Agreement. This Agreement embodies the entire agreement between the parties with regard to the subject matter hereof and supersedes all prior agreements, understandings and representations with the exception of any promissory note, security agreement or other credit or financial related document(s) executed by Omnicare or between Omnicare and McKesson. This Agreement may not be modified, supplemented or extended except by a writing signed by both parties. This Agreement supersedes any and all prior MHS agreements and discount plans in which any Omnicare Facility may currently be participating. 20 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. OMNICARE, INC. MCKESSON CORPORATION By: /s/ Timothy E. Bien By: /s/ Paul C. Julian - ------------------------------- ------------------------------------- Signature Signature Timothy E. Bien Paul C. Julian - ------------------------------- ------------------------------------- Printed Name Printed Name Senior Vice President President, Supply Solutions - ------------------------------- ------------------------------------- Title Title December 23, 2003 December 23, 2003 - ------------------------------- ------------------------------------- Date Date 21 EXHIBIT A DEFINITIONS "ACH" has the meaning set forth in Section 4.6.4.1. "Additional Products" has the meaning set forth in Section 5.1. "Confidential Information" has the meaning set forth in Section 12.1. "Contract Price" means the cost (before distribution fees) for a Contract Product determined pursuant to the pricing contract (to which MHS has access) negotiated by Omnicare or the group purchasing organization to which it is a member and the manufacturer of the Contract Product. "Omnicare Facilities" has the meaning set forth in Section 2.2. "Cost" has the meanings set forth in Section 4. "EFT" has the meaning set forth in Section 4.6.4.1 "Pharmaceutical Products" has the meaning set forth in Section 2.1.1 and Section 5.1. "Prime Vendor" means that MHS shall be the first choice for the purchase of all Pharmaceutical Products normally purchased through wholesale pharmaceutical distributors. "Products" means collectively Pharmaceutical Products, Additional Products and any and all of the pharmaceutical products and related healthcare products available for sale from MHS. "Service Level" has the meaning set forth in Section 6. "Slow Moving Inventory" means Products that MHS determine are not moving or slow moving. EXHIBIT B OMNICARE FACILITIES LIST
- -------------------------------------------------------------------------------- Estimated Monthly Omnicare Facility Name Omnicare Facility Address Purchasing Volume - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
EX-12 9 ex12.txt EXHIBIT 12 EXHIBIT 12 Omnicare, Inc. Statement of Computation of Ratio of Earnings to Fixed Charges (in thousands, except ratio)
For the years ended December 31, 2003 2002 2001 2000 1999 ---------------------------------------------------- Income before Income Taxes $310,449 $203,051 $119,785 $ 77,523 $ 91,671 Add: Interest Expense 73,345 52,811 52,724 52,974 44,439 Amortization of Debt Expense 4,200 4,000 3,600 2,100 1,727 Write-off of Debt Issuance Costs(1) 3,755 -- -- -- -- Interest Portion of Rent Expense 12,500 10,600 9,033 9,300 8,436 -------- -------- -------- -------- -------- Adjusted Income $404,249 $270,462 $185,142 $141,897 $146,273 ======== ======== ======== ======== ======== Fixed Charges Interest Expense $ 73,345 $ 52,811 $ 52,724 $ 52,974 $ 44,439 Amortization of Debt Expense 4,200 4,000 3,600 2,100 1,727 Write-off of Debt Issuance Costs(1) 3,755 -- -- -- -- Capitalized Interest -- -- -- -- 1,688 Interest Portion of Rent Expense 12,500 10,600 9,033 9,300 8,436 -------- -------- -------- -------- -------- Fixed Charges $ 93,800 $ 67,411 $ 65,357 $ 64,374 $ 56,290 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges(2) 4.3x 4.0x 2.8x 2.2x 2.6x ======== ======== ======== ======== ========
(1) The year ended December 31, 2003 includes the write-off of unamortized debt issuance costs relating to the Company's redemption of its 5% convertible subordinated debentures. See Note 7 of the Notes to Consolidated Financial Statements for further discussion. (2) The ratio of earnings to fixed charges has been computed by dividing earnings before income taxes plus fixed charges (excluding capitalized interest expense) by fixed charges. Fixed charges consist of interest expense on debt (including the amortization of debt expense and capitalized interest) and one-third (the proportion deemed representative of the interest portion) of rent expense. EX-21 10 ex21.txt EXHIBIT 21 EXHIBIT 21 Subsidiaries of Omnicare, Inc. The following is a list of subsidiaries included in the consolidated financial statements of the Company as of December 31, 2003. Other subsidiaries which have been omitted from the list would not, when considered in the aggregate, constitute a significant subsidiary. Each of the companies is incorporated under the laws of the state following its name.
State of Doing Business As Name Incorporation/ Legal Name (if other than legal name) Organization % Owned - ------------------------------------------------------------------------------------------------------------------- AAHS Acquisition Corp. A-Avenue Health Services Delaware 100% Accu-Med Services of Washington LLC Delaware 100% Accu-Med Services, LLC Delaware 100% ACP Acquisition Corp. Add-On Health Systems Delaware 100% AMC - New York, Inc. Royal Care Holdings, Inc. Delaware 100% AMC - Tennessee, Inc. The Pharmacy, Stephens Drugs Delaware 100% Anderson Medical Services, Inc. Delaware 100% APS Acquisition LLC Delaware 100% Arlington Acquisition I, Inc. Delaware 100% Bach's Pharmacy (East), Inc. fka Pompton Nursing Home Suppliers Delaware 100% Bach's Pharmacy Services, LLC Delaware 100% Badger Acquisition LLC Delaware 100% Badger Acquisition of Brooksville LLC Delaware 100% Badger Acquisition of Kentucky LLC Delaware 100% Badger Acquisition of Minnesota LLC Delaware 100% Badger Acquisition of Ohio LLC Omnicare Health Network Delaware 100% Badger Acquisition of Orlando LLC Home Care Pharmacy of Florida Delaware 100% Badger Acquisition of Tampa LLC Bay Pharmacy Delaware 100% Badger Acquisition of Texas LLC Delaware 100% Bio-Pharm International, Inc. Delaware 100% BPNY Acquisition Corp. Brookside Park Pharmacy Delaware 100% BPTX Acquisition Corp. Brookside Park Pharmacy of Texas Delaware 100% Campo's Medical Pharmacy, Inc. Louisiana 100% Care Pharmaceutical Services, LP Delaware 100% CHP Acquisition Corp. Cherry Hill Pharmacy Delaware 100% CIP Acquisition Corp. Carter's Institutional Pharmacy Delaware 100% CompScript - Boca, LLC Florida 100% Compscript - Mobile, Inc. Delaware 100% CompScript, Inc. Florida 100% CP Acquisition Corp. Central Pharmacy Oklahoma 100% Creekside Managed Care Pharmacy, Inc. Delaware 100% CTLP Acquisition LLC Care Tech Delaware 100% D & R Pharmaceutical Services, Inc. Kentucky 100% Dixon Pharmacy LLC Illinois 100%
State of Doing Business As Name Incorporation/ Legal Name (if other than legal name) Organization % Owned - ------------------------------------------------------------------------------------------------------------------ Enloe Drugs LLC Delaware 100% Euro Bio-Pharm Clinical Services, Inc. Delaware 100% Evergreen Pharmaceutical of California, Inc. fka PIP Acquisition, West Val Premiere California 100% Evergreen Pharmaceutical, Inc. Washington 100% Hardardt Group, Inc., The Delaware 100% Heartland Repack Services LLC Delaware 100% Highland Wholesale, LLC Ohio 100% HMIS, Inc. Delaware 100% Home Care Pharmacy, Inc. Delaware 100% Home Pharmacy Services, LLC Missouri 100% Hytree Pharmacy, Inc. Ohio 100% Interlock Pharmacy Systems, Inc. Missouri 100% JHC Acquisition LLC Jacobs Health Care Systems Delaware 100% Konsult, Inc. Delaware 100% Langsam Health Services, Inc. Sequoia Health Services, Inc. Delaware 100% LCPS Acquisition, LLC Medilife Pharmacy Delaware 100% Lobos Acquisition LLC Delaware 100% Lobos Acquisition of Arizona, Inc. Delaware 100% Lobos Acquisition of Pennsylvania, Inc. Delaware 100% Lo-Med Prescription Services, Inc. Ohio 100% LPA Acquisition Company, LLC Delaware 100% LPI Acquisition Corp. Lipira Pharmacy Delaware 100% Managed Healthcare, Inc. Delaware 100% Management & Network Services, Inc. Ohio 100% Med World Acquisition Corp. Delaware 100% Medical Arts Health Care, Inc. Georgia 100% Medical Services Consortium, Inc. Compscript - Miami Florida 100% MOSI Acquisition Corp. Medical Outpatient Services Delaware 100% National Care For Seniors LLC Ohio 100% NCS Healthcare, Inc. Delaware 100% NCS Healthcare of Arizona, Inc. Ohio 100% NCS Healthcare of Arkansas, Inc. Ohio 100% NCS Healthcare of Beachwood, Inc. Ohio 100% NCS Healthcare of California, Inc. Ohio 100% NCS Healthcare of Connecticut, Inc. Connecticut 100% NCS Healthcare of Florida, Inc. Ohio 100% NCS Healthcare of Illinois, Inc. Illinois 100% NCS Healthcare of Indiana, Inc. Indiana 100% NCS Healthcare of Indiana, LLC Delaware 100%
State of Doing Business As Name Incorporation/ Legal Name (if other than legal name) Organization % Owned - ------------------------------------------------------------------------------------------------------------------ NCS Healthcare of Iowa, Inc. Ohio 100% NCS Healthcare of Kansas, Inc. Ohio 100% NCS Healthcare of Kentucky, Inc. Ohio 100% NCS Healthcare of Maryland, Inc. Ohio 100% NCS Healthcare of Massachusetts, Inc. Ohio 100% NCS Healthcare of Michigan, Inc. Ohio 100% NCS Healthcare of Minnesota, Inc. Ohio 100% NCS Healthcare of Missouri, Inc. Ohio 100% NCS Healthcare of Montana, Inc. Ohio 100% NCS Healthcare of New Hampshire, Inc. New Hampshire 100% NCS Healthcare of New Jersey, Inc. New Jersey 100% NCS Healthcare of New Mexico, Inc. Ohio 100% NCS Healthcare of New York, Inc. Ohio 100% NCS Healthcare of North Carolina, Inc. North Carolina 100% NCS Healthcare of Ohio, Inc. Ohio 100% NCS Healthcare of Oklahoma, Inc. Oklahoma 100% NCS Healthcare of Oregon, Inc. Ohio 100% NCS Healthcare of Pennsylvania, Inc. Pennsylvania 100% NCS Healthcare of Rhode Island, Inc. Rhode Island 100% NCS Healthcare of South Carolina, Inc. Ohio 100% NCS Healthcare of Tennessee, Inc. Ohio 100% NCS Healthcare of Texas, Inc. Ohio 100% NCS Healthcare of Vermont, Inc. Ohio 100% NCS Healthcare of Washington, Inc. Ohio 100% NCS Healthcare of Wisconsin, Inc. Ohio 100% NCS of Illinois, Inc. Ohio 100% NCS Services, Inc. Ohio 100% NGC Acquisition Company LLC Delaware 100% Nihan & Martin LLC Delaware 100% NIV Acquisition LLC Denman Pharmacy Services Delaware 100% North Shore Pharmacy Services, Inc. Delaware 100% OCR Services Corporation Delaware 100% OCR-RA Acquisition Corp. Long Term Care Pharmacy Delaware 100% OFL Corp. Delaware 100% Omnibill Services LLC Delaware 100% Omnicare Air Transport Services, Inc. Delaware 100% Omnicare Clinical Research, Inc. fka IBAH, Inc. Delaware 100% Omnicare Clinical Research, LLC fka Coromed, Inc. Delaware 100% Omnicare CR Inc. Delaware 100%
State of Doing Business As Name Incorporation/ Legal Name (if other than legal name) Organization % Owned - ------------------------------------------------------------------------------------------------------------------ Omnicare Extended Pharma Services, LLC Delaware 100% Omnicare Headquarters LLC Delaware 100% Omnicare Holding Company Delaware 100% Omnicare Management Company Delaware 100% Omnicare Pennsylvania Med Supply, LLC Delaware 100% Omnicare Pharmacies of Maine Holding Company Delaware 100% Omnicare Pharmacies of Pennsylvania East, LLC Delaware 100% Omnicare Pharmacies of Pennsylvania West, Inc. Pennsylvania 100% Omnicare Pharmacies of the Great Plains Holding Company Delaware 100% Omnicare Pharmacy and Supply Services, Inc. South Dakota 100% Omnicare Pharmacy of Colorado LLC Delaware 100% Omnicare Pharmacy of Florida, LP Delaware 100% Omnicare Pharmacy of Indiana, LLC Delaware 100% Omnicare Pharmacy of Maine LLC Delaware 100% Omnicare Pharmacy of Nebraska LLC Delaware 100% Omnicare Pharmacy of North Carolina, LLC Delaware 100% Omnicare Pharmacy of Pueblo, LLC Delaware 100% Omnicare Pharmacy of South Dakota LLC Delaware 100% Omnicare Pharmacy of Tennessee LLC Delaware 100% Omnicare Pharmacy of Texas 1, LP Delaware 100% Omnicare Pharmacy of Texas 2, LP Delaware 100% Omnicare Pharmacy of the Midwest, Inc. fka Freed's Delaware 100% Omnicare Purchasing Company General Partner, Inc. Delaware 100% Omnicare Purchasing Company Limited Partner, Inc. Delaware 100% Omnicare Respiratory Services, LLC Delaware 100% Omnicare Senior Health Outcomes, LLC Delaware 100% Omnicare.com, Inc. Delaware 100% PBM-Plus, Inc. Wisconsin 100% PCI Acquisition, LLC Delaware 100% Pharmacon Corp. New York 100% Pharmacy Consultants, Inc. South Carolina 100% Pharmacy Holding # 1, LLC Delaware 100% Pharmacy Holding # 2, LLC Delaware 100% Pharmasource Healthcare, Inc. Georgia 100% Pharm-Corp of Maine LLC Delaware 100% Pharmed Holdings, Inc. Delaware 100% PRN Pharmaceutical Services, LP Delaware 100% Rescot Systems Group, Inc. Pennsylvania 100% Resource Biometrics, Inc. California 100% Roeschen's Healthcare Corp. Wisconsin 100%
State of Doing Business As Name Incorporation/ Legal Name (if other than legal name) Organization % Owned - ------------------------------------------------------------------------------------------------------------------ Royal Care of Michigan LLC Delaware 100% SHC Acquisition Co, LLC Synergy Delaware 100% Shore Pharmaceutical Providers, Inc. Delaware 100% Southside Apothecary, Inc. New York 100% Specialized Home Infusion of Michigan LLC Delaware 100% Specialized Patient Care Services, Inc. Alabama 100% Specialized Pharmacy Services, Inc. Michigan 100% Specialized Services of Michigan, Inc. Delaware 100% Sterling Healthcare Services, Inc. Delaware 100% Superior Care Pharmacy, Inc. Delaware 100% Swish, Inc. Delaware 100% TCPI Acquisition Corp. Total Care Pharmacy Delaware 100% THG Acquisition Corp. Tandem Health Group Delaware 100% Three Forks Apothecary, Inc. Kentucky 100% UC Acquisition Corp. UniCare, Inc. Delaware 100% Uni-Care Health Services of Maine, Inc. New Hampshire 100% Value Health Care Services, Inc. Delaware 100% Value Pharmacy, Inc. Massachusetts 100% Vital Care Infusions Supply, Inc. New York 100% Weber Medical Systems LLC Delaware 100% Westhaven Services Co. Ohio 100% Williamson Drug Company, Incorporated Virginia 100% Winslow's Pharmacy New Jersey 100%
Foreign Entities Country - ---------------- -------------- 3103-3798 Quebec, Inc. Omnicare Clinical Research Canada 100% De-Skor ZAO Russia 50% Omnicare Clinical Research (Proprietary) Limited South Africa 100% Omnicare Clinical Research A/S Denmark 100% Omnicare Clinical Research A/B Sweden 100% Omnicare Clinical Research AG Switzerland 100% Omnicare Clinical Research Holdings B.V. Netherlands 100% Omnicare Clinical Research International B.V. Netherlands 100% Omnicare Clinical Research GmbH Germany 100% Omnicare Clinical Research GmbH & Co. KG IFNS Germany 100% Omnicare Clinical Research Limited UK 100% Omnicare Clinical Research LLC Russia 100% Omnicare Clinical Research N.V. Belgium 100% Omnicare Clinical Research OY Finland 100% Omnicare Clinical Research PTE. LTD. Singapore 100% Omnicare Clinical Research PTY. LTD. Australia 100% Omnicare Clinical Research S.A. Argentina 100% Omnicare Clinical Research S.A.R.L. France 100% Omnicare Clinical Research S.L. Spain 100%
EX-23 11 ex23.txt EXHIBIT 23 EXHIBIT 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-103115), Form S-4 (Nos. 333-53637 and 333-53749, insofar as it relates to Post-Effective Amendments No. 1 to Forms S-8 filed on June 26, 1998 and June 29, 1998, respectively, and 333-80917) and Form S-8 (Nos. 33-48209, 33-88856, 333-02667, 333-45801, 333-48067, 333-77845, 333-95949, 333-36874 and 333-75102) of Omnicare, Inc. of our report dated February 6, 2004, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Chicago, Illinois March 12, 2004 EX-24 12 ex24.txt EXHIBIT 24 EXHIBIT 24 POWERS OF ATTORNEY The undersigned directors of OMNICARE, INC. ("Company") hereby appoints JOEL F. GEMUNDER, DAVID W. FROESEL, JR. and CHERYL D. HODGES as his/her true and lawful attorneys-in-fact for the purpose of signing the Company's Annual Report on Form 10-K for the year ended December 31, 2003, and all amendments thereto, to be filed with the Securities and Exchange Commission. Each of such attorneys-in-fact is appointed with full power to act without the other. /s/ Edward L. Hutton March 3, 2004 - --------------------------------------- -------------------------------------- Edward L. Hutton Date /s/ Charles H. Erhart, Jr. March 11, 2004 - --------------------------------------- -------------------------------------- Charles H. Erhart, Jr. Date /s/ Patrick E. Keefe March 2, 2004 - --------------------------------------- -------------------------------------- Patrick E. Keefe Date /s/ Sandra E. Laney March 5, 2004 - --------------------------------------- -------------------------------------- Sandra E. Laney Date /s/ Andrea R. Lindell, DNSc, RN March 5, 2004 - --------------------------------------- -------------------------------------- Andrea R. Lindell, DNSc, RN Date /s/ Sheldon Margen, M.D. March 5, 2004 - --------------------------------------- -------------------------------------- Sheldon Margen, M.D. Date /s/ John H. Timoney March 3, 2004 - --------------------------------------- -------------------------------------- John H. Timoney Date EX-31 13 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 RULE 13a-14(a) CERTIFICATION IN ACCORDANCE WITH SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joel F. Gemunder, President and Chief Executive Officer of Omnicare, Inc. (the "Company"), certify that: 1. I have reviewed this report on Form 10-K of the Company; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the Company and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: March 15, 2004 /s/ Joel F. Gemunder ------------------------------------- Joel F. Gemunder President and Chief Executive Officer EX-31 14 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 RULE 13a-14(a) CERTIFICATION IN ACCORDANCE WITH SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David W. Froesel, Jr., Senior Vice President and Chief Financial Officer of Omnicare, Inc. (the "Company"), certify that: 1. I have reviewed this report on Form 10-K of the Company; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the Company and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: March 15, 2004 /s/ David W. Froesel, Jr. ------------------------------------ David W. Froesel, Jr. Senior Vice President and Chief Financial Officer EX-32 15 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 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 Annual Report on Form 10-K of the Company for the period ended December 31, 2003 (the "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 Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 15, 2004 /s/ Joel F. Gemunder -------------------------------------- Joel F. Gemunder President and Chief Executive Officer EX-32 16 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 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 Annual Report on Form 10-K of the Company for the period ended December 31, 2003 (the "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 Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 15, 2004 /s/ David W. Froesel, Jr. -------------------------------------- David W. Froesel, Jr. Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----