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Proc-Type: 2001,MIC-CLEAR
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FORM
10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington,
D.C. 20549 (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File Number 1-8269 OMNICARE, INC. (Exact name of registrant as specified in its charter) 100 East RiverCenter Boulevard, Covington, Kentucky 41011 (Address of principal executive offices) (Zip code) (859) 392-3300 (Registrants telephone number, including area code) Indicate by check mark whether the registrant: 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirement for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o COMMON STOCK OUTSTANDING Number of Date Common Stock, $1 par value 106,582,399 September 30, 2005 OMNICARE, INC. AND SUBSIDIARY COMPANIES INDEX Explanatory
Note This Amendment No. 1 on Form 10-Q/A (“Amendment)
to Omnicare, Inc.s (the "Company") quarterly report on Form 10-Q
for the quarterly period ended September 30, 2005, initially filed with
the Securities and Exchange Commission (“SEC)
on November 8, 2005 (“Original Filing),
is being filed to correct the unaudited pro forma combined financial information
presented at Note 4, “Acquisitions, in
Part I., Item I., of the Original Filing. The revisions to the unaudited
pro forma combined financial information are related to corrections resulting
from the use of incorrect financial information relating to the NeighborCare,
Inc. acquisition. No other amounts in the Original Filing were adjusted, including
the historical results of operations, financial position or cash flows of the
Company as originally reported. PAGE PART I. FINANCIAL INFORMATION: ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Consolidated Statements of Income Three and nine months ended September 30, 2005 and 2004 3 Consolidated Balance Sheets September 30, 2005 and December 31, 2004 4 Consolidated Statements of Cash Flows Nine months ended September 30, 2005 and 2004 5 6 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26 52 53 PART II. OTHER INFORMATION: 54 54 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED (In thousands, except per share data) Three
Months Ended, Nine
Months Ended, 2005 2004 2005 2004 Sales $ 1,448,454 $ 1,049,412 $ 3,652,268 $ 3,033,207 Reimbursable
out-of-pockets 6,523 4,521 22,252 13,602 Total
net sales 1,454,977 1,053,933 3,674,520 3,046,809 Cost
of sales 1,087,381 790,842 2,747,027 2,264,349 Reimbursed
out-of-pocket expenses 6,523 4,521 22,252 13,602 Total
direct costs 1,093,904 795,363 2,769,279 2,277,951 Gross
profit 361,073 258,570 905,241 768,858 Selling,
general and administrative expenses 212,970 152,249 527,724 434,238 Restructuring
and other related charges (Note 8) 8,950 8,950 Operating
income 139,153 106,321 368,567 334,620 Investment
income 1,212 691 3,456 2,230 Interest
expense (Note 6) (46,857) (17,582) (87,215) (51,537) Income
before income taxes 93,508 89,430 284,808 285,313 Income
taxes 35,009 33,544 106,582 105,482 Net
income $ 58,499 $ 55,886 $ 178,226 $ 179,831 Earnings
per common share: Basic $ 0.57 $ 0.54 $ 1.74 $ 1.73 Diluted
(Note 3) $ 0.54 $ 0.52 $ 1.67 $ 1.65 Dividends
per common share $ 0.0225 $ 0.0225 $ 0.0675 $ 0.0675 Weighted
average number of common shares outstanding: Basic 103,292 104,171 102,481 103,876 Diluted
(Note 3) 108,038 112,808 107,593 113,174 Comprehensive
income $ 57,671 $ 56,644 $ 175,899 $ 179,144 The Notes to Consolidated Financial Statements are an integral part of these statements. 3 OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED (In thousands, except share data) September 30, December 31, ASSETS Current
assets: Cash
and cash equivalents $ 204,038 $ 84,169 Restricted
cash 7,049 262 Deposits
with drug wholesalers 78,972 44,000 Accounts
receivable, less allowances of $160,294 (2004-$123,288) 1,256,242 838,705 Unbilled
receivables 18,656 14,007 Inventories 433,808 331,367 Deferred
income tax benefits 116,656 94,567 Other
current assets 193,796 142,702 Total
current assets 2,309,217 1,549,779 Properties
and equipment, at cost less accumulated depreciation of $241,163 (2004-$222,524) 258,681 142,421 Goodwill 3,978,307 2,003,223 Other
noncurrent assets 476,669 203,758 Total
noncurrent assets 4,713,657 2,349,402 Total
assets $ 7,022,874 $ 3,899,181 LIABILITIES
AND STOCKHOLDERS EQUITY Current
liabilities: Accounts
payable $ 394,562 $ 282,956 Accrued
employee compensation 48,858 19,820 Deferred
revenue 24,099 24,245 Current
debt 1,905,389 25,218 Other
current liabilities and income taxes payable 194,265 115,243 Total
current liabilities 2,567,173 467,482 Long-term
debt 939,519 281,559 8.125%
senior subordinated notes, due 2011 375,000 375,000 6.125%
senior subordinated notes, net, due 2013 231,554 232,508 4.00%
junior subordinated convertible debentures, due 2033 (Note 6) 345,000 345,000 Deferred
income tax liabilities 241,841 137,593 Other
noncurrent liabilities 172,602 132,931 Total
noncurrent liabilities 2,305,516 1,504,591 Total
liabilities 4,872,689 1,972,073 Commitments
and contingencies (Note 9) 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, 109,328,500 shares
issued (2004-106,579,800 shares issued) 109,328 106,580 Paid-in
capital 1,118,646 1,038,671 Retained
earnings 1,082,064 910,973 Treasury
stock, at cost-2,746,100 shares (2004-2,083,400 shares) (78,381) (54,931) Deferred
compensation (70,551) (65,591) Accumulated
other comprehensive income (10,921) (8,594) Total
stockholders equity 2,150,185 1,927,108 Total
liabilities and stockholders equity $ 7,022,874 $ 3,899,181 The Notes to Consolidated Financial Statements are an integral part of these statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED (In thousands) Nine Months Ended 2005 2004 Cash
flows from operating activities: Net income $ 178,226 $ 179,831 Adjustments
to reconcile net income to net cash flows from operating activities: Depreciation 29,482 26,728 Amortization 22,583 15,094 Provision
for doubtful accounts 40,352 33,424 Deferred
tax provision 27,574 54,473 Write-off
of debt issuance costs 1,914
Changes
in assets and liabilities, net of effects from acquisition of businesses: Accounts
receivable and unbilled receivables (134,356) (110,526) Inventories (30,959) 24,797 Deposit
with drug wholesaler (44,000) Current
and noncurrent assets (15,819) (26,766) Accounts
payable 34,285 (836) Accrued
employee compensation 7,854 (5,242) Deferred
revenue (146) (6,116) Current
and noncurrent liabilities, and income taxes payable 14,354 (7,663) Net
cash flows from operating activities 175,344 133,198 Cash
flows from investing activities: Acquisition
of businesses, net of cash received (2,566,335) (239,940) Capital
expenditures (14,672) (13,586) Transfer
of cash to trusts for employee health and severance costs, net of payments
out of the trust (5,898) (5,063) Other 39 41 Net
cash flows from investing activities (2,586,866) (258,548) Cash
flows from financing activities: Borrowings
on line of credit facilities and term A loan 3,543,000 407,000 Payments
on line of credit facilities and term A loan (1,068,385) (361,360) Proceeds
from long-term borrowings and obligations 41,546 Payments
on long-term borrowings and obligations (612) (378) Fees
paid for financing arrangements (14,179) Change
in cash overdraft balance 8,054 (2,996) Proceeds
from stock awards and exercise of stock options and warrants, net of stock
tendered in payment 30,339 7,871 Dividends
paid (7,135) (7,030) Net
cash flows from financing activities 2,532,628 43,107 Effect
of exchange rate changes on cash (1,237) (2,048) Net
increase (decrease) in cash and cash equivalents 119,869 (84,291) Cash
and cash equivalents at beginning of period 84,169 187,413 Cash
and cash equivalents at end of period $ 204,038 $ 103,122 The Notes to Consolidated Financial Statements are an integral part of these statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OMNICARE, INC. AND SUBSIDIARY COMPANIES UNAUDITED 1. Interim Financial Data, Description of Business and Summary of Significant Accounting Policies Interim Financial Data The interim financial data is unaudited; however, in the opinion of the management of Omnicare, Inc., the interim data includes all adjustments (which include only normal adjustments, except as described in Notes 6 and 8) considered necessary for a fair presentation of the consolidated financial position, results of operations and cash flows of Omnicare, Inc. and its consolidated subsidiaries (Omnicare or the Company). These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in Omnicares Annual Report on Form 10-K for the year ended December 31, 2004 and any related updates included in the Companys periodic quarterly Securities and Exchange Commission (SEC) filings. Certain reclassifications of prior year amounts have been made to conform with the current year presentation. Description of Business and Summary of Significant Accounting Policies The Companys description of business and significant accounting policies have been disclosed in its Annual Report on Form 10-K. As previously disclosed, these financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in Omnicares Annual Report on Form 10-K for the year ended December 31, 2004 and any related updates included in the Companys periodic quarterly SEC filings. Recently Issued Accounting Standards In
December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Shared-Based Payment (SFAS 123R). This Statement
requires the Company to record compensation costs relating to equity-based payments,
in its financial statements, over the requisite service period (usually the
vesting period). This Statement is effective for the Company in the period beginning
January 1, 2006. The Company currently intends to elect the modified prospective
application method of implementing SFAS 123R. This method requires that
SFAS 123R be applied to all new awards whose service inception date follows
the effective date of January 1, 2006, and all existing awards modified, repurchased,
or cancelled after January 1, 2006. In addition, this method requires compensation
cost for the portion of awards for which the requisite service has not been
rendered (i.e., nonvested portion) and are outstanding as of January 1, 2006
to be recognized as the requisite service is rendered on or after January 1,
2006. Omnicare is currently evaluating the impact of the adoption of SFAS 123R
to the Company, but has not yet quantified the effect of this new standard on
its financial results for 2006 and future years. 2. Stock-Based Employee Compensation At September 30, 2005, the Company had four stock-based employee compensation plans under which incentive awards were outstanding, including the 2004 Stock and Incentive Plan, approved by the stockholders at the Companys May 18, 2004 Annual Meeting of 6 Stockholders. Beginning May 18, 2004, stock-based incentive awards have been and will be made only from the 2004 Stock and Incentive Plan. As permitted under United States Generally Accepted Accounting Principles (U.S. GAAP), the Company accounts for stock incentive plans under the recognition and measurement principles of Accounting Principles Board 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. 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), as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure an amendment of SFAS 123 (SFAS 148), for stock options (in thousands, except per share data): Three months ended Nine months ended 2005 2004 2005 2004 Net
income, as reported $ 58,499 $ 55,886 $ 178,226 $ 179,831 Add:
Stock-based employee compensation expense (stock awards) included in reported
net income, net of related tax effects 1,603 1,342 4,605 4,398 Deduct:
Total stock-based employee compensation expense (stock options and awards)
determined under fair value based method, net of related tax effects (3,373) (5,440) (17,316) (17,066) Pro
forma net income $ 56,729 $ 51,788 $ 165,515 $ 167,163 Earnings
per common share: Basic
- as reported $ 0.57 $ 0.54 $ 1.74 $ 1.73 Basic
- pro forma $ 0.55 $ 0.50 $ 1.62 $ 1.61 Diluted
- as reported $ 0.54 $ 0.52 $ 1.67 $ 1.65 Diluted
- pro forma $ 0.53 $ 0.48 $ 1.56 $ 1.54 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: Three months ended Nine months ended 2005 2004 2005 2004 Volatility 34% 54% 34% 54% Risk-free
interest rate 4.1% 3.4% 4.1% 3.4% Dividend
yield 0.2% 0.3% 0.2% 0.3% Expected
term of options (in years)
5.0 5.1 5.0 5.1 Weighted-average
fair value per option $ 17.52 $ 13.22 $ 15.26 $ 17.60 7 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. 3. 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, warrants and awards, as well as 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 three months ended September 30, 2005: Income
Common Per
Common Basic
EPS Net
income $ 58,499 103,292 $ 0.57 Effect
of Dilutive Securities 4.00%
junior subordinated convertible debentures 72 1,819 Stock
options, warrants and awards 2,927 Diluted
EPS Net
income plus assumed conversions $ 58,571 108,038 $ 0.54 2004: Basic
EPS Net
income $ 55,886 104,171 $ 0.54 Effect
of Dilutive Securities 4.00%
junior subordinated convertible debentures 2,266 8,451 Stock
options, warrants and awards 186 Diluted
EPS Net
income plus assumed conversions $ 58,152 112,808 $ 0.52 8 For
the nine months ended September 30, 2005: Income
Shares
Per
Share Basic
EPS Net
income $ 178,226 102,481 $ 1.74 Effect
of Dilutive Securities 4.00%
junior subordinated convertible debentures 1,886 2,767 Stock
options, warrants and awards 2,345 Diluted
EPS Net
income plus assumed conversions $ 180,112 107,593 $ 1.67 2004: Basic
EPS Net
income $ 179,831 103,876 $ 1.73 Effect
of Dilutive Securities 4.00%
junior subordinated convertible debentures 6,797 8,451 Stock
options, warrants and awards 847 Diluted
EPS Net
income plus assumed conversions $ 186,628 113,174 $ 1.65 During the three and nine months ended September 30, 2005 and 2004, the anti-dilutive effect associated with certain stock options, warrants and awards was excluded from the computation of diluted EPS, since the exercise price was greater than the average market price of the Companys common stock during these periods. The aggregate number of stock options, warrants and awards excluded from the computation of diluted EPS for the quarter ended September 30, 2004 totaled 3.4 million, and for the nine months ended September 30, 2005 and 2004 totaled 1.4 million and 2.7 million, respectively. All stock options were dilutive for the quarter ended September 30, 2005. In October 2004, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share (EITF No. 04-8), which requires the shares underlying contingently convertible debt instruments to be included in diluted earnings per share computations using the if-converted accounting method, regardless of whether the market price trigger has been met. Under that method, the 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 convertible debentures is added back to net income. Diluted earnings per common share amounts have been retroactively restated for 2004 to give effect to the application of EITF No. 04-8 as it relates to the
Companys original 4.00% junior subordinated convertible debentures issued in the second quarter of 2003. The effect of Omnicares fourth quarter 2004 adoption of EITF No. 04-8 was to decrease diluted earnings per share $0.02 and $0.07 for the three and nine months ended September 30, 2004, respectively. For purposes of the if-converted calculation, 8,451,000 shares were assumed to be converted for both the three and nine months ended September 30, 2004. Additionally, interest expense, net of taxes, of $2.3 million and $6.8 million for the three and nine months ended September 30, 2004, respectively, was added back to 9 net income for purposes of calculating diluted earnings per share using this method. The effect of EITF No. 04-8 on the Companys 2005 earnings results was to decrease diluted earnings per share by $0.02 for the nine months ended September 30, 2005. The impact had no effect on diluted earnings per share for the three months ended September 30, 2005. See further discussion of the trust PIERS exchange offering in the Debt note. 4. 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 Companys 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 or medical supply companies, which complement the Companys core business. During the first nine months of 2005, Omnicare completed certain acquisitions of businesses and other assets in the Pharmacy Services segment, which were
not, individually or in the aggregate, significant to the Company, except as discussed below. Acquisitions of businesses required cash payments of $2,566.3 million (including amounts payable pursuant to acquisition agreements relating to pre-2005 acquisitions) in the nine months ended September 30, 2005. The impact of these aggregate acquisitions on the Companys overall goodwill balance has been reflected in the disclosures at the Goodwill and Other Intangible Assets note. On
July 28, 2005, Omnicare closed its $34.75 per share cash tender offer (the Offer)
for all of the issued and outstanding shares of the common stock (the Shares)
of NeighborCare, Inc. (NeighborCare). Approximately 42,897,600 Shares
were tendered in the Offer, representing approximately 97.2% of the then-outstanding
Shares. On July 28, 2005, Omnicare accepted for payment all Shares validly tendered
and not properly withdrawn. In the Offer, after giving effect to the settlement
of Shares tendered that were subject to guaranteed delivery, the Company acquired
the aggregate of 42,011,760 Shares, representing approximately 95.2% of the
outstanding Shares. All Shares not tendered in the Offer were converted into
the right to receive the same consideration per Share paid in the Offer. The acquisition of NeighborCare was accounted for as a purchase business combination and included cash consideration and transaction costs of approximately $1.9 billion. The cash consideration included the payoff of certain NeighborCare debt totaling approximately $328 million, of which $78 million was retired by Omnicare immediately following the acquisition. In addition, on August 27, 2005 the Company closed its tender offer for cash to purchase all of the $250 million outstanding principal amount of NeighborCares 6.875% senior subordinated notes due 2013 (the NeighborCare Notes). All of the NeighborCare Notes were validly tendered in the offer. The total consideration, excluding accrued and unpaid interest, for each $1,000 principal amount of NeighborCare Notes validly tendered was $1,096.85. At the time of the acquisition, NeighborCare was an institutional pharmacy provider serving long-term care and skilled nursing facilities, specialty hospitals and assisted and 10 independent living communities comprising approximately 295,000 beds in 34 states and the District of Columbia. NeighborCare also provided infusion therapy services, home medical equipment, respiratory therapy services, community-based retail pharmacies and group purchasing. On August 12, 2005, Omnicare completed the acquisition of excelleRx, Inc. (excelleRx). The acquisition included cash consideration at closing of approximately $269 million. At the time of the acquisition, excelleRx provided pharmaceutical products and care services to approximately 400 hospice programs with approximately 48,000 patients in 46 states. On August 15, 2005, Omnicare completed the acquisition of RxCrossroads, L.L.C. (RxCrossroads). The acquisition included cash consideration at closing of approximately $235 million. At the time of the acquisition, RxCrossroads provided specialty distribution, product support and mail order pharmacy services for pharmaceutical manufacturers and biotechnology companies, generally for high-cost drugs used in the treatment of chronic disease states. The Company financed the acquisitions of NeighborCare, excelleRx and RxCrossroads with proceeds from a new $3.4 billion credit agreement as discussed at the Debt Note. The Company has engaged an independent valuation firm to assist with the purchase price allocation for these acquisitions, including the identification of goodwill and other identifiable intangible assets. Omnicare expects to achieve certain economies of scale and operational efficiencies from these acquisitions. The net assets and operating results of these acquisitions have been included from their respective dates of acquisition in the Companys financial statements. Unaudited
pro forma combined results of operations of the Company and NeighborCare for
the three and nine months ended September 30, 2005 and 2004 are presented below.
Such pro forma presentation has been prepared assuming that the NeighborCare
acquisition had been made as of January 1, 2004. The unaudited pro forma presentation
excludes the impact of excelleRx and RxCrossroads, due to the lack of significance
on the pro forma combined results. 11 The
revisions to the unaudited pro forma combined financial information are related
to corrections resulting from the use of incorrect financial information relating
to the NeighborCare, Inc. acquisition. The unaudited pro forma combined financial information follows (in thousands, except per share data): As
Revised: Three
Months Three
Months Nine
Months Nine
Months Pro
forma net sales $ 1,574,615 $ 1,431,382 $ 4,602,169 $ 4,151,998 Pro
forma net income from continuing operations $ 52,566 $ 49,641 $ 159,672 $ 154,433 Pro
forma earnings per share: Basic $ 0.51 $ 0.48 $ 1.56 $ 1.49 Diluted $ 0.49 $ 0.46 $ 1.50 $ 1.42 As
Originally Reported: Three
Months Nine
Months Nine
Months Pro
forma net sales $ 1,431,382 $ 4,956,378 4,138,986 Pro
forma net income from continuing operations $ 62,011 $ 211,343 185,753 Pro
forma earnings per share: Basic $ 0.60 $ 2.06 1.79 Diluted $ 0.57 $ 1.98 1.70 5. Goodwill and Other Intangible Assets Changes in the carrying amount of goodwill for the nine months ended September 30, 2005, by business segment, are as follows (in thousands): Pharmacy CRO Total Balance
as of December 31, 2004 $ 1,920,612 $ 82,611 $ 2,003,223 Goodwill
acquired in the nine months ended September 30, 2005 1,970,635 1,970,635 Other 5,419 (970) 4,449 Balance
as of September 30, 2005 $ 3,896,666 $ 81,641 $ 3,978,307 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 adjustments for the finalization
of purchase price allocations). Other also includes the effect of
adjustments due to foreign currency translations, which relate to the Contract
Research Organization (CRO) Services segment and one pharmacy located
in Canada that is included in the Pharmacy Services segment. During
the third quarter of 2005, the Company completed its annual goodwill impairment
assessment and determined that goodwill was not impaired. The
net carrying amount of the Companys other intangible assets (included
in the Other noncurrent assets caption on the Consolidated Balance
Sheets) increased by $251.6 million during the first nine months of 2005, from
$67.9 million to $319.5 million. The increase primarily relates to the estimated
customer relationship assets and non-compete agreements recorded as part of
the preliminary purchase price allocation for the acquisitions of NeighborCare,
excelleRx and RxCrossroads. The Company has engaged an independent valuation
firm to assist with the final purchase price allocation for these acquisitions,
including the identification of goodwill and other identifiable intangible assets.
The Company also continues to evaluate the tax effects of these acquisitions.
The Company is in the process of completing its allocation of the 12 purchase price for these acquisitions and accordingly, the goodwill balance is preliminary and subject to change. 6. Debt Current and Long-Term Debt During
the quarter ended September 30, 2005, the Company entered into a new $3.4 billion
Credit Agreement (Credit Agreement) consisting of a $1.9 billion
364-day loan facility, maturing between July 27, 2006 and August 17, 2006 (the
364-Day Loans), an $800 million revolving credit facility, maturing
on July 28, 2010 (the Revolving Loans) and a $700 million senior
term A loan facility, maturing on July 28, 2010 (the Term Loans).
Interest on the outstanding balances of the 364-Day Loans is payable, at the
Companys option, (i) at a Eurodollar Base Rate (as defined in the Credit
Agreement) plus a margin of 0.75% or (ii) at an Alternate Base Rate (as defined
in the Credit Agreement). The 364-Day Loans were drawn at various intervals
during the third quarter of 2005, with each separate borrowing having a slightly
different interest rate based on the timing of the borrowing. As a result, the
weighted average interest rate on the 364-Day Loans was 4.55% at September 30,
2005. Interest on the outstanding balances of the Revolving Loans and the Term
Loans is payable, at the Companys option, (i) at a Eurodollar Base Rate
(as defined in the Credit Agreement) plus a margin based on the Companys
senior unsecured long-term debt securities rating and the Companys capitalization
ratio (as defined in the Credit Agreement), that can range from 0.50% to 1.75%
or (ii) at an Alternate Base Rate (as defined in the Credit Agreement). The
interest rate on the Revolving Loans and Term Loans was 4.49% at September 30,
2005. The Credit Agreement requires the Company to meet certain financial covenants,
including a minimum consolidated net worth and a minimum fixed charges coverage
ratio, and customary affirmative and negative covenants. The Company primarily used the net proceeds from the Credit Agreement to repay amounts outstanding under the Companys old term A loan of $123.1 million and old revolving credit facility of $181 million, and for the acquisitions of NeighborCare, excelleRx and RxCrossroads (see additional discussion at the Acquisitions Note). At September 30, 2005, there was $1.9 billion outstanding under the 364-Day Loans, $180 million outstanding under the Revolving Loans and $700 million outstanding under the Term Loan. In connection with the completion of the new Credit Agreement, the Company has deferred debt issuance costs of $11.7 million, which consisted of $2.7 million deferred from the old term A loan and the old revolving credit facility and $9.0 million of new debt issuance costs. Interest expense included a charge of approximately $7.5 million pretax in connection with the write-off of certain deferred financing fees related to the refinancing of the Companys old term A loan and revolving credit facility, the expensing of certain debt issuance costs related to the new term A loan and revolving credit facility, and debt costs related to the new 364-day loan facility. The Company amortized approximately $0.4 million of the $11.7 million deferred debt issuance costs during the three and nine months ended September 30, 2005. The Companys long-term debt instruments (other than the new Credit Agreement discussed above), including related terms and financial covenants, have been disclosed in detail at Note 7, Long-Term Debt in Omnicares Annual Report on Form 10-K for the year ended 13 December
31, 2004. In addition to the new Credit Agreement, the Company had additional
borrowings of long-term debt during the nine months ended September 30, 2005
approximating $42 million, primarily consisting of a note payable carrying a
five-year term and a variable interest rate of 3.87% per annum at September
30, 2005. At September 30, 2005, the overall weighted average interest rate on the Companys variable interest portion of its long-term debt, including the swap agreement, was 4.69%. The Company was in compliance with its debt related financial covenants as of September 30, 2005. 4.00% Junior Subordinated Convertible Debentures During the first quarter of 2005, the composition of the Companys 4.00% junior subordinated convertible debentures underlying the trust PIERS was impacted by the completion of an exchange offering, explained in further detail below. Original 4.00% Junior Subordinated Convertible Debentures: In connection with the offering of the 4.00% Trust Preferred Income Equity Redeemable Securities (the Old Trust PIERS) in the second quarter of 2003, the Company issued a corresponding amount of original 4.00% junior subordinated convertible debentures (Old 4.00% Debentures) due 2033 to the Omnicare Capital Trust I (the Old Trust). The Old Trust is a 100%-owned finance subsidiary of the Company. The Company has fully and unconditionally guaranteed the securities of the Old Trust. The Old Trust PIERS offer fixed cash distributions at a rate of 4.00% per annum payable quarterly, and a fixed conversion price of $40.82 under a contingent conversion feature whereby the holders may convert their Old 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 Old Trust PIERS is less than 105% of the average of the conversion values for the Old Trust PIERS through 2028 (98% for any period thereafter through maturity). The Old Trust PIERS also will pay contingent distributions, commencing with the quarterly distribution period beginning September 15, 2009, if the average trading prices of the Old Trust PIERS for a predetermined period equals 115% or more of the stated liquidation amount of the Old Trust PIERS. Embedded in the Old 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 September 30, 2005, the values of both derivatives embedded in the Old Trust PIERS were not material. However, the values are subject to change, based on market conditions,
which could affect the Companys future financial position, cash flows and results of operations. Omnicare irrevocably and unconditionally guarantees, on a subordinated basis, certain payments to be made by the Old Trust in connection with the Old Trust PIERS. Subsequent to the first quarter 2005 exchange offer discussed in further detail at the Series B 4.00% Junior Subordinated Convertible Debentures caption below, the Company has $11,233,050 aggregate liquidation amount of the Old Trust PIERS and underlying Old 4.00% Debentures remaining outstanding at September 30, 2005. 14 Series B 4.00% Junior Subordinated Convertible Debentures: On March 8, 2005, the Company completed the exchange of $333,766,950 aggregate liquidation amount of the Old Trust PIERS (representing approximately 96.7% of the total liquidation amount of the Old Trust PIERS outstanding) for an equal amount of newly issued Series B 4.00% Trust Preferred Income Equity Redeemable Securities (the New Trust PIERS) of Omnicare Capital Trust II (the New Trust), plus an exchange fee of $0.125 per $50 stated liquidation amount of Old Trust PIERS. Each New Trust PIERS represents an undivided beneficial interest in the assets of the New Trust, which assets consist solely of a corresponding amount of Series B 4.00% junior subordinated convertible debentures (New 4.00% Debentures) issued by Omnicare, Inc. with a stated maturity of June 15, 2033. The Company has fully and unconditionally guaranteed the securities of the New Trust.
Subsequent to the completion of the exchange offering and at September 30, 2005, the Company has $333,766,950 of New 4.00% Debentures outstanding. The terms of the New Trust PIERS are substantially identical to the terms of the Old Trust PIERS, except that the New Trust PIERS are convertible into cash and, if applicable, shares of Omnicare common stock, whereas the outstanding Old Trust PIERS are convertible only into Omnicare common stock (except for cash in lieu of fractional shares). The purpose of the exchange offer was to change the conversion settlement provisions of the Old Trust PIERS. The Company made this change in response to the ratification by the FASB of EITF No. 04-8, which, effective December 15, 2004, changed the accounting rules applicable to the Old Trust PIERS and requires Omnicare to include the common stock issuable upon conversion of the Old Trust PIERS in Omnicares diluted shares outstanding, regardless of whether the market trigger has been met (see further discussion of EITF No. 04-8 at the Earnings Per Share Data Note). By committing to pay up to the stated liquidation amount of the New Trust PIERS to be converted in cash upon conversion, Omnicare is able to account for the New Trust PIERS under the treasury stock method, which is expected to be less dilutive to earnings per share than the if converted method
required by EITF No. 04-8. In
connection with the issuance of the Old 4.00% Debentures and the New 4.00% Debentures,
the Company has deferred $11.8 million in debt issuance costs, of which approximately
$0.1 million and $0.3 million was amortized in each of the three and nine month
periods ended September 30, 2005 and 2004, respectively. The nine months ended
September 30, 2005 included a special charge to operating expenses totaling
$1.2 million pretax in connection with the issuance of the New Trust PIERS. 7. 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. Expense relating primarily to the Companys matching contributions for these defined contribution plans was $1.5 million and $4.2 million for the three and nine months ended September 30, 2005, respectively, and $1.2 million and $3.6 million for the three and nine months ended September 30, 2004, respectively. 15 The Company also has an excess benefit plan which provides retirement benefits to certain headquarters employees in amounts generally consistent with what they would have received under the Companys non-contributory, defined benefit pension plan (the Qualified Plan), frozen in 1993. The retirement benefits provided by the excess benefit plan are generally comparable to those that would have been earned in the Qualified Plan, if payments under the Qualified Plan were not limited by the Internal Revenue Code. The Company has established rabbi trusts, which are invested primarily in a mutual fund holding U.S. Treasury obligations, to provide for retirement obligations under the excess benefit plan. The Companys policy is to fund pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act (ERISA). The following table presents the components of pension cost for each of the three and nine months ended September 30, 2005 and 2004 (in thousands): Three months ended Nine months ended 2005 2004 2005 2004 Service
cost $ 404 $ 382 $ 1,177 $ 1,131 Interest
cost 797 527 2,393 1,581 Amortization
of deferred amounts (primarily
prior actuarial losses) 817 470 2,450 1,410 Expected
return on assets (59) (176) Net
periodic pension cost $ 1,959 $ 1,379 $ 5,844 $ 4,122 During the three and nine months ended September 30, 2005, the Company made payments of $3.1 million and $12.6 million, respectively, related to funding plan assets for the settlement of the Companys pension obligations, and anticipates payments of approximately $3 million during the remainder of the 2005 year. In addition, the Company 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 $0.2 million and $0.6 million for each of the three and nine month periods ended September 30, 2005 and 2004, respectively. 8. Restructuring Program In connection with the previously disclosed second phase of its productivity and consolidation initiative (the Phase II Program), the Company had liabilities of $3.3 million at December 31, 2004, of which $2.9 million was utilized in the nine months ended September 30, 2005. The remaining liabilities of $0.4 million at September 30, 2005 represent amounts not yet paid relating to actions taken, and will be adjusted as these matters are settled. 16 In the third quarter of 2005, the Company announced the implementation of certain consolidation plans and other productivity initiatives to streamline operations, maximize workforce and operating asset utilization, and produce a more cost-efficient, operating infrastructure. These consolidation and productivity initiatives are primarily related to the integration of NeighborCare. Given the geographic overlap of the NeighborCare and Omnicare pharmacies, substantial opportunities for consolidation exist. While the majority of consolidations will result in NeighborCare pharmacies being consolidated into Omnicare pharmacies, depending on location, capacity and operating performance, certain Omnicare pharmacies have also been identified for consolidation into NeighborCare locations. Additionally, as part of the evaluation process on how best to integrate the two organizations, the Company also
focused broadly on ways to lower operating infrastructure costs to maximize efficiencies and asset utilization and identified opportunities to right-size the business, streamline operations and eliminate redundant assets. This portion of the consolidation activity and other productivity initiatives are expected to result in the closure of 17 facilities, of which 15 are pharmacy operations. It will also lead to a net reduction in force of approximately 730 positions. Of this reduction in force, approximately 93% are in pharmacy operations and the remaining reductions are at the corporate headquarters or the Companys contract research operations. In
connection with this program, these particular consolidation and productivity
initiatives are expected to be completed within 12 months, and are expected
to generate approximately $40 million in pretax savings. Given the timing of
the initiatives, the Company expects the bulk of these savings to occur beginning
in 2006. These initiatives are currently estimated to require a total restructuring
charge of approximately $20 million before taxes, which relates solely to the
costs associated with the consolidation of Omnicare pharmacies into NeighborCare
pharmacies and the other productivity initiatives described above. Approximately
$18 million of this pretax restructuring charge will occur in the quarters ending
September 30, 2005 (approximately $8.9 million pretax) and December 31, 2005
(approximately $9 million pretax). The remaining charges of approximately $2
million are expected to occur in the first and second quarters of 2006. 17 In connection with this program, the Company expensed approximately $8.9 million ($5.6 million aftertax, or $0.05 per diluted share) for restructuring charges, during the quarter ended September 30, 2005. The restructuring charges primarily include severance pay, the buy-out of employment agreements, and lease terminations. Details of the pretax restructuring charges and associated utilization relating to this productivity and consolidation program follow (in thousands): 2005 Utilized Balance at Restructuring
charges: Employee
severance $ 5,426 $ (554) $ 4,872 Employment
agreement buy-outs 493 (44) 449 Lease
terminations 3,031 (249) 2,782 Total
restructuring charges $ 8,950 $ (847) $ 8,103 As
of September 30, 2005, the Company had incurred approximately $0.6 million of
severance and other employee-related costs relating to the reduction of approximately
210 employees. The remaining liabilities at September 30, 2005 represent amounts
not yet paid relating to actions taken in connection with the program (primarily
severance payments and lease payments), and will be adjusted as these matters
are settled. 9. Commitments and Contingencies Omnicare continuously evaluates contingencies based upon the best available information. The Company believes that liabilities have been provided to the extent necessary in cases where the outcome is considered probable and reasonably estimable, and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from managements estimates, future earnings will be charged or credited accordingly. As part of its ongoing operations, the Company is subject to various inspections, audits, inquiries and similar actions by third parties, as well as governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Company is subject. Omnicare is also involved in various legal actions arising in the normal course of business. These matters are continuously being evaluated and, in many cases, are being contested by the Company and the outcome is not predictable. Consequently, an estimate of the possible loss or range of loss associated with these actions cannot be made. Although occasional adverse outcomes (or settlements) may occur and could possibly have an adverse effect on the results of operations in any one accounting period, the Company believes that the final disposition of such matters will not have a material adverse affect on the Companys
consolidated financial position. 18 10. 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 reporting segments. The Companys larger segment is Pharmacy Services.
Pharmacy Services primarily provides distribution of pharmaceuticals, related
pharmacy consulting and other ancillary services, data management services and
medical supplies to skilled nursing, assisted living, hospice programs and other
providers of healthcare services in 47 states in the United States of America
(USA), the District of Columbia and in Canada at September 30, 2005.
The Companys other segment is CRO Services, which provides comprehensive
product development and research services to client companies in pharmaceutical,
biotechnology, medical device and diagnostics industries in 30 countries around
the world at September 30, 2005, including the USA. The table below presents information about the reportable segments as of and for the three and nine months ended September 30, 2005 and 2004 and should be read in conjunction with the paragraph that follows (in thousands): Three Months Ended September 30, 2005: Pharmacy CRO Corporate Consolidated Net
sales $ 1,410,653 $ 44,324 $ $ 1,454,977 Depreciation
and amortization 21,734 511 678 22,923 Operating
income (expense) 153,803 27 (14,677) 139,153 Total
assets 6,479,350 155,292 388,232 7,022,874 Capital
expenditures 6,211 296 227 6,734 2004: Net
sales $ 1,020,972 $ 32,961 $ $ 1,053,933 Depreciation
and amortization 13,160 336 656 14,152 Operating
income (expense) 114,872 3,161 (11,712) 106,321 Total
assets 3,330,861 95,928 289,753 3,716,542 Capital
expenditures 3,119 181 449 3,749 19 Nine Months Ended September 30, 2005: Pharmacy CRO Corporate Consolidated Net
sales $ 3,533,955 $ 140,565 $ $ 3,674,520 Depreciation
and amortization 48,567 1,495 2,003 52,065 Operating
income (expense) 405,375 6,296 (43,104) 368,567 Total
assets 6,479,350 155,292 388,232 7,022,874 Capital
expenditures 12,803 720 1,149 14,672 2004: Net
sales $ 2,946,253 $ 100,556 $ $ 3,046,809 Depreciation
and amortization 38,902 1,037 1,883 41,822 Operating
income (expense) 358,851 9,637 (33,868) 334,620 Total
assets 3,330,861 95,928 289,753 3,716,542 Capital
expenditures 11,324 541 1,721 13,586 In accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred, the Company included in its reported CRO segment net sales amount, reimbursable out-of-pockets totaling $6.5 million and $22.3 million for the three and nine months ended September 30, 2005, respectively, and $4.5 million and $13.6 million for the three and nine months ended September 30, 2004, respectively. 11. Guarantor Subsidiaries The Companys $375.0 million 8.125% senior subordinated notes due 2011 and the 6.125% senior subordinated notes due 2013 are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain wholly-owned subsidiaries of the Company (the Guarantor Subsidiaries). The following condensed consolidating financial data illustrates the composition of Omnicare, Inc. (Parent), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of September 30, 2005 and December 31, 2004 for the balance sheets, the three and nine months ended September 30, 2005 and 2004 for the statements of income, and the statements of cash flows for the nine months ended September 30, 2005 and 2004. 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 consolidating/eliminating adjustment column is presented for the condensed consolidating statements of cash flows since there were no significant consolidating/eliminating adjustment amounts during the periods presented. 20 11. Guarantor Subsidiaries (Continued) Condensed Consolidating Statements of Income (In
thousands) Three
months ended September 30, 2005: Parent Guarantor Non- Consolidating/ Omnicare,
Inc. Total
net sales $ $ 1,383,638 $ 71,339 $ $ 1,454,977 Total
direct costs 1,041,326 52,578 1,093,904 Gross
profit 342,312 18,761 361,073 Selling,
general and administrative expenses 422 202,721 9,827 212,970 Restructuring
and other related charges 775 7,603 572 8,950 Operating
income (loss) (1,197 ) 131,988 8,362 139,153 Investment
income 295 917 1,212 Interest
expense (45,497 ) (892 ) (468 ) (46,857 ) Income
(loss) before income taxes (46,399 ) 132,013 7,894 93,508 Income
tax (benefit) expense (17,372 ) 49,425 2,956 35,009 Equity
in net income of subsidiaries 87,526 (87,526 ) Net
income (loss) $ 58,499 $ 82,588 $ 4,938 $ (87,526 ) $ 58,499 2004: Total
net sales $ $ 1,022,683 $ 31,250 $ $ 1,053,933 Total
direct costs 770,278 25,085 795,363 Gross
profit 252,405 6,165 258,570 Selling,
general and administrative expenses 408 147,077 4,764 152,249 Operating
income (loss) (408 ) 105,328 1,401 106,321 Investment
income 123 568 691 Interest
expense (17,255 ) (219 ) (108 ) (17,582 ) Income
(loss) before income taxes (17,540 ) 105,677 1,293 89,430 Income
tax (benefit) expense (6,578 ) 39,637 485 33,544 Equity
in net income of subsidiaries 66,848 (66,848 ) Net
income (loss) $ 55,886 $ 66,040 $ 808 $
(66,848 ) $ 55,886 21 11. Guarantor Subsidiaries (Continued) Condensed Consolidating Statements of Income - Continued (In thousands) Nine months ended September 30, 2005: Parent Guarantor Non-Guarantor Consolidating/ Omnicare, Inc. Total net sales $ $ 3,513,681 $ 160,839 $ $ 3,674,520 Total
direct costs 2,651,815 117,464 2,769,279 Gross
profit 861,866 43,375 905,241 Selling,
general and administrative expenses 2,638 502,890 22,196 527,724 Restructuring
and other related charges 775 7,603 572 8,950 Operating
income (loss) (3,413 ) 351,373 20,607 368,567 Investment
income 867 2,589 3,456 Interest
expense (84,672 ) (1,250 ) (1,293 ) (87,215 ) Income
(loss) before income taxes (87,218 ) 352,712 19,314 284,808 Income
tax (benefit) expense (32,646 ) 132,001 7,227 106,582 Equity
in net income of subsidiaries 232,798 (232,798 ) Net income (loss) $ 178,226 $ 220,711 $ 12,087 $ (232,798 ) $ 178,226 2004: Total
net sales $ $ 2,954,712 $ 92,097 $ $ 3,046,809 Total
direct costs 2,205,048 72,903 2,277,951 Gross
profit 749,664 19,194 768,858 Selling,
general and administrative expenses 923 418,247 15,068 434,238 Operating
income (loss) (923 ) 331,417 4,126 334,620 Investment
income 472 1,745 13 2,230 Interest
expense (50,653 ) (457 ) (427 ) (51,537 ) Income
(loss) before income taxes (51,104 ) 332,705 3,712 285,313 Income
tax (benefit) expense (18,915 ) 123,021 1,376 105,482 Equity
in net income of subsidiaries 212,020 (212,020 ) Net
income (loss) $ 179,831 $ 209,684 $ 2,336 $
(212,020 ) $ 179,831 22 11. Guarantor Subsidiaries (Continued) Condensed Consolidating Balance Sheets (In
thousands) As
of September 30, 2005: Parent Guarantor Non-Guarantor Consolidating/ Omnicare,
Inc. and ASSETS Cash
and cash equivalents $ 150,065 $ 30,090 $ 23,883 $ $ 204,038 Restricted
cash 7,049 7,049 Deposits
with drug wholesalers 78,972 78,972 Accounts
receivable, net (including intercompany) 52 1,276,714 43,635 (64,159 ) 1,256,242 Unbilled
receivables 18,309 347 18,656 Inventories 420,637 13,171 433,808 Deferred
income tax benefits (liabilities), net-current (904 ) 117,124 436 116,656 Other
current assets 616 189,050 4,130 193,796 Total current assets 149,829 2,137,945 85,602 (64,159 ) 2,309,217 Properties and equipment, net 242,207 16,474 258,681 Goodwill 3,882,421 95,886 3,978,307 Other noncurrent assets 34,183 442,131 355 476,669 Investment in subsidiaries 5,752,273 (5,752,273 ) Total assets $ 5,936,285 $ 6,704,704 $ 198,317 $ (5,816,432 ) $ 7,022,874 LIABILITIES
AND STOCKHOLDERS EQUITY Current liabilities (including intercompany) $ 1,934,133 $ 632,949 $ 64,250 $ (64,159 ) $ 2,567,173 Long-term debt 880,000 12,681 46,838 939,519 8.125% senior subordinated notes, due 2011 375,000 375,000 6.125% senior subordinated notes, net, due 2013 231,554 231,554 4.00% junior subordinated convertible debentures, due 2033 345,000 345,000 Deferred income tax liabilities (benefits), net-noncurrent 1,967 233,961 5,913 241,841 Other noncurrent liabilities 18,446 153,482 674 172,602 Stockholders equity 2,150,185 5,671,631 80,642 (5,752,273 ) 2,150,185 Total liabilities and stockholders equity $ 5,936,285 $ 6,704,704 $ 198,317 $ (5,816,432 ) $ 7,022,874 As
of December 31, 2004: ASSETS
Cash and cash equivalents $ 46,569 $ 32,453 $ 5,147 $ $ 84,169 Restricted cash 262 262 Deposit with drug wholesaler 44,000 44,000 Accounts receivable, net (including intercompany) 41,448 781,553 17,454 (1,750 ) 838,705 Unbilled receivables 13,538 469 14,007 Inventories 326,091 5,276 331,367 Deferred income tax benefits (liabilities), net-current (6 ) 94,074 499 94,567 Other current assets 572 141,153 977 142,702 Total current assets 88,583 1,433,124 29,822 (1,750 ) 1,549,779 Properties and equipment, net 134,601 7,820 142,421 Goodwill 1,948,633 54,590 2,003,223 Other noncurrent assets 125,636 77,911 211 203,758 Investment in subsidiaries 2,985,941 (2,985,941 ) Total assets $ 3,200,160 $ 3,594,269 $ 92,443 $ (2,987,691 ) $ 3,899,181 LIABILITIES
AND STOCKHOLDERS EQUITY Current liabilities (including intercompany) $ 24,757 $ 417,721 $ 26,754 $ (1,750 ) $ 467,482 Long-term debt 280,769 790 281,559 8.125% senior subordinated notes, due 2011 375,000 375,000 6.125% senior subordinated notes, net, due 2013 232,508 232,508 4.00% junior subordinated convertible debentures, due 2033 345,000 345,000 Deferred income tax liabilities (benefits), net-noncurrent (2,204 ) 145,484 (5,687 ) 137,593 Other noncurrent liabilities 17,222 114,940 769 132,931 Stockholders equity 1,927,108 2,915,334 70,607 (2,985,941 ) 1,927,108 Total liabilities and stockholders equity $ 3,200,160 $ 3,594,269 $ 92,443 $ (2,987,691 ) $ 3,899,181 23 11. Guarantor Subsidiaries (Continued) Condensed Consolidating Statements of Cash Flows (In thousands) Nine months ended September 30, 2005: Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Omnicare, Inc. Cash
flows from operating activities: Provision
for doubtful accounts $ $ 39,556 $ 796 $ 40,352 Other 1,319 151,325 (17,652 ) 134,992 Net cash flows from operating activities 1,319 190,881 (16,856 ) 175,344 Cash
flows from investing activities: Acquisition
of businesses, net of cash received (2,562,605 ) (3,730 ) (2,566,335 ) Capital
expenditures (13,838 ) (834 ) (14,672 ) Transfer
of cash to trusts for employee health and severance costs, net of payments
out of the trust (5,898 ) (5,898 ) Other 39 39 Net cash flows from investing activities (2,582,302 ) (4,564 ) (2,586,866 ) Cash
flows from financing activities: Borrowings
on line of credit facilities and term A loan 3,543,000 3,543,000 Payments
on line of credit facilities and term A loan (1,068,385 ) (1,068,385 ) Proceeds
from long-term borrowings and obligations 153 41,393 41,546 Payments
on long-term borrowings and obligations (612 ) (612 ) Fees
paid for financing arrangements (14,179 ) (14,179 ) Change
in cash overdraft balance (7,131 ) 15,185 8,054 Proceeds
from stock awards and exercise of stock options and warrants, net of stock
tendered in payment 30,339 30,339 Dividends
paid (7,135 ) (7,135 ) Other (2,373,873 ) 2,373,873 Net cash flows from financing activities 102,177 2,389,058 41,393 2,532,628 Effect
of exchange rate changes on cash (1,237 ) (1,237 ) Net
increase (decrease) in cash and cash equivalents 103,496 (2,363 ) 18,736 119,869 Cash
and cash equivalents at beginning of period 46,569 32,453 5,147 84,169 Cash
and cash equivalents at end of period $ 150,065 $ 30,090 $ 23,883 $ 204,038 24 11. Guarantor Subsidiaries (Continued) Condensed Consolidating Statements of Cash Flows - Continued (In thousands) Nine months ended September 30, 2004: Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Omnicare, Inc. Cash
flows from operating activities: Provision
for doubtful accounts $ $ 32,701 $ 723 $ 33,424 Other (25,118 ) 119,734 5,158 99,774 Net
cash flows from operating activities (25,118 ) 152,435 5,881 133,198 Cash
flows from investing activities: Acquisition
of businesses (238,710 ) (1,230 ) (239,940 ) Capital
expenditures (13,244 ) (342 ) (13,586 ) Transfer
of cash to trusts for employee health and severance costs, net of payments
out of the trust (5,063 ) (5,063 ) Other 41 41 Net
cash flows from investing activities (256,976 ) (1,572 ) (258,548 ) Cash
flows from financing activities: Borrowings
on line of credit facility 407,000 407,000 Payments
on line of credit facility and term A loan (361,360 ) (361,360 ) Payments
on long-term borrowings and obligations (378 ) (378 ) Change
in cash overdraft balance (3,433 ) 437 (2,996 ) Proceeds
from stock awards and exercise of stock options and warrants, net of stock
tendered in payment 7,871 7,871 Dividends
paid (7,030 ) (7,030 ) Other (95,330 ) 95,330 Net
cash flows from financing activities (52,660 ) 95,767 43,107 Effect
of exchange rate changes on cash (2,048 ) (2,048 ) Net
(decrease) increase in cash and cash equivalents (77,778 ) (8,774 ) 2,261 (84,291 ) Cash
and cash equivalents at beginning of period - unrestricted 134,513 48,940 3,960 187,413 Cash
and cash equivalents at end of period - unrestricted $ 56,735 $ 40,166 $ 6,221 $ 103,122 25 ITEM 2. MANAGEMENTS 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 Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information. THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 OVERVIEW Omnicare, Inc. (Omnicare or the Company) is a leading provider of pharmaceutical care for the elderly. Omnicare primarily serves residents in long-term care facilities and other chronic care settings comprising approximately 1,441,000 beds in 47 states in the United States (U.S.), the District of Columbia and in Canada at September 30, 2005, making it the largest U.S. provider of professional pharmacy, related consulting and data management services for skilled nursing, assisted living and other institutional healthcare providers, as well as for hospice patients. In addition, Omnicare provides pharmaceutical distribution and patient assistance services for specialty pharmaceuticals. Omnicare also provides clinical research services (CRO) for the pharmaceutical and biotechnology industries in 30 countries worldwide. During
the quarter, the Company completed the acquisitions of NeighborCare, Inc. (NeighborCare),
excelleRx, Inc. (excelleRx) and RxCrossroads, LLC (RxCrossroads).
At the time of the acquisition, NeighborCare was an institutional pharmacy provider
serving long-term care and skilled nursing facilities, specialty hospitals and
assisted and independent living communities comprising approximately 295,000
beds in 34 states and the District of Columbia. NeighborCare also provided infusion
therapy services, home medical equipment, respiratory therapy services, community-based
retail pharmacies and group purchasing. At the time of the acquisition, excelleRx
provided pharmaceutical products and care services to approximately 400 hospice
programs with approximately 48,000 patients in 46 states. At the time of the
acquisition, RxCrossroads provided specialty distribution, product support and
mail order pharmacy services for pharmaceutical manufacturers and biotechnology
companies, generally for high-cost drugs used in the treatment of chronic disease
states. The Company entered into a new $3.4 billion Credit Agreement (Credit Agreement) during the quarter, primarily to provide interim financing for the NeighborCare, excelleRx and RxCrossroads transactions. Interest expense included a charge of approximately $7.5 million pretax ($4.7 million aftertax, or $0.04 per diluted share) related to the debt extinguishment and new debt issuance costs in connection with the new Credit Agreement. See further discussion of the associated financing transactions at the Financial Condition, Liquidity and Capital Resources section of this MD&A. Operating results for the three and nine months ended September 30, 2005 included a restructuring charge of approximately $8.9 million pretax ($5.6 million aftertax, or $0.05 per diluted share) in connection with the Companys previously disclosed consolidation efforts associated with the NeighborCare integration plan and other productivity initiatives to streamline operations, maximize workforce and asset utilization, and produce a more cost-efficient, 26 operating infrastructure. See further discussion of the restructuring charge at the Restructuring Program section of this MD&A. A summary of the key operating results for the three and nine months ended September 30, 2005 and 2004 follows (in thousands, except per share amounts): Three months ended Nine months ended 2005 2004 2005 2004 Consolidated: Total net sales $ 1,454,977 $ 1,053,933 $ 3,674,520 $ 3,046,809 Net income $ 58,499 $ 55,886 $ 178,226 $ 179,831 Diluted earnings per share ("EPS") $ 0.54 $ 0.52 $ 1.67 $ 1.65 Sales and profitability results are discussed at the Pharmacy Services Segment and CRO Services Segment captions below. Three months ended Nine months ended 2005 2004 2005 2004 Pharmacy Services Segment: Net sales $ 1,410,653 $ 1,020,972 $ 3,533,955 $ 2,946,253 Operating income $ 153,803 $ 114,872 $ 405,375 $ 358,851 The
sales growth for the three and nine months ended September 30, 2005 continues
to be driven largely by the ongoing execution of the Companys acquisition
strategy, particularly, the acquisitions of NeighborCare, excelleRx and RxCrossroads
as discussed below. In addition, sales growth is also attributable to higher
acuity in certain areas, the expansion of the Companys clinical and other
service programs, drug price inflation and 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. These factors were partially offset by the ongoing impact
of the trends experienced over the last several quarters, namely government
reimbursement reductions, both state and federal, as well as intense competitive
pricing pressures, and the increasing use of generic drugs. The increased operating
income was primarily the result of increased sales, ongoing benefits of the
Companys acquisition integration efforts and productivity enhancement
initiatives throughout the Pharmacy Services Segment, partially offset by the
previously mentioned intensified pricing and government reimbursement pressures,
and the previously mentioned restructuring charge, of which approximately $4.4
million was included in the Pharmacy Services Segment. 27 Three months ended Nine months ended 2005 2004 2005 2004 CRO Services Segment: Revenues $ 44,324 $ 32,961 $ 140,565 $ 100,556 Operating income $ 27 $ 3,161 $ 6,296 $ 9,637 The
CRO Services Segment revenues were higher in the three and nine months ended
September 30, 2005 than in the comparable periods of 2004 due primarily to the
impact of the December 2004 acquisition of Clinimetrics Research Associates,
Inc. (Clinimetrics). Operating income in the three and nine months
ended September 30, 2005 was impacted by the previously mentioned restructuring
charge, of which approximately $3.7 million was included in the CRO Services
Segment. Operating income for the nine months ended September 30, 2005 was also
impacted by the addition of Clinimetrics, and its early completion of a large
data management project which resulted in lower revenues recognized in the first
quarter without a proportionate reduction in the operating cost structure until
the second quarter of 2005. Financial Condition, Liquidity and Capital Resources Net
cash flows from operating activities for the nine months ended September 30,
2005, were $175.3 million compared with $133.2 million for the same period of
2004. Operating cash flows, as well as debt borrowings, were used primarily
for acquisition-related payments, debt repayment, capital expenditures and dividends.
During the nine months ended September 30, 2005, the Companys investing
activities included payments of $2,566.3 million for the completion of acquisitions
in its Pharmacy Services Segment, including the acquisitions of NeighborCare,
excelleRx and RxCrossroads. Net cash provided by financing activities was $2,532.6
million for the nine months ended September 30, 2005. Borrowings during the
nine months ended September 30, 2005 were primarily related to the Company entering
into the new $3.4 billion Credit Agreement as further discussed below. Proceeds
from the new Credit Agreement were primarily used for the acquisitions of NeighborCare,
excelleRx and RxCrossroads and the refinancing of the old term A loan and revolving
credit facility. At September 30, 2005, outstanding borrowings under the new
Credit Agreement were approximately $2.8 billion. 28 RESULTS OF OPERATIONS The following table presents the consolidated net sales and results of operations of Omnicare for the three and nine months ended September 30, 2005 and 2004 (in thousands, except per share amounts). Three
months ended Nine
months ended 2005 2004 2005 2004 Total
net sales $ 1,454,977 $ 1,053,933 $ 3,674,520 $ 3,046,809 Net
income $ 58,499 $ 55,886 $ 178,226 $ 179,831 Earnings
per share: Basic $ 0.57 $ 0.54 $ 1.74 $ 1.73 Diluted $ 0.54 $ 0.52 $ 1.67 $ 1.65 EBITDA(a) $ 162,076 $ 120,473 $ 420,632 $ 376,442 EBITDA
reconciliation to net cash flows from operating activities: EBITDA(a) $ 162,076 $ 120,473 $ 420,632 $ 376,442 (Subtract)/Add: Interest
expense, net of investment income (45,645 ) (16,891 ) (83,759 ) (49,307 ) Income
taxes (35,009 ) (33,544 ) (106,582 ) (105,482 ) Changes
in assets and liabilities, net of effects from acquisition of businesses (7,003 ) (72,244 ) (124,787 ) (176,352 ) Write-off
of debt issuance costs 1,914 1,914 Provision
for doubtful accounts 15,602 11,534 40,352 33,424 Deferred
tax provision 1,568 29,386 27,574 54,473 Net
cash flows from operating activities $ 93,503 $ 38,714 $ 175,344 $ 133,198 (a) EBITDA represents earnings before interest (net of investment income), income taxes, depreciation and amortization. The Company believes that certain investors find EBITDA to be a useful tool for measuring a companys ability to service its debt, which is also the primary purpose for which management uses this financial measure. However, EBITDA does not represent net cash flows from operating activities, as defined by United States Generally Accepted Accounting Principles (U.S. GAAP), and should not be considered as a substitute for operating cash flows as a measure of liquidity. The Companys calculation of EBITDA may differ from the calculation of EBITDA by others. 29 Three Months Ended September 30, 2005 vs. 2004 Consolidated Total net sales for the three months ended September 30, 2005 rose to $1,455.0 million from $1,053.9 million in the comparable prior year period. Diluted earnings per share for the three months ended September 30, 2005 were $0.54 versus $0.52 in the same prior year period. Net income for the three months ended September 30, 2005 was $58.5 million versus $55.9 million earned in the comparable 2004 period. EBITDA totaled $162.1 million for the three months ended September 30, 2005 as compared with $120.5 million for the same period of 2004. The three months ended September 30, 2005 included the following charges: (i) Operating income included a restructuring charge of approximately $8.9 million pretax ($5.6 million aftertax, or $0.05 per diluted share) in connection with the Companys previously disclosed consolidation efforts associated with the NeighborCare integration plan and other productivity initiatives. See further discussion of the restructuring charge at the Restructuring Program section of this MD&A. (ii) Interest expense included a charge of approximately $7.5 million pretax ($4.7 million aftertax, or $0.04 per diluted share) in connection with the write-off of certain deferred financing fees related to the refinancing of the Companys old term A loan and revolving credit facility, the expensing of certain debt issuance costs related to the new term A loan and revolving credit facility, and debt costs related to the 364-day credit facility entered into this quarter. See further discussion of the associated financing transactions at the Financial Condition, Liquidity and Capital Resources section of this MD&A. The
three months ended September 30, 2004 included a charge totaling $5.2 million
pretax ($3.2 million aftertax or $0.03 per diluted share) in connection with
certain state Medicaid audits related to prior periods, lowering gross profit
by approximately $2.7 million and increasing operating expenses by approximately
$2.5 million. Pharmacy Services Segment Omnicares
Pharmacy Services Segment recorded sales of $1,410.7 million for the three months
ended September 30, 2005, exceeding the 2004 amount of $1,021.0 million by $389.7
million, or 38.2%. At September 30, 2005, Omnicare served long-term care facilities
and other chronic care settings comprising approximately 1,441,000 beds as compared
with approximately 1,071,000 beds served at September 30, 2004. Contributing
in large measure to the increase in sales and in beds served was the completion
of several acquisitions, particularly, the acquisitions of NeighborCare, excelleRx
and RxCrossroads as discussed below. Additionally, Pharmacy Services sales increased
due to higher acuity in certain areas, and the continued implementation and
expansion of the Companys clinical and other service programs, drug price
inflation and the further 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.
These factors were partially offset by the increased use of generic drugs and
the continued impact of intensified competitive pricing pressures, Medicaid
reimbursement reductions, including overall reimbursement formula changes in
certain states, as well as drug-specific pricing reductions or limitations on
certain generic drugs. While the Company is focused on reducing the impact of
these factors, there can be no assurance that these or other 30 pricing
and governmental reimbursement pressures will not continue to impact the Pharmacy
Services Segment. Operating
income of the Pharmacy Services Segment was $153.8 million in the third quarter
of 2005, a $38.9 million improvement as compared with the $114.9 million earned
in the comparable period of 2004. The increased operating income was primarily
the result of increased sales, particularly from the acquisitions of NeighborCare,
excelleRx and RxCrossroads, and productivity enhancement initiatives, as well
as the overall synergies from the integration of prior period acquisitions.
In addition, the three months ended September 30, 2004 included the previously
discussed charge of $5.2 million pretax in connection with certain state Medicaid
audits related to prior periods. These positive factors were partially offset
by the previously mentioned intensified competitive pricing and Medicaid reimbursement
pressures, as well as, the previously mentioned restructuring charge of which
approximately $4.4 million was included in the Pharmacy Services Segment. In
addition, operating margins were unfavorably impacted by the addition of the
large base of lower-margin NeighborCare business, which has not been fully integrated
at this time. Although operating margins were initially unfavorably impacted
by the addition of lower-margin institutional pharmacy acquisitions, the integration
efforts have historically resulted in drug purchasing improvements, the consolidation
of redundant pharmacy locations and other economies of scale, which served to
leverage the Companys operating cost structure and have historically resulted
in improved operating margins in the long-term as cost synergies were realized.
On
July 28, 2005, Omnicare closed its $34.75 per share cash tender offer (the Offer)
for all of the issued and outstanding shares of the common stock (the Shares)
of NeighborCare. Approximately 42,897,600 Shares were tendered in the Offer,
representing approximately 97.2% of the then-outstanding Shares. On July 28,
2005, Omnicare accepted for payment all Shares validly tendered and not properly
withdrawn. In the Offer, after giving effect to the settlement of Shares tendered
that were subject to guaranteed delivery, the Company acquired the aggregate
of 42,011,760 Shares, representing approximately 95.2% of the outstanding Shares.
All Shares not tendered in the Offer were converted into the right to receive
the same consideration per Share paid in the Offer. The acquisition of NeighborCare was accounted for as a purchase business combination and included cash consideration and transaction costs of approximately $1.9 billion. The cash consideration included the payoff of certain NeighborCare debt totaling approximately $328 million, of which $78 million was retired by Omnicare immediately following the acquisition. In addition, on August 27, 2005 the Company closed its tender offer for cash to purchase all of the $250 million outstanding principal amount of NeighborCares 6.875% senior subordinated notes due 2013 (the NeighborCare Notes). All of the NeighborCare Notes were validly tendered in the offer. The total consideration, excluding accrued and unpaid interest, for each $1,000 principal amount of NeighborCare Notes validly tendered was $1,096.85. At the time of the acquisition, NeighborCare was an institutional pharmacy provider serving long term care and skilled nursing facilities, specialty hospitals and assisted and independent living communities comprising approximately 295,000 beds in 34 states and the District of Columbia. NeighborCare also provided infusion therapy services, home medical equipment, respiratory therapy services, community-based retail pharmacies and group purchasing. 31 On August 12, 2005, Omnicare completed the acquisition of excelleRx. The acquisition included cash consideration at closing of approximately $269 million. At the time of the acquisition, excelleRx provided pharmaceutical products and care services to approximately 400 hospice programs with approximately 48,000 patients in 46 states. On August 15, 2005, Omnicare completed the acquisition of RxCrossroads. The acquisition included cash consideration at closing of approximately $235 million. At the time of the acquisition, RxCrossroads provided specialty distribution, product support and mail order pharmacy services for pharmaceutical manufacturers and biotechnology companies, generally for high-cost drugs used in the treatment of chronic disease states. The Company financed the acquisitions of NeighborCare, excelleRx and RxCrossroads with proceeds from a new $3.4 billion credit agreement as further discussed at the Financial Condition, Liquidity and Capital Resources section of this MD&A. The Company has engaged an independent valuation firm to assist with the purchase price allocation for these acquisitions, including the identification of goodwill and other identifiable intangible assets. Omnicare expects to achieve certain economies of scale and operational efficiencies from these acquisitions. The net assets and operating results of these acquisitions have been included from their respective dates of acquisition in the Companys financial statements. 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 skilled nursing facilities (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 Omnicares results beginning in 1999, as the Company experienced lower utilization of Omnicare services, coupled with PPS-related pricing pressure from Omnicares SNF customers. The BBA also imposed numerous other cost-saving measures affecting Medicare SNF services. In 1999 and 2000, Congress sought to restore some of the reductions in reimbursement resulting from PPS. Omnicare believes this legislation improved the financial condition of SNFs 32 and provided incentives to increase occupancy and Medicare admissions, particularly among the more acutely ill. While certain of the payment increases mandated by these laws expired October 1, 2002, one provision gave SNFs a temporary rate increase for certain high-acuity patients, including medically-complex patients with generally higher pharmacy costs, beginning April 1, 2000 and ending when the Centers for Medicare & Medicaid Services, (CMS) implements a refined resource utilization group (RUG) patient classification system that better accounts for medically-complex patients. For several years, CMS did not implement such refinements, thus continuing the additional rate increases for certain high-acuity patients through federal fiscal year 2005. On July 28, 2005, CMS issued, and on August 4, 2005 published in the Federal Register, its final SNF PPS rule for fiscal year 2006.
Under the rule, CMS added nine patient classification categories to the PPS patient classification system, thus triggering the expiration of the high-acuity payment add-ons. However, CMS estimates that the rule will have no net financial impact on SNFs in fiscal year 2006 because the $1.02 billion reduction from the expiration of the add-on payments will be more than offset by a $510 million increase in the nursing case-mix weight for all of the RUG categories and a $530 million increase associated with various updates to the payment rates (including updates to the wage and market basket indexes), resulting in a $20 million overall increase in payments for fiscal year 2006. The new patient classification refinements will be effective on January 1, 2006, and the market basket increase became effective October 1, 2005. While the fiscal year 2006 SNF PPS rates will not decrease payments to skilled nursing facilities, the loss of revenues associated with future changes in skilled nursing
facility payment rates could, in the future, have an adverse effect on the financial condition of Omnicares SNF clients which could, in turn, adversely affect the timing or level of their payments to Omnicare. In
December 2003, Congress enacted the Medicare Prescription Drug, Improvement
and Modernization Act of 2003, (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 through
a new prescription drug discount card program, which began in June 2004, and
which gives enrollees access to negotiated discounted prices for prescription
drugs. Under the new prescription drug benefit, Medicare beneficiaries may enroll in prescription drug plans offered by private entities (or in a fallback plan offered on behalf of the government through a contractor, to the extent private entities fail to offer a plan in a given area), which will provide coverage of outpatient prescription drugs (collectively, Part D Plans). Part D Plans will include both plans providing the drug benefit on a stand alone basis and Medicare Advantage plans providing drug coverage as a supplement to an existing medical benefit under that Medicare Advantage plan, most commonly a health maintenance organization plan. Medicare beneficiaries generally will have to pay a premium to enroll in a Part D Plan, with the premium amount varying from plan to plan, although CMS will provide various federal subsidies to Part D Plans to reduce the cost to
beneficiaries. 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 the nursing home residents the Company serves, whose drug costs are currently covered by state Medicaid programs. 33 CMS
will provide premium and cost-sharing subsidies to Part D Plans with respect
to dual eligible residents of nursing homes. Therefore, such dual eligibles
will not be required to pay a premium for enrollment in a Part D Plan, so long
as the premium for the Part D Plan in which they are enrolled is at or below
the premium subsidy. Dual eligible residents of nursing homes will be entitled
to have their entire prescription drug costs covered by a Part D Plan, provided
that the prescription drugs which they are taking are either on the Part D Plans
formulary, or an exception to the plans formulary is granted. CMS has
reviewed the formularies of Part D Plans and has indicated that it will require
their formularies to include the types of drugs most commonly needed by Medicare
beneficiaries. CMS also will ensure that plans formulary exceptions criteria
provide for coverage of drugs determined by the plan to be medically necessary
for the enrollee. Pursuant to the Part D final rule, Omnicare will obtain reimbursement for drugs the Company provides to enrollees of a given Part D Plan in accordance with the terms of agreements negotiated between Omnicare and that Part D Plan. Omnicare has negotiated such agreements with many Part D Plan sponsors, including national, regional and local plans, under which the Company will provide drugs and associated services to their enrollees. Omnicare continues to negotiate agreements with other Part D plans. Until all such agreements are finalized and Medicare beneficiaries enroll in the plans, Omnicare will not be able to determine the impact of the new Part D drug benefit on the Companys results of operations or financial condition. The MMA will not change the manner in which Medicare pays for drugs for Medicare beneficiaries covered in a Part A stay. Omnicare will continue to receive
reimbursement for drugs provided to such residents from the SNFs, in accordance with the terms of the agreements the Company has negotiated with each SNF. CMS has issued subregulatory guidance on many aspects of the final Part D rule, including the provision of pharmaceutical services to long-term care residents, and the agency will continue to issue guidance as the new program is implemented. Omnicare is continuing to monitor implementation of the new Part D benefit, and cannot predict the ultimate effect of the final rule or the outcome of other potential developments relating to its implementation on our business or results of operations. The MMA also reforms the Medicare Part B prescription drug payment methodology. With certain exceptions, in 2004 most Part B drugs were reimbursed at 85 percent of the April 1, 2003 average wholesale price. In 2005, Medicare Part B payment generally equals 106 percent of the lesser of (i) the wholesale acquisition cost of the product, or (ii) the average sales price, or ASP, of the product, with certain exceptions and adjustments. More significant reforms are planned for 2006, when most drugs will be reimbursed under either an ASP methodology or under a competitive acquisition program. The Companys 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. The impact that the MMAs legislative
reforms or future Medicare reform legislation ultimately will have on Omnicare is uncertain at this time. Discounted average wholesale price, (AWP), plus a dispensing fee is the basis for many state Medicaid programs reimbursement of drugs to pharmacy providers for Medicaid beneficiaries generally as well as under certain private reimbursement programs. If government or private health insurance programs discontinue or modify the use of AWP or otherwise 34 implement payment methods that reduce the reimbursement for drugs and biologicals, it could adversely affect the Companys level of reimbursement. With respect to Medicaid, the BBA repealed the Boren Amendment federal payment standard for Medicaid payments to Medicaid nursing facilities, 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 nursing facilities 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. Omnicares operations have not been adversely
affected in states with managed care programs in effect. In addition, some states continue to face budget shortfalls, and most states are taking steps to implement cost controls within their Medicaid programs. Likewise, the federal government may consider changes to Medicaid designed to rein in program spending. A Medicaid Commission has been established to advise the Secretary of HHS on, among other things, ways to achieve $10 billion in Medicaid savings over five years. In addition, Congress is considering various proposals to reduce Medicaid spending. There can be no assurance that future changes in Medicaid payments to pharmacies, nursing facilities or managed care systems will not have an adverse impact on the Companys business. While Omnicare has endeavored to adjust to these pricing pressures to date, these pressures are likely to continue or escalate, particularly if economic recovery does not emerge, and there can be no assurance
that such occurrence will not have an adverse impact on the Companys business. Further, in order to rein in healthcare costs, Omnicare anticipates that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for healthcare providers, including long-term care facilities and pharmacies. Given the continuous debate regarding the cost of healthcare, managed care and other healthcare issues, Omnicare cannot predict with any degree of certainty what additional healthcare initiatives, if any, will be implemented or the effect any future legislation or regulation will have on the Company. 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; the implementation of the Medicare drug benefit for seniors; and the long-term financing of the entire Medicare program. Given competing national priorities, it remains difficult to predict the outcome and impact on Omnicare of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs. Further, Medicaid and/or Medicare payment rates for pharmaceutical supplies and services may not continue to be based on current methodologies or remain comparable to present levels. Any future healthcare legislation or regulation may adversely affect the Company. CRO Services Segment Omnicares
CRO Services Segment recorded revenues of $44.3 million for the three months
ended September 30, 2005, which were $11.3 million, or 34.2%, higher than the
$33.0 35 million
recorded in the same prior year period. 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 included $6.5 million and $4.5 million
of reimbursable out-of-pockets in its CRO Services Segment reported revenue
and direct cost amounts for the quarters ended September 30, 2005 and 2004,
respectively. Revenues for the three months ended September 30, 2005 were higher
than in the same prior year period due primarily to the impact of the December
2004 Clinimetrics acquisition and the aforementioned increase in reimbursable
out-of-pockets of $2.0 million under EITF No. 01-14. Operating
income in the CRO Services Segment was $0.03 million in the third quarter of
2005 compared with $3.2 million in the same 2004 period. The decrease is attributable
to the previously mentioned restructuring charge, of which approximately $3.7
million was included in the CRO Services Segment. Backlog at September 30, 2005
was $258.3 million, representing an increase of $76.1 million from the September
30, 2004 backlog of $182.2 million largely due to the Clinimetrics acquisition,
and an $18.6 million decline from the December 31, 2004 backlog of $276.9 million. Consolidated The Companys consolidated gross profit of $361.1 million increased $102.5 million during the third quarter of 2005 from the same prior-year period amount of $258.6 million. Gross profit as a percentage of total net sales of 24.8% in the three months ended September 30, 2005, was higher than the 24.5% experienced during the same period of 2004. Positively impacting overall gross profit margin were the Companys purchasing leverage associated with the procurement of pharmaceuticals and benefits realized from the Companys formulary compliance program, the increased use of generic drugs, the impact of productivity enhancements, and the addition of the higher-margin RxCrossroads and excelleRx businesses. In addition, the three months ended September 30, 2004 included the previously discussed charge in connection with certain state Medicaid audits related to prior periods, which
lowered gross profit by approximately $2.7 million. These favorable year-over-year factors were partially offset by the addition of the large base of lower-margin NeighborCare business, the previously mentioned intensified competitive pricing and reimbursement pressures, as well as further market penetration of newer branded drugs targeted at the diseases of the elderly, which typically produce higher gross profit but lower gross profit margins. Omnicares selling, general and administrative (operating) expenses for the quarter ended September 30, 2005 of $213.0 million were higher than the comparable year amount of $152.2 million by $60.8 million, due primarily to the completion of several acquisitions, including NeighborCare, excelleRx and RxCrossroads. Operating expenses as a percentage of total net sales amounted to 14.6% in the third quarter of 2005, representing an increase from the 14.4% experienced in the comparable prior-year period. This increase as a percentage of total net sales is due primarily to a $4.3 million increase in amortization expense and the impact of the 2005 acquisitions, including the addition of the NeighborCare business, which had a higher operating cost structure at the time of the acquisition and has not been fully integrated at this time. As the NeighborCare integration plan is
completed and expected cost synergies are realized, operating expenses as a percentage of net sales should be reduced. Partially offsetting the increased operating expenses were the favorable impact of leveraging of fixed and variable overhead costs over a larger sales base in 2005 than that which existed in 2004 and the 36 Companys continued productivity enhancements. In addition, the third quarter of 2004 included the previously discussed charge in connection with certain state Medicaid audits related to prior periods, which increased operating expenses by approximately $2.5 million. Investment income for the three months ended September 30, 2005 of $1.2 million was higher than the $0.7 million earned in the comparable prior year quarter, largely attributable to higher interest rates and average invested plan asset balances versus the prior year. Interest expense for the three months ended September 30, 2005 of $46.9 million was higher than the $17.6 million in the comparable prior-year period due to increased borrowings under the new Credit Agreement and increased interest rates for variable rate loans. In addition, interest expense for the three months ended September 30, 2005 included a charge of approximately $7.5 million pretax related to the debt extinguishment and new debt issuance costs in connection with the new Credit Agreement. The effective income tax rate was 37.4% in the third quarter of 2005, marginally lower than the comparable prior year period rate of 37.5%. The effective tax rates in 2005 and 2004 are higher than the federal statutory rate largely as a result of the combined impact of state and local income taxes and various nondeductible expenses. Nine Months Ended September 30, 2005 vs. 2004 Consolidated Total net sales for the nine months ended September 30, 2005 rose to $3,674.5 million from $3,046.8 million in the comparable prior year period. Diluted earnings per share for the nine months ended September 30, 2005 were $1.67 versus $1.65 in the same prior year period. Net income for the nine months ended September 30, 2005 was $178.2 million versus $179.8 million earned in the comparable 2004 period. EBITDA totaled $420.6 million for the nine months ended September 30, 2005 as compared with $376.4 million for the same period of 2004. The nine months ended September 30, 2005 included the following charges: (i) Operating income included a restructuring charge of approximately $8.9 million pretax ($5.6 million aftertax, or $0.05 per diluted share) in connection with the Companys previously disclosed consolidation efforts associated with the NeighborCare integration plan and other productivity initiatives. See further discussion of the restructuring charge at the Restructuring Program section of this MD&A. (ii) Interest expense included a charge of approximately $7.5 million pretax ($4.7 million aftertax, or $0.04 per diluted share) in connection with the write-off of certain deferred financing fees related to the refinancing of the Companys old term A loan and revolving credit facility, the expensing of certain debt issuance costs related to the new term A loan and revolving credit facility, and debt costs related to the 364-day credit facility entered into this quarter. See further discussion of the associated financing transactions at the Financial Condition, Liquidity and Capital Resources section of this MD&A. (iii) Operating expenses included a charge of $1.2 million pretax in connection with the issuance of the Series B 4.00% Trust Preferred Income Equity Redeemable Securities (the New Trust PIERS) of Omnicare Capital Trust II (the New Trust). See further discussion of 37 this transaction, as well as the impact of EITF No. 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share (EITF No. 04-8) on Omnicares first nine months ended September 30, 2005 and 2004 earnings, at the Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements and Diluted Earnings Per Share sections, respectively, of this MD&A. (iv) Operating expenses included a charge of $1.1 million pretax for acquisition-related expenses pertaining to a proposed transaction that was not consummated. The
nine months ended September 30, 2004 included a charge totaling $5.2 million
pretax ($3.2 million aftertax or $0.03 per diluted share) in connection with
certain state Medicaid audits related to prior periods, lowering gross profit
by approximately $2.7 million and increasing operating expenses by approximately
$2.5 million. Pharmacy Services Segment Omnicares
Pharmacy Services Segment recorded sales of $3,534.0 million for the nine months
ended September 30, 2005, exceeding the 2004 amount of $2,946.3 million by $587.7
million, or 19.9%. At September 30, 2005, Omnicare served long-term care facilities
and other chronic care settings comprising approximately 1,441,000 beds as compared
with approximately 1,071,000 beds served at September 30, 2004. Contributing
in large measure to the increase in sales and in beds served was the completion
of several acquisitions, particularly the acquisitions of NeighborCare, excelleRx
and RxCrossroads as previously discussed. Additionally, Pharmacy Services sales
increased due to improved year-over-year occupancy and acuity in certain areas,
and the continued implementation and expansion of the Companys clinical
and other service programs, drug price inflation and the further 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. These factors were partially offset
by the increased use of generic drugs and the continued impact of intensified
competitive pricing pressures, Medicaid reimbursement reductions, including
overall reimbursement formula changes in certain states, as well as drug-specific
pricing reductions or limitations on certain generic drugs. While the Company
is focused on reducing the impact of these factors, there can be no assurance
that these or other pricing and governmental reimbursement pressures will not
continue to impact the Pharmacy Services Segment. Operating
income of the Pharmacy Services Segment was $405.4 million for the nine months
ended September 30, 2005, a $46.5 million improvement as compared with the $358.9
million earned in the same period of 2004. The increased operating income was
primarily the result of increased sales and productivity enhancement initiatives,
as well as the overall synergies from the integration of prior period acquisitions.
In addition, the nine months ended September 30, 2004 included the previously
discussed charge of $5.2 million pretax in connection with certain state Medicaid
audits related to prior periods. These positive factors were partially offset
by the previously mentioned intensified competitive pricing and Medicaid reimbursement
pressures, as well as, the previously mentioned restructuring charge of which
approximately $4.4 million was included in the Pharmacy Services Segment. In
addition, operating margins were unfavorably impacted by the addition of the
large base of lower-margin NeighborCare business, which has not been fully integrated
at this time. Although operating margins were initially unfavorably impacted
by the addition of lower-margin institutional pharmacy acquisitions, the 38 integration efforts have historically resulted in drug purchasing improvements, the consolidation of redundant pharmacy locations and other economies of scale, which served to leverage the Companys operating cost structure and have historically resulted in improved operating margins in the long-term as cost synergies were realized. CRO Services Segment Omnicares
CRO Services Segment recorded revenues of $140.6 million for the nine months
ended September 30, 2005, which were $40.0 million, or 39.8%, higher than the
$100.6 million recorded in the same prior year period. In accordance with EITF
No. 01-14, the Company included $22.3 million and $13.6 million of reimbursable
out-of-pockets in its CRO Services Segment reported revenue and direct cost
amounts for the nine months ended September 30, 2005 and 2004, respectively.
Revenues for the nine months ended September 30, 2005 were higher than in the
same prior year period due primarily to the impact of the December 2004 Clinimetrics
acquisition and the aforementioned increase in reimbursable out-of-pockets of
$8.7 million under EITF No. 01-14. Operating
income in the CRO Services Segment was $6.3 million in the first nine months
of 2005 compared with $9.6 million in the same 2004 period. Operating income
in the nine months ended September 30, 2005 was impacted by the previously mentioned
restructuring charge of which approximately $3.7 million was included in the
CRO Services Segment. Operating income versus the comparable prior-year period
was also unfavorably affected, especially in the first three months of the year,
by the impact of the Clinimetrics acquisition, largely as a result of the early
completion of a large data management project, the results of which were accepted
by the Food and Drug Administration more rapidly than anticipated. This resulted
in lower revenues to coincide with the existent operating cost structure, which
has since been modified. Consolidated The Companys consolidated gross profit of $905.2 million increased $136.3 million during the first nine months of 2005 from the same prior-year period amount of $768.9 million. Gross profit as a percentage of total net sales of 24.6% in the nine months ended September 30, 2005, was lower than the 25.2% experienced during the same period of 2004. Positively impacting overall gross profit margin were the Companys purchasing leverage associated with the procurement of pharmaceuticals and benefits realized from the Companys formulary compliance program, the increased use of generic drugs and the impact of productivity enhancements, and the addition of the higher-margin RxCrossroads and excelleRx businesses. In addition, the nine months ended September 30, 2004 included the previously discussed charge in connection with certain state Medicaid audits related to prior periods,
which lowered gross profit by approximately $2.7 million. These favorable year-over-year factors were more than offset by the addition of the large base of lower-margin NeighborCare business, the previously mentioned intensified competitive pricing and reimbursement pressures, as well as the further market penetration of newer branded drugs targeted at the diseases of the elderly, which typically produce higher gross profit but lower gross profit margins. Omnicares operating expenses for the nine months ended September 30, 2005 of $527.7 million were higher than the comparable year amount of $434.2 million by $93.5 million, due 39 primarily
to the completion of several acquisitions, including NeighborCare, excelleRx
and RxCrossroads. Operating expenses as a percentage of total net sales amounted
to 14.4% for the first nine months of 2005, slightly higher than the comparable
prior-year period of 14.3%. Operating expenses in the first nine months of 2005
were unfavorably impacted by a $7.5 million increase in amortization expense,
the 2005 acquisitions, the aforementioned $1.2 million special charge for professional
fees and expenses related to the first quarter 2005 trust PIERS exchange offering,
the aforementioned $1.1 million special charge for acquisition-related expenses,
and the addition of the NeighborCare business, which had a higher operating
cost structure at the time of the acquisition and has not been fully integrated
at this time. As the NeighborCare integration plan is completed and expected
cost synergies are realized, operating expenses as a percentage of net sales
should be reduced. Partially offsetting these factors were the favorable impact
of the leveraging of fixed and variable overhead costs over a larger sales base
in 2005 than that which existed in 2004 and the Companys continued productivity
enhancements. In addition, the nine months ended September 30, 2004 included
the previously discussed charge in connection with certain state Medicaid audits
related to prior periods, which increased operating expenses by approximately
$2.5 million. Investment income for the nine months ended September 30, 2005 of $3.5 million was higher than the $2.2 million earned in the comparable prior year period, largely attributable to higher interest rates and average invested plan asset balances versus the prior year. Interest expense for the nine months ended September 30, 2005 of $87.2 million was higher than the $51.5 million in the comparable prior-year period due to increased borrowings under the new Credit Agreement and increased interest rates for variable rate loans. In addition, interest expense for the nine months ended September 30, 2005 included a charge of approximately $7.5 million pretax related to the debt extinguishment and new debt issuance costs in connection with the new Credit Agreement. The effective income tax rate was 37.4% in the year-to-date 2005 period, marginally higher than the comparable prior year period rate of 37.0%. The effective tax rates in 2005 and 2004 are higher than the federal statutory rate largely as a result of the combined impact of state and local income taxes and various nondeductible expenses. Restructuring Program In connection with the previously disclosed second phase of its productivity and consolidation initiative (the Phase II Program), the Company had liabilities of $3.3 million at December 31, 2004, of which $2.9 million was utilized in the nine months ended September 30, 2005. The remaining liabilities of $0.4 million at September 30, 2005 represent amounts not yet paid relating to actions taken and will be adjusted as these matters are settled. In the third quarter of 2005, the Company announced the implementation of certain consolidation plans and other productivity initiatives to streamline operations, maximize workforce and operating asset utilization, and produce a more cost-efficient, operating infrastructure. These consolidation and productivity initiatives are primarily related to the integration of NeighborCare. Given the geographic overlap of the NeighborCare and Omnicare pharmacies, substantial opportunities for consolidation exist. While the majority of 40 consolidations will result in NeighborCare pharmacies being consolidated into Omnicare pharmacies, depending on location, capacity and operating performance, certain Omnicare pharmacies have also been identified for consolidation into NeighborCare locations. Additionally, as part of the evaluation process on how best to integrate the two organizations, the Company also focused broadly on ways to lower operating infrastructure costs to maximize efficiencies and asset utilization and identified opportunities to right-size the business, streamline operations and eliminate redundant assets. This portion of the consolidation activity and other productivity initiatives are expected to result in the closure of 17 facilities, of which 15 are pharmacy operations. It will also lead to a net reduction in force of approximately 730 positions. Of this reduction in force, approximately 93% are in pharmacy operations and the
remaining reductions are at the corporate headquarters or the Companys contract research operations. In connection with this program, these particular consolidation and productivity initiatives are expected to be completed within 12 months, and are expected to generate approximately $40 million in pretax savings. Given the timing of the initiatives, the Company expects the bulk of these savings to occur beginning in 2006. These initiatives are currently estimated to require a total restructuring charge of approximately $20 million before taxes, which relates solely to the costs associated with the consolidation of Omnicare pharmacies into NeighborCare pharmacies and the other productivity initiatives described above. Approximately $18 million of this pretax restructuring charge will occur in the quarters ending September 30, 2005 (approximately $8.9 million pretax) and December 31, 2005 (approximately $9 million pretax). The remaining charges of approximately $2 million are expected to
occur in the first and second quarters of 2006. In connection with this program, the Company expensed approximately $8.9 million ($5.6 million aftertax, or $0.05 per diluted share) for restructuring charges, during the quarter ended September 30, 2005. The restructuring charges primarily include severance pay, the buy-out of employment agreements, and lease terminations. Details of the pretax restructuring charges and associated utilization relating to this productivity and consolidation program follow (in thousands): 2005 Utilized Balance at Restructuring charges: Employee severance $ 5,426 $ (554) $ 4,872 Employment agreement buy-outs 493 (44) 449 Lease terminations 3,031 (249) 2,782 Total
restructuring charges $ 8,950 $ (847) $ 8,103 As
of September 30, 2005, the Company had incurred approximately $0.6 million of
severance and other employee-related costs relating to the reduction of approximately
210 employees. The remaining liabilities at September 30, 2005 represent amounts
not yet paid relating to actions taken in connection with the program (primarily
severance payments and lease payments), and will be adjusted as these matters
are settled. 41 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents at September 30, 2005 were $211.1 million compared with $84.4 million at December 31, 2004 (including restricted cash amounts of $7.0 million and $0.3 million, respectively). The Company generated positive net cash flows from operating activities of $175.3 million during the nine months ended September 30, 2005, compared with net cash flows from operating activities of $133.2 million during the nine months ended September 30, 2004. Largely contributing to net cash flows from operating activities during the nine months ended September 30, 2005 was operating results during the period. Year-over-year cash flow was unfavorably impacted by $39.7 million owing to the continuation of the broad-based delay in receipts from the Illinois Department of Public Aid. Net cash flow from operating activities included a year-over-year favorable impact of a one-time deposit of $44.0 million made during the first quarter of 2004, due to a change in payment terms under the Companys new contract with its drug wholesaler. In addition, the 2004 period was unfavorably impacted by
a statewide administrative backup in the transfer of Medi-Cal provider numbers affecting California-based pharmacies acquired in certain acquisitions that created a temporary delay in cash receipts of approximately $37 million through September 30, 2004. Operating cash flows, as well as borrowings under the new Credit Agreement, were used primarily for acquisition-related payments, debt repayment, capital expenditures and dividends. Net cash used in investing activities was $2,586.9 million and $258.5 million for the nine months ended September 30, 2005 and 2004, respectively. Acquisitions of businesses required cash payments of $2,566.3 million (including amounts payable pursuant to acquisition agreements relating to pre-2005 acquisitions) in 2005, which were largely funded by borrowings under the new Credit Agreement, as discussed below. Acquisitions of businesses during the first nine months of 2004 required $239.9 million of cash payments (including amounts payable pursuant to acquisition agreements relating to pre-2004 acquisitions) which were primarily funded by borrowings under the Companys old credit facility, existing cash balances and operating cash flows. Omnicares capital requirements are primarily comprised of its acquisition program, and capital expenditures, largely relating to investments in
the Companys information technology systems. Net cash provided by financing activities was $2,532.6 million for the nine months ended September 30, 2005 as compared to $43.1 million for the comparable prior year period. Borrowings during the nine months ended September 30, 2005 were primarily related to the Company entering into the new $3.4 billion Credit Agreement as further discussed below. Proceeds from the new Credit Agreement were primarily used for the acquisitions of NeighborCare, excelleRx and RxCrossroads and the refinancing of the old term A loan and revolving credit facility. Additional borrowings of long-term debt totaled approximately $42 million during the nine month period ended September 30, 2005 and were largely used for payments relating to the acquisition of businesses. On August 4, 2005, the Companys Board of Directors declared a quarterly cash dividend of 2.25 cents per common share for an indicated annual rate of 9 cents per common share for 42 2005. Aggregate dividends of $7.1 million and $7.0 million were paid during the nine month periods ended September 30, 2005 and 2004, respectively. The
Company entered into a new $3.4 billion Credit Agreement during the quarter
consisting of a $1.9 billion 364-day loan facility, maturing between July 27,
2006 and August 17, 2006 (the 364-Day Loans), an $800 million revolving
credit facility, maturing on July 28, 2010 (the Revolving Loans)
and a $700 million senior term A loan facility, maturing on July 28, 2010 (the
Term Loans). Interest on the outstanding balances of the 364-Day
Loans is payable, at the Companys option, (i) at a Eurodollar Base Rate
(as defined in the Credit Agreement) plus a margin of 0.75% or (ii) at an Alternate
Base Rate (as defined in the Credit Agreement). The 364-Day Loans were drawn
at various intervals during the third quarter of 2005, with each separate borrowing
having a slightly different interest rate based on the timing of the borrowing.
As a result, the weighted average interest rate on the 364-Day Loans was 4.55%
at September 30, 2005. Interest on the outstanding balances of the Revolving
Loans and the Term Loans is payable, at the Companys option, (i) at a
Eurodollar Base Rate (as defined in the Credit Agreement) plus a margin based
on the Companys senior unsecured long-term debt securities rating and
the Companys capitalization ratio (as defined in the Credit Agreement),
that can range from 0.50% to 1.75% or (ii) at an Alternate Base Rate (as defined
in the Credit Agreement). The interest rate on the Revolving Loans and Term
Loans was 4.49% at September 30, 2005. The Credit Agreement requires the Company
to meet certain financial covenants, including a minimum consolidated net worth
and a minimum fixed charges coverage ratio, and customary affirmative and negative
covenants. The Company primarily used the net proceeds from the Credit Agreement to repay amounts outstanding under the Companys old term A loan of $123.1 million and old revolving credit facility of $181 million, and for the acquisitions of NeighborCare, excelleRx and RxCrossroads. At September 30, 2005, there was $1.9 billion outstanding under the 364-Day Loans, $180 million outstanding under the Revolving Loans and $700 million outstanding under the Term Loan. In
connection with the completion of the new Credit Agreement, the Company has
deferred debt issuance costs of $11.7 million, which consisted of $2.7 million
deferred from the old term A loan and the old revolving credit facility and
$9.0 million of new debt issuance costs. Interest expense included a charge
of approximately $7.5 million pretax in connection with the write-off of certain
deferred financing fees related to the refinancing of the Companys old
term A loan and revolving credit facility, the expensing of certain debt issuance
costs related to the new term A loan and revolving credit facility, and debt
costs related to the new 364-day loan facility. The Company amortized approximately
$0.4 million of the $11.7 million in deferred debt issuance costs during the
three and nine months ended September 30, 2005. The
Company believes that net cash flows from operating activities, the new Credit
Agreement and any other short- and long-term debt financings 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. Omnicare is currently evaluating its capital requirements
and is considering longer-term financing alternatives. The Company may, in the
future, refinance its indebtedness, issue additional indebtedness, and/or issue
additional equity as considered appropriate. The Company believes that, if needed,
these additional sources of financing are readily available. 43 Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements Aggregate Contractual Obligations: The following summarizes the Companys aggregate contractual obligations at September 30, 2005, and the effect such obligations are expected to have on the Companys liquidity and cash flows in future periods (in thousands): Total Less Than 1 1-3 Years 4-5 Years After 5 Debt
obligations(a) $ 3,798,256 $ 1,901,264 $ 3,915 $ 923,077 $ 970,000 Capital lease obligations 16,652 4,125 11,829 698 Operating lease obligations 168,378 37,991 57,001 36,011 37,375 Purchase obligations(b) 61,731 53,731 8,000 Other current obligations(c) 407,489 407,489 Other long-term obligations(d) 172,602 71,444 1,656 99,502 Total contractual cash obligations $ 4,625,108 $ 2,404,600 $ 152,189 $ 961,442 $ 1,106,877 (a) The
above debt obligation amounts represent the principal portion of the associated
debt obligations. (b) Purchase obligations primarily consist of open inventory purchase orders, as well as obligations for other goods and services, at period end. (c) Other current obligations primarily consist of accounts payable at period end. (d) Other long-term obligations is largely comprised of pension and excess benefit plan obligations, acquisition-related liabilities and the obligation associated with the interest rate swap agreement. During the first quarter of 2005, Omnicare completed its offer to exchange up to $345 million aggregate liquidation amount of 4.00% Trust Preferred Income Equity Redeemable Securities (the Old Trust PIERS) of the Omnicare Capital Trust I (the Old Trust), for an equal amount of the New Trust PIERS of the New Trust. The New Trust PIERS have substantially similar terms to the Old Trust PIERS, except that the New Trust PIERS have a net share settlement feature. Additional information regarding the 4.00% junior subordinated convertible debentures underlying the Old Trust PIERS and the New Trust PIERS is summarized below. 4.00% Junior Subordinated Convertible Debentures During the first quarter of 2005, the composition of the Companys 4.00% junior subordinated convertible debentures underlying the trust PIERS was impacted by the completion of the aforementioned exchange offering, and explained in further detail throughout the remainder of this section of MD&A. 44 Original 4.00% Junior Subordinated Convertible Debentures In connection with the offering of the Old Trust PIERS in the second quarter of 2003, the Company issued a corresponding amount of original 4.00% junior subordinated convertible debentures (Old 4.00% Debentures) due 2033 to the Old Trust. The Old Trust is a 100%-owned finance subsidiary of the Company. The Company has fully and unconditionally guaranteed the securities of the Old Trust. The Old Trust PIERS offer fixed cash distributions at a rate of 4.00% per annum payable quarterly, and a fixed conversion price of $40.82 under a contingent conversion feature whereby the holders may convert their Old 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 Old Trust PIERS is less than 105% of the average of the conversion values for the Old Trust PIERS through 2028 (98% for any period thereafter through maturity). The Old Trust PIERS also will pay contingent distributions, commencing with the quarterly distribution period beginning June 15, 2009, if the average trading prices of the Old Trust PIERS for a predetermined period equals 115% or more of the stated liquidation amount of the Old Trust PIERS. Embedded in the Old 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 September 30, 2005, the values of both derivatives embedded in the Old Trust PIERS were not material. However, the values are subject to change, based on market conditions, which could affect the Companys future financial position, cash flows and results of operations. Omnicare irrevocably and
unconditionally guarantees, on a subordinated basis, certain payments to be made by the Old Trust in connection with the Old Trust PIERS. Subsequent to the first quarter 2005 exchange offer discussed in further detail at the Series B 4.00% Junior Subordinated Convertible Debentures caption below, the Company has $11,233,050 aggregate liquidation amount of the Old Trust PIERS and underlying Old 4.00% Debentures remaining outstanding at September 30, 2005. Series B 4.00% Junior Subordinated Convertible Debentures On
March 8, 2005, the Company completed the exchange of $333,766,950 aggregate
liquidation amount of the Old Trust PIERS (representing approximately 96.7%
of the total liquidation amount of the Old Trust PIERS outstanding) for an equal
amount of newly issued New Trust PIERS of the New Trust, plus an exchange fee
of $0.125 per $50 stated liquidation amount of the Old Trust PIERS. Each New
Trust PIERS represents an undivided beneficial interest in the assets of the
New Trust, which assets consist solely of a corresponding amount of Series B
4.00% junior subordinated convertible debentures (New 4.00% Debentures)
issued by Omnicare, Inc. with a stated maturity of June 15, 2033. The Company
has fully and unconditionally guaranteed the securities of the New Trust. Subsequent
to the completion of the exchange offering and at September 30, 2005, the Company
has $333,766,950 of New 4.00% Debentures outstanding. The terms of the New Trust PIERS are substantially identical to the terms of the Old Trust PIERS, except that the New Trust PIERS are convertible into cash and, if applicable, shares of Omnicare common stock, whereas the outstanding Old Trust PIERS are convertible only into Omnicare common stock (except for cash in lieu of fractional shares). The purpose of the exchange offer was to change the conversion settlement provisions of the Old Trust PIERS. The Company made this change in response to the ratification by the 45 Financial Accounting Standards Board (FASB) of EITF No. 04-8, which, effective December 15, 2004, changed the accounting rules applicable to the Old Trust PIERS and requires Omnicare to include the common stock issuable upon conversion of the Old Trust PIERS in Omnicares diluted shares outstanding, regardless of whether the market trigger has been met (see further discussion of EITF No. 04-8 at the Diluted Earnings Per Share caption below). By committing to pay up to the stated liquidation amount of the New Trust PIERS to be converted in cash upon conversion, Omnicare is able to account for the New Trust PIERS under the treasury stock method, which is expected to be less dilutive to earnings per share than the if converted method required by EITF No. 04-8. In connection with the issuance of the Old 4.00% Debentures and the New 4.00% Debentures, the Company has deferred $11.8 million in debt issuance costs, of which approximately $0.1 million and $0.3 million was amortized in each of the three and nine month periods ended September 30, 2005 and 2004, respectively. As previously disclosed, the nine months ended September 30, 2005 included a special charge to operating expenses totaling $1.2 million pretax in connection with the issuance of the New Trust PIERS. Off-Balance Sheet Arrangements: At September 30, 2005, the Company had two unconsolidated entities, the Old Trust and the New Trust, which were established for the purpose of facilitating the offerings of the Old Trust PIERS and the New Trust PIERS, respectively. For financial reporting purposes, the Old Trust and New Trust are treated as equity method investments of Omnicare. The Old Trust and New Trust are 100%-owned finance subsidiaries of the Company. The Company has fully and unconditionally guaranteed the securities of the Old Trust and New Trust. The Old 4.00% Debentures issued by the Company to the Old Trust and the New 4.00% Debentures issued by the Company to the New Trust in connection with the issuance of the Old Trust PIERS and the New Trust PIERS, respectively, are presented as a single line item on Omnicares consolidated balance sheet, and the related disclosures concerning the Old Trust PIERS and the
New Trust PIERS, the guarantees and the Old 4.00% Debentures and New 4.00% Debentures are included in Omnicares notes to consolidated financial statements. Omnicare records interest payable to the Old Trust and New Trust as interest expense in its consolidated statement of income. At September 30, 2005, 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. Allowance for Doubtful Accounts Collection of accounts receivable from customers is the Companys primary source of operating cash flow and is critical to Omnicares operating performance. Omnicares primary collection risk relates to facility and private pay customers. The Company provides for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. Omnicare establishes this allowance for doubtful accounts using the specific identification approach, and considering such factors as historical collection experience (i.e., payment history and credit losses) and creditworthiness, specifically identified credit risks, aging of accounts receivable by payor 46 category, current and expected economic conditions and other relevant factors. Management reviews this allowance on an ongoing basis for appropriateness. Judgment is used to assess the collectibility of account balances and the economic ability of customers to pay. The Company computes and monitors its accounts receivable days sales outstanding (DSO) in order to evaluate the liquidity and collection patterns of its accounts receivable. DSO is calculated by averaging the beginning and end of quarter accounts receivable, less contractual allowances and the allowance for doubtful accounts, to derive average accounts receivable; and dividing average accounts receivable by the sales amount (excluding reimbursable out-of-pockets) for the related quarter. The resultant percentage is multiplied by the days in the quarter to derive the DSO amount. Omnicares DSO of 72 days at September 30, 2005 increased from 71 days at December 31, 2004, largely attributable to an incremental slowdown in Medicaid reimbursement from the state of Illinois. The allowance for doubtful accounts as of September 30, 2005 was $160.3 million compared with
$123.3 million at December 31, 2004. The increase was primarily due to acquisition related growth, particularly NeighborCare, completed during the nine months ended September 30, 2005. These allowances represent 11.3% and 12.8% of gross receivables (net of contractual allowances) as of September 30, 2005 and December 31, 2004, respectively. Although no near-term changes are expected, unforeseen changes to future allowance percentages could materially impact overall financial results. A one percentage point increase in the allowance for doubtful accounts as a percentage of gross receivables as of September 30, 2005 would result in an increase to the allowance for doubtful accounts and bad debt expense of approximately $14.2 million. The following table is an aging of the Companys September 30, 2005 and December 31, 2004 gross accounts receivable (net of allowances for contractual adjustments, and prior to allowances for doubtful accounts), aged based on payment terms and categorized based on the four primary overall types of accounts receivable characteristics (in thousands): September
30, 2005 Current and 181 Days and Total Medicaid, Medicare Part B and Third Party payors $ 437,299 $ 40,056 $ 477,355 Facility payors 530,200 160,745 690,945 Private Pay payors 158,834 69,029 227,863 CRO 20,157 216 20,373 Total gross accounts receivable (net of contractual allowance adjustments) $ 1,146,490 $ 270,046 $ 1,416,536 47 December
31, 2004 Current and 181 Days Total Medicaid, Medicare Part B and Third Party payors $ 303,638 $ 29,871 $ 333,509 Facility payors 355,593 97,449 453,042 Private Pay payors 120,579 40,783 161,362 CRO 13,085 995 14,080 Total gross accounts receivable (net of contractual allowance adjustments) $ 792,895 $ 169,098 $ 961,993 DILUTED EARNINGS PER SHARE In
October 2004, the FASB ratified EITF Issue No. 04-8, which requires the shares
underlying contingently convertible debt instruments to be included in diluted
earnings per share computations using the if-converted accounting
method, regardless of whether the market price trigger has been met. Under that
method, the 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 convertible debentures is
added back to net income. Diluted earnings per common share amounts have been
retroactively restated for 2004 to give effect to the application of EITF No.
04-8 as it relates to the Old 4.00% Debentures issued in the second quarter
of 2003. The effect of Omnicares fourth quarter 2004 adoption of EITF
No. 04-8 was to decrease diluted earnings per share $0.02 and $0.07 for the
three and nine months ended September 30, 2004. For purposes of the if-converted
calculation, 8,451,000 shares were assumed to be converted for both the three
and nine months ended September 30, 2004. Additionally, interest expense, net
of taxes, of $2.3 million and $6.8 million for the three and nine months ended
September 30, 2004, was added back to net income for purposes of calculating
diluted earnings per share using this method. The effect of EITF No. 04-8 on
the Companys 2005 earnings results was to decrease diluted earnings per
share by $0.02 for the nine months ended September 30, 2005. The impact had
no effect on diluted earnings per share for the three months ended September
30, 2005. See further discussion of the trust PIERS exchange offering in the
Debt note at Part I, Item 1 of this Filing. RECENTLY ISSUED ACCOUNTING STANDARDS In
December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Shared-Based Payment (SFAS 123R).
This Statement requires the Company to record compensation costs relating to
equity-based payments, in its financial statements, over the requisite service
period (usually the vesting period). This Statement is effective for the Company
in the period beginning January 1, 2006. The Company currently intends to elect
the modified prospective application method of implementing SFAS
123R. This method requires that SFAS 123R be applied to all new awards whose
service inception date follows the effective date of January 1, 2006, and all
existing awards modified, repurchased, or cancelled after January 1, 2006. In
addition, this method requires compensation cost for the portion of awards for
which the requisite service has not been rendered (i.e., nonvested portion)
and are outstanding as of 48 January
1, 2006 to be recognized as the requisite service is rendered on or after January
1, 2006. Omnicare is currently evaluating the impact of the adoption of SFAS
123R to the Company, but has not yet quantified the effect of this new standard
on its financial results for 2006 and future years. 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 managements 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 Companys financial performance, results of operations, sales, earnings or business outlook; expectations regarding acquisitions; the impact of the
NeighborCare acquisition on Omnicare's earnings and the ability to implement Omnicare's consolidation efforts and other productivity initiatives and to
realize anticipated benefits; trends in the long-term healthcare and contract research industries generally; expectations concerning the Companys ability to leverage its core business; anticipated growth in alternative institutional markets such as correctional facilities, hospice care, mental health and personal care or supportive living facilities; expectations concerning continued relative stability in the operating environment in the long-term care industry; 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 Companys value creation strategy through expanding its core pharmaceutical business and leveraging that business through the development and expansion of clinical information services; the Companys ability to continue to leverage fixed and variable overhead costs through internal and acquired growth; other factors affecting the Companys strategy for future growth; the effectiveness of the Companys unit-of-use controls and computerized documentation system; the effectiveness of the Companys health and outcomes management programs; the ability to leverage the Companys 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 2005; expectations in the CRO business resulting from streamlining and globalization efforts, the Companys unique capabilities in the geriatric market and strength of presence in the drug development marketplace; trends in healthcare funding issues, including, but not limited to, state Medicaid budgets, enrollee eligibility, escalating drug prices due to higher utilization among seniors and the aging of the population; expectations concerning increasing Medicare admissions and improving occupancy rates; the introduction of more expensive medications, and increasing use of generic medications; the impact of any changes in healthcare policy relating to the future 49 funding of the Medicaid and Medicare programs; the cost-effectiveness of pharmaceuticals in treating chronic illnesses for the elderly; the effectiveness of the Companys formulary compliance program; the effectiveness of the Companys pharmaceutical purchasing programs and its ability to obtain discounts and manage pharmaceutical costs; the adequacy and availability of the Companys sources of liquidity and capital; payments of future quarterly dividends; the adequacy of the Companys net cash flows from operating activities, credit facilities and other long- and short-term debt financings to satisfy the Companys 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 Companys outstanding debt; valuations of derivative instruments embedded in the Old Trust PIERS and New Trust PIERS instruments; the adequacy of the Companys 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 Companys SNF clients which could adversely affect the timing or level of SNF payments to the Company; the impact of the MMA, including the Medicare Part D prescription drug benefit, effective January 1, 2006, as implemented pursuant to CMS regulations and subregulatory guidance; 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 Companys 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 and its database on drug utilization and outcomes in the elderly to meet the anticipated challenges of
the healthcare environment; the effectiveness of the Companys growth strategy in allowing the Company to maximize cash flow, maintain a strong financial position, enhance the efficiency of its operations and continue to develop the Companys franchise in the geriatric pharmaceutical market; the ability of expansion in the Companys core business to provide the Company greater ability to leverage its clinical services and information business, thereby enhancing cost advantages in the institutional pharmacy market; the belief that new drug discovery will remain an important priority for pharmaceutical manufacturers; and expectations concerning opportunities for future growth and 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 actual results, performance or achievements to differ materially from those stated. Such risks, uncertainties, contingencies and other factors, many of which are beyond the control of 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 50 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; the ability to consummate pending acquisitions; trends for the continued growth of the Companys businesses; expectations concerning the development and performance of the Companys informatics business; the effectiveness of the Companys 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 or for other reasons; the overall financial condition of the Companys customers; the ability of the Company to assess and react to the financial condition of its
customers; the effectiveness of the Companys 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 Companys 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 Companys 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 and globalization efforts at the CRO; trends concerning CRO backlog; the effectiveness of the Companys 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, including the Medicare Part D prescription drug benefit effective January 1, 2006, as implemented pursuant to CMS regulations
and subregulatory guidance; 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 Companys 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 the Companys 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 assets, including but not limited to, goodwill; market conditions which adversely affect the valuation of the Old Trust PIERS and the
New Trust PIERS; the outcome of audit, compliance, administrative or investigatory reviews; volatility in the market for the Companys 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; changes in accounting rules and standards; and other risks and uncertainties described in the Companys reports and filings with the Securities and Exchange Commission. 51 Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, the Companys 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 hereof. 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
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK Omnicares
primary market risk exposure relates to variable interest rate risk through
its borrowings. Accordingly, market risk loss is primarily defined as the potential
loss in earnings due to higher interest rates on variable-rate debt of the Company.
The modeling technique used by Omnicare for evaluating interest rate risk exposure
involves performing sensitivity analysis on the variable-rate debt, assuming
a change in interest rates of 100 basis-points. The Companys debt obligations
at September 30, 2005 include $700 million outstanding under the variable-rate
term A loan, $1,943.1 million borrowed on variable-rate short-term debt facilities,
and $180.0 million on a variable-rate revolving credit facility at a cumulative
weighted-average interest rate of 4.52% at September 30, 2005 (a 100 basis-point
change in the interest rates for variable-rate debt in the aggregate would increase
or decrease pretax interest expense by approximately $28.2 million per year);
$375.0 million outstanding under its fixed-rate 8.125% senior subordinated notes,
due 2011 (8.125% Senior Notes); $250.0 million outstanding under
its fixed-rate 6.125% senior subordinated notes, due 2013 (6.125% Senior
Notes); and $345.0 million outstanding under its fixed-rate 4.00% junior
subordinated convertible debentures underlying the Old Trust PIERS and the New
Trust PIERS, due 2033. In connection with its offering of $250.0 million of
6.125% Senior Notes, 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% 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 for the Swap
Agreement was 6.58% at September 30, 2005 (a 100 basis-point change in the interest
rate would increase or decrease 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 the 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 of approximately $18.4 million at September 30, 2005 is
recorded as a noncurrent liability and a reduction to the carrying value of
the related 6.125% Senior Notes. At September 30, 2005, the fair value of Omnicares
variable-rate long-term debt facilities approximates the carrying value, and
the fair value of the 8.125% Senior Notes, 6.125% Senior Notes, Old 4.00% Debentures
and New 4.00% Debentures is approximately $391.9 million, $245.0 million, $16.6
million and $485.4 million, respectively. Embedded in the Old Trust PIERS and the New 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 52 September 30, 2005, the values of both derivatives embedded in the Old Trust PIERS and New Trust PIERS were not material. However, the values are subject to change, based on market conditions, which could affect the Companys future financial position, cash flows and results of operations. The Company has operations and revenue that occur outside of the United States and transactions that are settled in currencies other than the U.S. dollar, exposing it to market risk related to changes in foreign currency exchange rates. However, the substantial portion of the Companys operations and revenues and the substantial portion of the Companys 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 overall Company. In connection with the acquisition of Canadian (CDN)-based Medico pharmacy, Omnicare entered into a CDN $50 million foreign exchange transaction arrangement on December 29, 2004. This arrangement expired on January 7, 2005, and had an immaterial impact on the consolidated financial position, income statement and cash flows of the Company. The Company does not have any financial instruments held for trading purposes. (a)
On November 22, 2005, the management of Omnicare, Inc. concluded that the Company’s
interim financial statements for the period ended September 30, 2005 should
be revised to correct the unaudited pro forma combined financial information
in Note 4, “Acquisitions,” that was included in the Company’s
Form 10-Q for such period. As the revision only related to the disclosure of
pro forma footnote information, no financial statement line items in the consolidated
statements of income, balance sheets, and statements of cash flows were impacted.
As the revision relates to supplemental information included in a footnote to
the unaudited financial statements, management does not believe this matter
is indicative of a material weakness in the Company’s internal control
over financial reporting. Controls over the preparation and review of this footnote
were enhanced prior to the date of the filing of this Form 10-Q/A.
Based on a recent evaluation, as of the end of the period covered by this Quarterly
Report on Form 10-Q/A, the Company’s Chief Executive Officer and Chief
Financial Officer have concluded that, solely as a result of the revisions described
in the previous paragraph, the Company’s disclosure controls and procedures
(as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) were not 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, and as of the date hereof,
the Company’s Chief Executive Officer and Chief Financial Officer have
concluded that the Company’s disclosure controls and procedures 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. Omnicare is an acquisitive
company that continuously acquires and integrates new businesses. Throughout
and following an acquisition, Omnicare focuses on analyzing the acquiree’s
procedures and controls to determine their effectiveness and, where appropriate,
implements changes to conform them to the Company’s disclosure controls
and procedures. (b) On July 28, 2005, Omnicare completed its acquisition of NeighborCare,
Inc., upon which NeighborCare became a subsidiary of Omnicare, Inc. The Company
considers the acquisition of NeighborCare material to the results of its operations,
financial position and cash flows from the date of acquisition through September
30, 2005 and considers the internal controls and procedures of NeighborCare
to be reasonably likely to materially affect the Company’s internal control
over financial reporting. Other than as set forth in the preceding sentence,
there were no changes in the Company’s internal control over financial
reporting that occurred during the Company’s fiscal quarter ended September
30, 2005 that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting. However,
Omnicare is continuing to analyze, and expects to make changes in, the controls
and procedures in place with respect to all its recent acquisitions. In this
process of evaluation and testing, the Company may identify deficiencies that
would require remediation.
Amendment No. 1 Delaware
(State or Other Jurisdiction of
Incorporation or Organization) 31-1001351
(I.R.S. Employer Identification No.)
Shares
Other than the revisions described above, the information contained in this
Form 10-Q/A continues to speak as of the date of the Original Filing, and
the Company has not updated the disclosures contained therein to reflect any
events that occurred after the November 8, 2005 filing date. Accordingly,
this Amendment should be read in connection with our subsequent filings with
the SEC.
In connection with the filing of this Amendment, and pursuant to the rules of
the SEC, there is included with this Amendment a currently dated signature page
and currently dated certifications, included as Exhibits 31.1, 31.2, 32.1 and
32.2.
September 30,
September 30,
2005
2004
September 30,
September 30,
September 30,
September 30,
September 30,
(Numerator)
Shares (Denominator)
Share
Amounts
(Numerator)
(Denominator)
Amounts
Ended
September 30,
2005
Ended
September 30,
2004
Ended
September 30,
2005
Ended
September 30,
2004
Ended
September 30,
2004
Ended
September 30,
2005
Ended
September 30,
2004
Services
Services
September 30,
September 30,
Provision
during
2005
September 30,
2005
Services
Services
and
Consolidating
Totals
Services
Services
and
Consolidating
Totals
Subsidiaries
Guarantor
Subsidiaries
Eliminating
Adjustments
and Subsidiaries
Subsidiaries
Subsidiaries
Eliminating
Adjustments
and Subsidiaries
Subsidiaries
Subsidiaries
Eliminating
Adjustments
Subsidiaries
and Subsidiaries
and Subsidiaries
September 30,
September 30,
September 30,
September 30,
September 30,
September 30,
September 30,
September 30,
Provision
during
2005
September 30,
2005
Year
Years
0-180 Days
Past Due
Over
Past Due
0-180 Days
Past Due
and Over
Past Due
53
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
A summary of the Companys repurchases of Omnicare, Inc. common stock during the quarter ended September 30, 2005 is as follows (in thousands, except per share data):
Period |
|
Total |
|
Average Price |
|
Total Number of |
|
Maximum Number (or |
| |
July 1-31, 2005 |
|
|
|
$ |
|
|
|
|
|
|
August 1-31, 2005 |
|
4 |
|
|
47.90 |
|
|
|
|
|
September 1-30, 2005 |
|
|
|
|
|
|
|
|
|
|
Total |
|
4 |
|
$ |
47.90 |
|
|
|
|
|
(a) During the third quarter of 2005, the Company purchased 4 shares of Omnicare common stock in connection with its employee benefit plans, including purchases associated with the vesting of restricted stock awards. These purchases were not made pursuant to a publicly announced repurchase plan or program.
See Index of Exhibits.
54
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
Registrant |
|
|
|
|
|
|
By: |
|
|
|
|
David W. Froesel, Jr. |
55
INDEX OF EXHIBITS
Number and Description of Exhibit |
|
Document
Incorporated by Reference | |
|
|
|
|
(2.1) |
Agreement and Plan of Merger by and among Omnicare, Inc., Nectarine Acquisition Corp. and NeighborCare, Inc. dated as of July 6, 2005 |
|
Form 8-K |
(2.2) |
Asset Purchase Agreement by and among Omnicare, Inc., RxCrossroads, L.L.C., RxInnovations, L.L.C., Making Distribution Intelligent, L.L.C. and Louisville Public Warehouse Company dated as of July 1, 2005 |
|
Form 8-K |
(2.3) |
Agreement and Plan of Merger, dated as of July 9, 2005, by and between Omnicare, Inc., Hospice Acquisition Corp., excelleRx, Inc. and certain of the stockholders and option holders of excelleRx, Inc. |
|
Form 8-K |
(3.1) |
Restated Certificate of Incorporation of Omnicare, Inc. (as amended) |
|
Form 10-K |
(3.3) |
Second Amended and Restated By-Laws of Omnicare, Inc. |
|
Form 10-Q |
(4.7) |
Third Supplemental Indenture dated as of March 8, 2005, between Omnicare, Inc. & SunTrust Bank, as Trustee |
|
Form 8-K |
(4.10) |
Amended and Restated Trust Agreement of Omnicare Capital Trust II, dated as of March 8, 2005 |
|
Form 8-K |
(4.11) |
Guarantee Agreement of Omnicare, Inc. relating to the Series B 4.00% Trust Preferred Income Equity Redeemable Securities of Omnicare Capital Trust II, dated as of March 8, 2005 |
|
Form 8-K |
E-1
INDEX OF EXHIBITS
Number and Description of Exhibit |
|
Document Incorporated by Reference | |
|
|
|
|
(10.22) |
Amendment to Employment Agreement with J.F. Gemunder dated as of March 24, 2005* |
|
Form 8-K |
(10.23) |
Amendment to Employment Agreement with P.E. Keefe dated as of March 24, 2005* |
|
Form 8-K |
(10.24) |
Amendment to Employment Agreement with C.D. Hodges dated as of March 24, 2005* |
|
Form 8-K |
(10.28) |
Form
of Restricted Stock Award Letter (Executive |
|
Form 8-K |
(10.29) |
Form of Restricted Stock Award Letter (Employees Other than Executive Officers)* |
|
Form 8-K |
(10.30) |
Credit Agreement, dated as of July 28, 2005, among Omnicare, Inc., as borrower, the lenders named therein, JPMorgan Chase Bank, N.A., as a joint syndication agent, Lehman Brothers Inc., as a joint syndication agent, CIBC World Markets Corp., as a co-documentation agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as a co-documentation agent, Wachovia Capital Markets, LLC, as a co-documentation agent, and SunTrust Bank, as administrative agent. |
|
Form 8-K |
(10.31) |
Employment Agreement with Glen C. Laschober dated as of August 5, 2005* |
|
Form 8-K |
(12) |
Statement of Computation of Ratio of Earnings to Fixed Charges |
|
Filed Herewith |
E-2
INDEX OF EXHIBITS
Number and Description of Exhibit |
|
Document
Incorporated by Reference | |
|
|
|
|
(31.1) |
Rule 13a-14(a) Certification of Chief Executive Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 |
|
Filed Herewith |
(31.2) |
Rule 13a-14(a) Certification of Chief Financial Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 |
|
Filed Herewith |
(32.1) |
Section 1350 Certification of Chief Executive Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002** |
|
Furnished Herewith |
(32.2) |
Section 1350 Certification of Chief Financial Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002** |
|
Furnished Herewith |
* Indicates management contract or compensatory arrangement.
** 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-3
EXHIBIT 12
Statement of Computation of Ratio of Earnings to Fixed Charges
Omnicare, Inc. and Subsidiary Companies
Unaudited
(In thousands, except ratio) |
|
|
|
|
| ||||||||
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
| ||||
Income before Income Taxes |
|
$ |
93,508 |
|
$ |
89,430 |
|
$ |
284,808 |
|
$ |
285,313 |
|
Add Fixed Charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
45,722 |
|
|
16,464 |
|
|
83,763 |
|
|
48,082 |
|
Amortization of Debt Expense |
|
|
1,135 |
|
|
1,118 |
|
|
3,452 |
|
|
3,455 |
|
Interest Portion of Rent Expense |
|
|
5,091 |
|
|
3,769 |
|
|
13,594 |
|
|
10,899 |
|
Adjusted Income |
|
$ |
145,456 |
|
$ |
110,781 |
|
$ |
385,617 |
|
$ |
347,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
45,722 |
|
$ |
16,464 |
|
$ |
83,763 |
|
$ |
48,082 |
|
Amortization of Debt Expense |
|
|
1,135 |
|
|
1,118 |
|
|
3,452 |
|
|
3,455 |
|
Interest Portion of Rent Expense |
|
|
5,091 |
|
|
3,769 |
|
|
13,594 |
|
|
10,899 |
|
Fixed Charges |
|
$ |
51,948 |
|
$ |
21,351 |
|
$ |
100,809 |
|
$ |
62,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges(1) |
|
|
2.8 |
x |
|
5.2 |
x |
|
3.8 |
x |
|
5.6 |
x |
(1) |
The ratio of earnings to fixed charges has been computed by adding income before income taxes and fixed charges to derive adjusted income, and dividing adjusted income by fixed charges. Fixed charges consist of interest expense on debt (including the amortization of debt expense) and one-third (the proportion deemed representative of the interest portion) of rent expense. |
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-Q/A 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 Companys 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the Companys 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 |
|
d) |
disclosed in this report any change in the Companys internal control over financial reporting that occurred during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting; and |
5. |
The Companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys 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 Companys 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 Companys internal control over financial reporting. |
Date: November 23, 2005 |
|
|
|
|
|
|
|
|
|
|
Joel F. Gemunder |
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-Q/A 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 Companys 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the Companys 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 |
|
d) |
disclosed in this report any change in the Companys internal control over financial reporting that occurred during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting; and |
5. |
The Companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys 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 Companys 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 Companys internal control over financial reporting. |
Date: November 23, 2005 |
|
|
|
|
|
|
|
|
|
|
David W. Froesel, Jr. |
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 Quarterly Report on Form 10-Q/A of the Company for the period ended September 30, 2005 (the Periodic Report) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
2. | The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 23, 2005
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Joel F. Gemunder |
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 Quarterly Report on Form 10-Q/A of the Company for the period ended September 30, 2005 (the Periodic Report) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
2. | The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 23, 2005
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David W. Froesel, Jr. |