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UNITED STATES (Mark One)
Commission File Number 1-8269 OMNICARE,
INC. (Exact
name of registrant as specified in its charter) Delaware 31-1001351 (State
or other jurisdiction of (I.R.S. Employer Identification No.) 100
East RiverCenter Boulevard, Covington, Kentucky 41011 (Address of principal executive
offices) (Zip
Code) (859)
392-3300 (Registrants
telephone number, including area code) (Former
name, former address and former fiscal year, if changed since last report) Indicate by check mark
whether the registrant: 1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and 2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act (Check one): Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x APPLICABLE ONLY TO ISSUER INVOLVED IN BANKRUPTCY Indicate by check mark
whether the registrant has filed all documents and reports required to be filed
by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court. Yes o No o SEC
1296 (12-05) Potential persons who are to
respond to the collection of information contained in this form are not
required to respond unless the form displays a currently valid OMB control
number. COMMON
STOCK OUTSTANDING Number of Date Common Stock, $1 par value 121,143,420 March
31, 2006 OMNICARE, INC. AND SUBSIDIARY COMPANIES INDEX PART I FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF
INCOME (in thousands, except per
share data) Three months
ended, 2006 2005 Net
sales $ 1,658,598 $ 1,096,146 Cost
of sales 1,242,083 826,824 Gross
profit 416,515 269,322 Selling,
general and administrative expenses 247,342 157,759 Restructuring
and other related charges (Note 10) 7,713 Litigation
charge (Note 2 and Note 11) 34,100 Operating
income 127,360 111,563 Investment
income 1,799 1,153 Interest
expense (42,412 ) (19,919 ) Income
before income taxes 86,747 92,797 Income
tax provision 33,516 34,802 Net
income $ 53,231 $ 57,995 Earnings
per share: Basic $ 0.45 $ 0.57 Diluted
(Note 4) $ 0.43 $ 0.54 Dividends
per common share $ 0.0225 $ 0.0225 Weighted
average number of common shares outstanding: Basic 117,911 101,759 Diluted
(Note 4) 123,595 109,940 Comprehensive
income $ 50,879 $ 57,180 The Notes to Consolidated
Financial Statements are an integral part of these statements. 3 CONSOLIDATED BALANCE SHEETS (in thousands, except share
data) March 31, December 31, ASSETS Current assets: Cash and cash equivalents $ 315,500 $ 215,421 Restricted cash 12,151 2,674 Deposits with drug wholesalers 44,740 83,036 Accounts receivable, less allowances of $170,005
(2005-$169,390) 1,394,972 1,260,634 Unbilled receivables 20,828 17,195 Inventories 476,427 473,942 Deferred income tax benefits 116,557 107,967 Other current assets 176,322 200,026 Total current assets 2,557,497 2,360,895 Properties and equipment, at cost less accumulated depreciation of
$265,215 222,770 231,734 Goodwill 4,071,714 4,029,482 Identifiable intangible assets, less accumulated amortization of
$54,007 332,070 339,474 Other noncurrent assets 194,992 195,820 Total noncurrent assets 4,821,546 4,796,510 Total assets $ 7,379,043 $ 7,157,405 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable $ 391,835 $ 397,471 Accrued employee compensation 66,646 56,063 Deferred revenue 26,554 24,857 Current debt (Note 7) 357,854 355,943 Other current liabilities and income taxes payable 235,746 166,170 Total current liabilities 1,078,635 1,000,504 Long-term debt 750,968 752,901 8.125% senior subordinated notes, due 2011 8,225 8,775 6.125% senior subordinated notes, net, due 2013 224,401 230,216 6.75% senior subordinated notes, due 2013 225,000 225,000 6.875% senior subordinated notes, due 2015 525,000 525,000 4.00% junior subordinated convertible debentures, due 2033 (Note
7) 3.25% convertible senior debentures, due 2035 977,500 977,500 Deferred income tax liabilities 265,074 249,034 Other noncurrent liabilities 270,181 246,429 Total noncurrent liabilities 3,246,349 3,214,855 Total liabilities 4,324,984 4,215,359 Commitments and contingencies (Note 11) 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,
124,046,500
shares issued (2005-122,619,100 shares issued) 124,047 122,619 Paid-in capital 1,857,960 1,861,483 Retained earnings 1,178,421 1,127,915 Treasury stock, at cost-2,903,100 shares (2005-2,737,100
shares) (89,368 ) (78,418 ) Deferred compensation
(Note 3) (76,904 ) Accumulated other comprehensive income (17,001 ) (14,649 ) Total stockholders equity 3,054,059 2,942,046 Total liabilities and stockholders equity $ 7,379,043 $ 7,157,405 The Notes to Consolidated
Financial Statements are an integral part of these statements. 4 CONSOLIDATED STATEMENTS OF
CASH FLOWS (in thousands) Three months ended, 2006 2005 Cash flows from operating activities: Net income $ 53,231 $ 57,995 Adjustments to reconcile net income to net cash flows from operating
activities: Depreciation 14,382 8,194 Amortization 16,516 6,075 Provision for doubtful accounts 17,094 12,409 Deferred tax provision 8,463 14,068 Changes in assets and liabilities, net of effects from acquisition of
businesses: Accounts receivable and unbilled receivables (158,186 ) (54,829 ) Inventories (766 ) 8,428 Deposits with drug wholesalers 38,296 Current and noncurrent assets 24,035 (15,630 ) Accounts payable (13,790 ) 3,019 Accrued employee compensation 22,007 7,605 Deferred revenue 1,697 (1,025 ) Income taxes payable 303 4,830 Current and noncurrent liabilities 59,495 13,915 Net cash flows from operating activities 82,777 65,054 Cash flows from investing activities: Acquisition of businesses, net of cash received (23,201 ) (28,180 ) Capital expenditures (6,109 ) (3,133 ) Transfer of cash to trusts for employee health and severance costs,
net of payments out of the trust (9,871 ) (5,522 ) Other 82 34 Net cash flows from investing activities (39,099 ) (36,801 ) Cash flows from financing activities: Borrowings on line of credit facilities and term A loan 133,000 157,000 Payments on line of credit facilities and term A loan (133,000 ) (163,154 ) Proceeds from long-term borrowings and obligations 63 41,345 Payments on long-term borrowings and obligations (584 ) (35 ) Fees paid for financing arrangements (2,052 ) (1,454 ) Change in cash overdraft balance 8,423 (1,645 ) Proceeds from stock offering, net of issuance costs 49,239 Proceeds from stock awards and exercise of stock options and
warrants,
net of stock tendered in payment (6,030 ) 605 Excess tax benefits from stock-based compensation 10,021 Dividends paid (2,725 ) (2,358 ) Net cash flows from financing activities 56,355 30,304 Effect of exchange rate changes on cash 46 297 Net increase in cash and cash equivalents 100,079 58,854 Cash and cash equivalents at beginning of year 215,421 84,169 Cash and cash equivalents at end of year $ 315,500 $ 143,023 The Notes to Consolidated
Financial Statements are an integral part of these statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 the Debt, Restructuring
and Other Related Charges and Subsequent Event notes) 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, 2005 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, 2005 and any related updates contained
in the Companys periodic quarterly SEC filings, including those presented below. Stock-Based Compensation Effective
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which replaced Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123) and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25). Prior to the adoption
of SFAS 123R, the Company accounted for stock incentive plans under the recognition
and measurement principles of APB 25, and related Interpretations (intrinsic
value method). As a result, no stock-based employee compensation cost for stock
options was 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. SFAS
123R requires the Company to record compensation costs relating to share-based
payment transactions in its financial statements. Under the fair value
recognition provisions of SFAS 123R, share-based compensation cost is measured
at the grant date based on the fair value of the award and is recognized as
expense ratably over the requisite service period of the award (usually the
vesting period). The Company elected the modified prospective method of
implementing SFAS 123R, which requires that SFAS 123R be applied to all new
awards whose 6 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 service
has not been rendered (i.e., nonvested portion) and were outstanding as of
January 1, 2006. Estimated compensation for awards that were outstanding as of
January 1, 2006 will be recognized over the remaining service period using the
compensation cost estimate included in the SFAS 123 pro forma disclosures at
the time the awards were issued. In accordance with the modified prospective
method, the Companys Consolidated Financial Statements for prior periods have
not been restated to reflect the adoption of SFAS 123R. Operating
income for the three months ended March 31, 2006, includes additional share-based
compensation expense for stock options and stock awards of approximately $2.9
million before taxes related to the adoption of SFAS 123R. See the Stock-Based
Employee Compensation note for further information regarding our stock-based
compensation assumptions and expenses, including pro forma disclosures for the
comparable prior year period as if we had recorded stock-based compensation
expense. Concentration of Credit Risk The
new prescription drug benefit under Medicare Part D (Part D) became
effective on January 1, 2006. As a result, Omnicare experienced a significant
shift in payor mix during the quarter ended March 31, 2006, as Part D currently
represents over 40% of Omnicares overall revenues. Prior to the implementation
of the new Medicare Part D program, most of these residents were reimbursed
under state Medicaid programs and, to a lesser extent, private pay sources.
Under
the new Part D benefit, payment is determined in accordance with the agreements
Omnicare has negotiated with the Part D Plans. The remainder of Omnicares
billings are paid or reimbursed by individual residents, long-term care facilities
(including revenues for residents funded under Medicare Part A) and other third
party payors, including private insurers. The Medicaid and Medicare programs
are highly regulated. The failure, even if inadvertent, of Omnicare and/or client
facilities to comply with applicable reimbursement regulations could adversely
affect Omnicares reimbursement under these programs and Omnicares
ability to continue to participate in these programs. In addition, failure to
comply with these regulations could subject the Company to other penalties.
Pursuant
to the final Part D rule, effective January 1, 2006, the Company obtains
reimbursement for drugs it provides to enrollees of a given Part D Plan in
accordance with the terms of agreements negotiated between it and that Part D
Plan. The Company has entered into such agreements with nearly all Part D Plan
sponsors under which it will provide drugs and associated services to their
enrollees. The Company continues to negotiate agreements with Part D Plans.
Moreover, as expected in the transition to a new program of this magnitude,
certain administrative and payment issues have arisen. Until all such
agreements are finalized and Medicare beneficiaries complete enrollment in the
Plans, and until these administrative and payment issues have been resolved,
the Company will not be able to determine the impact of the 7 new Part D Drug Benefit on the Companys results of operations,
financial condition and cash flows. Recently Issued Accounting Standards In
February 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 155 (SFAS 155),
Accounting for Certain Hybrid Financial Instruments which nullifies
and amends various accounting guidance related to accounting for derivative
instruments and securitization transactions. The intent of this guidance is
primarily to reduce operational complexity associated with bifurcating embedded
derivatives, among other items. SFAS 155 is effective for new instruments issued
by the Company beginning January 1, 2007. The Company currently does not expect
that the adoption of SFAS 155 will have a material impact on its consolidated
financial position, results of operations or cash flows. 2. Subsequent Event On
May 10, 2006, the Company announced that it has recorded a special litigation
charge of $34.1 million pretax ($24 million aftertax) in its financial results
for the quarter ended March 31, 2006 to establish a settlement reserve relating
to previously disclosed inquiries by the federal government and certain states
relating to three generic pharmaceuticals provided by the Company, based on
recent discussions between these government representatives and the Companys
legal counsel during May 2006. As previously disclosed, the inquiries relate
to the substitution of capsules for tablets (Ranitidine), tablets for capsules
(Fluoxetine) and two 7.5 mg tablets for one 15 mg tablet (Buspirone). This special
litigation charge represents the Companys current best estimate of potential
settlement amounts and associated costs under SFAS No. 5, Accounting for
Contingencies. The Company cannot predict the ultimate outcome of this
matter. See further discussion at the Commitments and Contingencies
note of the Notes to Consolidated Financial Statements. 3. Stock-Based Employee Compensation
SFAS 123R Adoption At
March 31, 2006, the Company had four stock-based employee compensation plans
under which incentive awards were outstanding, which are described more fully
below. Omnicare believes that the incentive awards issued under these plans
serve to better align the interests of its employees with those of its stockholders.
Prior to January 1, 2006, the Company accounted for those plans under the recognition
and measurement provisions of APB 25, and related Interpretations (intrinsic
value method). As a result, no stock-based employee compensation cost for stock
options was 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. Effective January 1, 2006, the Company adopted
the fair value recognition provisions of SFAS 123R as further described in the
Interim Financial Data, Description of Business and Summary of Significant
Accounting Policies note of the Notes to Consolidated Financial Statements.
Stock-Based Employee Compensation Plans During
2004, stockholders of the Company approved the 2004 Stock and Incentive Plan,
under which the Company is authorized to grant equity-based and other incentive
compensation to employees, officers, directors, consultants and advisors of the
Company in an amount aggregating up to 10 million shares of Company common
stock. Beginning May 18, 2004, stock-based incentive awards are made only from
the 2004 Stock and Incentive Plan. During
1998, the Companys Board of Directors approved the 1998 Long-Term Employee
Incentive Plan (the 1998 Plan), under which the Company was authorized to grant
stock-based incentives to a broad base of employees (excluding executive
officers and directors of the Company) in an amount initially aggregating up to
1 million shares of Company common stock for non-qualified options, stock
awards and stock appreciation rights. In March 2000 and November 2002, the
Companys Board of Directors amended the 1998 Plan to increase the shares
available for granting to 3.5 million and 6.3 million, respectively. During
1995, the Companys Board of Directors and stockholders approved the 1995
Premium-Priced Stock Option Plan, providing options to purchase 2.5 million
shares of 8 Company common
stock available for grant at an exercise price of 125% of the stocks fair
market value at the date of grant. Under
the 1992 Long-Term Stock Incentive Plan, the Company granted stock awards and
stock options at not less than fair market value of the Companys common stock
on the date of grant. The
Company also had a Director Stock Plan, which allowed for stock options and
stock awards to be granted to certain non-employee directors. As of May 18,
2004, this plan was terminated. Consequentially, awards are no longer made from
this plan. Under
these plans, stock options vest and become exercisable at varying points in
time, ranging up to four years in length, and have terms that generally span
ten years from the grant date. Stock option awards are generally granted with
an exercise price equal to the fair market value of Company stock on the date
of grant. Omnicares policy is to issue new shares upon stock option exercise.
Certain option and share awards provide for accelerated vesting if there is
a change in control, as defined in the plans. Employee Stock Purchase Plan In
November 1999, the Companys Board of Directors adopted the Omnicare StockPlus
Program, a non-compensatory employee stock purchase plan (the ESPP). Under
the ESPP, employees and non-employee directors of the Company who elect to
participate may contribute up to 6% of eligible compensation (or an amount not
to exceed $20,000 for non-employee directors) to purchase shares of the
Companys common stock. For each share of stock purchased, the participant also
receives two options to purchase additional shares of the Companys stock. The
stock options are subject to a four-year vesting period and are generally
subject to forfeiture in the event the related shares purchased are not held by
the participant for a minimum of two years. The stock options have a ten-year
life from the date of issuance. Amounts contributed to the ESPP are used by the
plan administrator to purchase the Companys stock on the open market. Prior to
May 18, 2004, stock options awarded under the ESPP were issued out of the
1992-Long-Term Stock Incentive Plan and the 1998 Long-Term Employee Incentive
Plan. Beginning May 18, 2004, stock options under the ESPP are only issued out
of the 2004 Stock and Incentive Plan. Stock Awards Non-vested
stock awards are granted to key employees at the discretion of the Compensation
and Incentive Committee of the Board of Directors. These awards are restricted
as to the transfer of ownership and generally vest over a seven-year period
(with a greater proportion vesting in the latter years), or five to ten-year
periods (vesting on a straight-line basis). Unrestricted stock awards are granted annually
to all members of the Board of Directors, and non-employee directors also receive
non-vested stock awards that generally vest on the third anniversary of the
date of grant. The fair value of a stock award is equal to the fair market value
of a share of Company stock on the grant date. 9 Stock-Based Compensation As
discussed in the “Interim Financial Data, Description of Business and
Summary of Significant Accounting Policies” note of the Notes to Consolidated
Financial Statements, effective January 1, 2006, the Company adopted the provisions
of SFAS 123R, which requires the Company to record compensation costs relating
to share-based payment transactions, including stock options, in its financial
statements, based on estimated fair values. The Company currently uses the Black-Scholes
options pricing model to determine the fair value of stock options on the grant
date, which is affected by Omnicares stock price as well as assumptions
regarding a number of complex and subjective variables, as further discussed
below. These variables include Omnicares expected stock price volatility
over the expected term of the awards, actual and projected employee exercise
behaviors, the risk-free interest rate and the stocks dividend yield.
The
expected term of stock options granted represents the period of time that stock
options granted are expected to be outstanding and is estimated based on historical
stock option exercise experience. The expected volatility is based on the historical
volatility of the Companys stock over a period generally commensurate
with the expected term of the stock options. The risk-free interest rate used
in the option valuation model is based on United States Treasury Strip (stripped
coupon interest) issues with remaining terms similar to the expected term
of the stock options. The expected dividend yield is based on the current Omnicare
stock yield. The Company is required to estimate forfeitures at the time of
the grant and revise those estimates in subsequent periods if actual forfeitures
differ from those estimates. Omnicare uses historical data to estimate pre-vesting
stock option forfeitures and records stock-based compensation expense only for
those awards that are expected to vest. All stock option awards are amortized
on a straight-line basis over the requisite service periods of the awards, which
are generally the vesting period. The
assumptions used to value stock options granted during the three months ended
March 31, 2006 and 2005 are as follows: Three
months ended 2006 2005 Expected volatility 30 % 47 % Risk-free interest rate 4.7 % 4.1 % Expected dividend yield 0.2 % 0.3 % Expected term of stock
options (in years) 4.6 5.1 Weighted-average fair
value of stock options granted $ 16.93 $ 14.25 Prior
to the adoption of SFAS 123R, the Company recognized the estimated compensation
cost of restricted stock awards over the vesting term in accordance with the
vesting schedule. Unrestricted stock awards were expensed during the period
granted. The estimated compensation cost was based on the fair market value
of Omnicares common stock on the date of the grant. Effective January
1, 2006, the Company recognizes the compensation cost of restricted stock awards
on a straight-line basis over the requisite service periods of the awards, which
are generally the vesting period. 10 Total
stock-based compensation expense recognized in the Consolidated Statement of
Income for the three months ended March 31, 2006 is $6.7 million pretax
(approximately $4.3 million aftertax) and is classified as selling, general and
administrative expenses. The
following table illustrates the effect on net income and earnings per share,
for the three months ended March 31, 2005, if the Company had accounted for
share-based payment transactions under the fair value recognition provisions of
SFAS 123, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of SFAS 123 (SFAS 148) (in thousands, except per
share data): 2005 Net income, as reported $ 57,995 Add: Stock-based employee compensation expense (stock awards) included
in reported net income, net of related tax effects 1,411 Deduct: Total stock-based employee compensation expense (stock
options
and awards) determined under the fair value based method, net of related tax
effects (6,845 ) Pro forma net income $ 52,561 Earnings per common share: Basic - as reported $ 0.57 Basic - pro forma $ 0.52 Diluted - as reported $ 0.54 Diluted - pro forma $ 0.49 Prior
to the adoption of SFAS 123R, the Company presented all tax benefits for
deductions resulting from the exercise of stock options and disqualifying dispositions
as operating cash flows on the Consolidated Statement of Cash Flows. SFAS 123R
requires the benefits of tax deductions in excess of recognized compensation
expense to be reported as a financing cash flow rather than an operating cash
flow, totaling approximately $10 million during the first quarter of 2006. This
requirement serves to reduce net operating cash flows and increase net
financing cash flows in the period of adoption and thereafter. Total cash flows
will remain unchanged from what would have been reported under prior accounting
rules. Prior
to the adoption of SFAS 123R, the Company recorded a contra-equity balance for
the unearned (deferred) compensation cost related to nonvested restricted stock
awards. SFAS 123R requires that this balance be charged against additional
paid-in capital upon adoption. As a result, the December 31, 2005 balance in
deferred compensation of $76.9 million was charged against paid-in capital upon
adoption of SFAS 123R, with no overall change to total stockholders equity. 11 As
of March 31, 2006, there was approximately $93 million of total unrecognized
compensation cost related to nonvested stock awards and stock options granted
to Omnicare employees. That cost is expected to be recognized over a weighted-average
period of approximately 5.1 years. The total fair value of shares vested during
the three months ended March 31, 2006 related to stock awards and stock options
was approximately $12 million. General Stock Option Information A
summary of stock option activity under the plans for the three months ended
March 31, 2006 is presented below (in thousands, except exercise price data): Weighted Average Aggregate Exercise Intrinsic Shares Price Value Options outstanding,
beginning of period 7,309 $ 29.84 Options granted 23 52.25 Options exercised (280 ) 24.25 Options forfeited (26 ) 35.87 Options outstanding, end
of period 7,026 $ 30.12 $ 174,742 Options exercisable, end
of period 4,903 $ 24.06 $ 151,685 The
total intrinsic value of options exercised during the period was approximately
$9.5 million. The
following summarizes information about stock options outstanding and
exercisable as of March 31, 2006 (in thousands, except exercise price and
remaining life data): OPTIONS
OUTSTANDING OPTIONS
EXERCISABLE Weighted Weighted Number Average Weighted Number Average Weighted Outstanding
at Remaining Average Exercisable
at Remaining Average Range of Exercise March 31, Contractual Exercise March 31, Contractual Exercise Prices 2006 Life (in
years) Price 2006 Life (in
years) Price $7.72 - $15.45 1,286 3.3 $ 15.30 1,286 3.3 $ 15.30 15.46 - 23.17 1,157 5.1 18.82 1,117 5.1 18.71 23.18 - 30.90 2,324 6.9 27.40 1,772 7.0 27.48 30.91 - 38.61 436 3.1 36.44 383 2.4 36.65 38.62 - 61.79 1,823 8.9 49.70 345 7.9 42.44 $7.72 - $61.79 7,026 6.2 $ 30.12 4,903 5.3 $ 24.06 12 General Restricted Stock Award Information A
summary of nonvested restricted stock awards for the three months ended March
31, 2006 is presented below (in thousands, except fair value data): Weighted Average Non-vested Grant
Date Restricted Stock Awards Shares Fair
Value Beginning of period 2,967 $ 29.80 Awarded 292 57.75 Vested (544 ) 21.04 Forfeited (13 ) 31.35 End of period 2,702 $ 34.58 4. 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 March 31, Per Common Common Income Shares Share 2006: (Numerator) (Denominator) Amounts Basic EPS Net income $ 53,231 117,911 $ 0.45 Effect of
Dilutive Securities 4.00% junior subordinated
convertible debentures 72 2,570 Stock options, warrants and
awards 3,114 Diluted
EPS Net income plus assumed
conversions $ 53,303 123,595 $ 0.43 2005: Basic EPS Net income $ 57,995 101,759 $ 0.57 Effect of
Dilutive Securities 4.00% junior subordinated
convertible debentures 1,682 6,271 Stock options, warrants and
awards 1,910 Diluted
EPS Net income plus assumed
conversions $ 59,677 109,940 $ 0.54 13 During
the three months ended March 31, 2006 and 2005, 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 those periods totaled 1.1 million and 4.4
million, respectively. 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 threshold 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. As further discussed in the Debt
note of the Notes to Consolidated Financial Statements, the Company completed
the exchange offer relating to the 4.00% junior subordinated convertible debentures
on March 8, 2005. Accordingly, the effect of Omnicares fourth quarter
2004 adoption of EITF No. 04-8 was to decrease diluted earnings per share $0.02
for the three months ended March 31, 2005 (primarily relating to the period
from January 1, 2005 through the exchange offering completion date of March
8, 2005). For purposes of the if-converted calculation, 6.3 million
shares were assumed to be converted for the three months ended March 31, 2005.
Additionally, interest expense net of taxes, of $1.7 million for the three months
ended March 31, 2005, was added back to net income for purposes of calculating
diluted earnings per share using this method. There was no impact relating to
this change on reported diluted earnings per share for the three months ended
March 31, 2006. See further discussion of the 4.00% junior subordinated convertible
debentures exchange offering in the Debt note. 5. 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, medical supply companies, hospice pharmacy companies and
companies providing distribution and patient assistance services for specialty
pharmaceuticals, which complement the Companys core business. During the
first three months of 2006, Omnicare completed certain acquisitions of businesses
and other assets in the Pharmacy Services segment, none of which were, individually
or in the aggregate, significant to the Company. Acquisitions of businesses
required cash payments of $23.2 million (including amounts payable pursuant
to acquisition agreements relating to pre-2006 acquisitions) in the three months
ended March 31, 2006. The impact of acquisitions on the Companys overall
goodwill balance has been reflected in the disclosures at the Goodwill
and Other Intangible Assets note. The Company has engaged an independent
valuation firm to assist with 14 identification and valuation of other
identifiable assets in connection with the purchase price allocation for
certain acquisitions. The Company also continues to evaluate the tax effects
and other preacquisition contingencies relating to certain acquisitions.
Omnicare is in the process of completing its allocation of the purchase price
for these acquisitions and, accordingly, the goodwill balance is preliminary
and subject to change. The net assets and operating results of acquisitions
have been included in the Companys consolidated financial statements from
their respective dates of acquisition. 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 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 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. Unaudited
pro forma combined results of operations of the Company and NeighborCare for
the quarter ended March 31, 2005 is presented below. Such pro forma
presentation has been prepared assuming that the NeighborCare acquisition had
been made as of January 1, 2005. 15 The
unaudited pro forma combined financial information of the Company and
NeighborCare for the three months ended March 31, 2005 follows (in thousands,
except per share data): Amount Pro forma net sales $ 1,500,852 Pro forma net income 56,528 Pro forma earnings per
share: Basic $ 0.56 Diluted $ 0.53 The
pro forma information is presented for illustration purposes only and does not
purport to be indicative of the combined results of operations that actually
would have occurred if the acquisition of NeighborCare, Inc. had been effected
at the date indicated, or to project future financial condition or results of
operations for any future period. The pro forma information presented above
gives effect only to historical results and certain estimated historical
adjustments (primarily interest costs and intangible asset amortization
expense, net of taxes), and does not reflect any pro forma synergies not yet
realized. 6. Goodwill and
Other Intangible Assets Changes
in the carrying amount of goodwill for the three months ended March 31, 2006,
by business segment, are as follows (in thousands): Pharmacy CRO Services Services Total Balance as of December 31, 2005 $ 3,952,472 $ 77,010 $ 4,029,482 Goodwill acquired in the three months ended March 31, 2006 119 119 Other 29,789 12,324 42,113 Balance as of March 31, 2006 $ 3,982,380 $ 89,334 $ 4,071,714 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. The
decrease in the net carrying amount of the Companys other identifiable
intangible assets of $7.4 million from December 31, 2005 primarily relates to
amortization expense recorded during the period. 16 7. Debt Current and Long-Term Debt At
March 31, 2006, there was no outstanding balance under the Companys $800
million revolving credit facility, maturing on July 28, 2010 (the Revolving
Loans) and $700 million outstanding under the Companys senior term A loan
facility, maturing on July 28, 2010 (the Term Loans). The interest rate on
the Revolving Loans and Term Loans was 5.47% at March 31, 2006. As of March 31,
2006, the Company had approximately $23.8 million outstanding relating to
standby letters of credit, substantially all of which are subject to automatic
annual renewals. The
Companys debt instruments, including related terms and financial covenants,
have been disclosed at the Debt note in Omnicares Annual Report on Form 10-K
for the year ended December 31, 2005. The Company had additional borrowings of
long-term debt during the three months ended March 31, 2005 approximating $41
million, primarily consisting of a note payable carrying a five-year term and a
variable interest rate of 4.82% per annum at March 31, 2006. At
March 31, 2006, the overall weighted average interest rate on the Companys
variable interest portion of its long-term debt, excluding the interest rate
swap agreement, was 5.43%. The estimated floating interest rate on the interest
rate swap agreement was 7.41% at March 31, 2006. 4.00% Junior Subordinated Convertible
Debentures: During
the first quarter of 2005, the Company completed its offer to exchange up to
$345 million aggregate liquidation amount of 4.00% Trust Preferred Income
Equity Redeemable Securities due 2033 (the Old Trust PIERS) of Omnicare
Capital Trust I (the Old Trust), for an equal amount of Series B 4.00% Trust
Preferred Income Equity Redeemable Securities (the New Trust PIERS) of
Omnicare Capital Trust II (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. In connection with the exchange
offer, the composition of the Companys 4.00% junior subordinated convertible
debentures underlying the trust PIERS was impacted. Additional information
regarding the 4.00% junior subordinated convertible debentures underlying the
Old Trust PIERS and the New Trust PIERS is summarized below. 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 17 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) and in certain other circumstances. 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 period end, 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 period end. As
of March 31, 2006, and consistent with December 31, 2005, the aforementioned
contingent conversion threshold of the Old 4.00% Debentures had been attained
(as the closing sales price of Omnicare common stock exceeded 130% of the
applicable conversion price of $40.82, or was above $53.07, for the twenty
trading days prior to quarter end). As a result, the Old 4.00% Debentures were
convertible by the debt holders to cash and to common stock, and have been
classified as current versus long-term debt on the consolidated balance sheet
as of period end. 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 the New Trust PIERS, 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 the Company 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 period end, 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 Company common stock, whereas the outstanding Old
Trust PIERS are convertible only into Company common stock (except for cash in
lieu of fractional shares). 18 As
of March 31, 2006, and consistent with December 31, 2005, the aforementioned
contingent conversion threshold of the New 4.00% Debentures had been attained
(as the closing sales price of Omnicare common stock exceeded 130% of the
applicable conversion price of $40.82, or was above $53.07, for the twenty
trading days prior to quarter end). As a result, the New 4.00% Debentures were
convertible by the debt holders to cash and to common stock, and have been
classified as current versus long-term debt on the consolidated balance sheet as
of period end. 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 was amortized to expense in the three months
ended March 31, 2006 and 2005, respectively. The three months ended March 31,
2005 included a special charge to operating expenses totaling $1.2 million
pretax relating to professional fees and expenses incurred in connection with
the issuance of the New Trust PIERS. 8. Public Offering of Common Stock During
January 2006, the underwriters of the common stock offering completed by the
Company in December 2005 exercised their option, in part, to purchase an
additional 850,000 shares of common stock, $1 par value, at $59.72 per share.
Gross cash proceeds, before underwriting discount, commission and expenses,
were approximately $51 million. 9. Employee Benefit Plans The
Company has various defined contribution savings plans under which eligible
employees can participate by contributing a portion of their salary for
investment, at the direction of each employee, in one or more investment funds.
Expense relating primarily to the Companys matching contributions for these
defined contribution plans was $1.8 million and $1.3 million for the three
months ended March 31, 2006 and 2005, respectively. The
Company also has an excess benefit plan (EBP) that provides retirement
payments 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) for corporate headquarters
employees, frozen and fully vested as of January 1, 1994. The retirement
benefits provided by the EBP 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 19 the EBP. The Companys policy is to fund its pension
obligations 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
months ended March 31, 2006 and 2005 (in thousands): Three
months ended 2006 2005 Service cost $ 456 $ 365 Interest cost 976 798 Amortization of
deferred amounts 1,091 816 Return on assets (44 ) (58 ) Net periodic
pension cost $ 2,479 $ 1,921 During
the first quarter of 2006, the Company made payments of $3.3 million related to
funding plan assets for the settlement of the Companys pension obligations,
resulting in aggregate assets for the settlement of the Companys pension
obligations with a fair value of approximately $66 million at period end
(included in the Other noncurrent assets section of the Consolidated Balance
Sheets). The Company anticipates payments of approximately $10.9 million during
the remainder of the 2006 year. The aftertax accumulated unrealized depreciation
in fair value of investments included in accumulated other comprehensive income
at March 31, 2006 totaled $1.9 million, representing an increase of $1.2
million from December 31, 2005. In
addition, the Company has a supplemental pension plan (SPP) in which
certain of its officers participate. Retirement benefits under the SPP 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 document.
Expense relating to the SPP was $0.2 million for the three month periods ended
March 31, 2006 and March 31, 2005. Obligations of the SPP of $4.9 million were
fully funded in rabbi trusts at March 31, 2006. 10. Restructuring and Other Related Charges In
the third quarter of 2005, the Company announced the implementation of certain
consolidation plans and other productivity initiatives to streamline pharmacy
services and contract research organization operations, including maximizing workforce
and operating asset utilization, and producing a more cost-efficient, operating
infrastructure (the 2005 Program). These consolidation and productivity
initiatives are related, in part, to the integration of NeighborCare. Given the
geographic overlap of the NeighborCare and Omnicare pharmacies, substantial
opportunities for consolidation existed at the time of acquisition. While the
majority of consolidations have resulted 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 20 operations and eliminate redundant assets. This portion of the
consolidation activity and other productivity initiatives are expected to result
in the closure of 31 Omnicare facilities, of which 28 are pharmacy operations.
It will also lead to a net reduction in force of approximately 900 positions.
Of this reduction in force, approximately 96% are in pharmacy operations and
the remaining reductions are at the corporate headquarters or the Companys
contract research operations. Approximately 600 of these positions have been
eliminated as of March 31, 2006. Restructuring activities in the contract research
organization segment relate primarily to facility lease obligations. In
connection with this program, these particular consolidation and productivity
initiatives are expected to be completed within 12 months of commencement of
the 2005 Program. These initiatives are currently estimated to require total
restructuring and other related charges of approximately $30 million before
taxes, which relate to the costs associated with the consolidation of Omnicare
pharmacies and the other consolidation and productivity initiatives described
above. The Company recorded restructuring and other related charges of
approximately $19 million pretax (approximately $12 million aftertax) during
the year ended December 31, 2005. Additionally, the Company recorded
restructuring and other related charges of approximately $8 million pretax
(approximately $5 million aftertax) during the quarter ended March 31, 2006.
The Company expects charges of approximately $3 million before taxes during the
remainder of the program. The
restructuring charges primarily include severance pay, the buy-out of
employment agreements, lease terminations and other assets, fees and facility
exit costs. The other related charges consist of professional fees associated
with certain productivity initiatives. Details of the restructuring and other
related charges follow (in thousands): Balance at 2006 Utilized Balance at Restructuring
charges: Employee
severance $ 2,809 $ 2,445 $ (499 ) $ 4,755 Employment
agreement buy-outs 734 933 (963 ) 704 Lease
terminations 9,833 874 (1,694 ) 9,013 Other assets,
fees and facility exit costs 1,335 931 (1,486 ) 780 Total
restructuring charges $ 14,711 $ 5,183 $ (4,642 ) $ 15,252 Other related
charges 2,530 Total
restructuring and other related charges $ 7,713 As
of March 31, 2006, the Company had paid approximately $3.9 million of severance
and other employee-related costs. The remaining liabilities at March 31, 2006
represent amounts not yet paid relating to actions taken in 21 connection with the program (primarily severance payments and
lease payments), and will be settled as these matters are finalized. 11. 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. To the extent that
resolution of contingencies results in amounts that vary from the Companys
recorded liabilities, future earnings will be charged or credited accordingly. The Company has received administrative subpoenas from the United
States Attorneys Office, District of Massachusetts, seeking information
arising out of the Companys relationships with certain manufacturers and
distributors of pharmaceutical products. The Company believes that its purchases
of pharmaceuticals comply with all applicable laws and regulations. In addition,
the federal government and certain states are investigating allegations relating
to three generic pharmaceuticals provided by the Company in connection with
the substitution of capsules for tablets (Ranitidine), tablets for capsules
(Fluoxetine) and two 7.5 mg tablets for one 15 mg tablet (Buspirone). The Company
is cooperating fully in these matters. See further discussion in the Subsequent
Event note of the Notes to Consolidated Financial Statements. On February 2 and February 13, 2006, respectively, two substantially
similar putative class action lawsuits, entitled Indiana State Dist. Council
of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc.,
et al., No. 2:06cv26 (HOD Carriers), and Chi v. Omnicare,
Inc., et al., No. 2:06cv31 (Chi), were filed against
Omnicare and two of its officers in the United States District Court For the
Eastern District of Kentucky purporting to assert claims for violation of §§
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The complaints, which purport to be brought on behalf of all Omnicare
shareholders, allege that Omnicare has artificially inflated its earnings by
engaging in improper generic drug substitution and that the defendants have
made false and misleading statements regarding the Companys business and
prospects. The complaints seek, among other things, compensatory damages and
injunctive relief. On March 7, 2006, the parties to both actions filed stipulations
agreeing that the cases should be consolidated and proposing a scheduling order
for the conduct of the actions upon consolidation. Those scheduling orders were
entered on March 10, 2006. On April 3, 2006 Plaintiffs in the HOD Carriers
case formally moved for consolidation and the appointment of lead plaintiff
and lead counsel pursuant to the Private Securities Litigation Reform Act of
1995. That motion is currently pending. Also
on February 13, 2006, two substantially similar shareholder derivative actions,
entitled Isak v. Gemunder, et al., Case No. 06-CI-390, and Fragnoli
v. Hutton, et al., Case No. 06-CI-389, were filed in Kentucky State Circuit
Court, Kenton Circuit, against the members of Omnicares board of directors,
individually, purporting to assert claims for breach of fiduciary duty, abuse
of control, gross mismanagement, waste of corporate assets and unjust enrichment
arising out of the Companys alleged violations of federal and state health
care laws based upon the same purportedly improper generic drug substitution
that is the subject of the federal purported class action lawsuits. The complaints
seek, among other things, damages, restitution and injunctive relief. On April
7, 2006, the defendants moved to stay all proceedings in both actions pending
resolution of the earlier-filed federal class actions and virtually identical
derivative action (see discussion of the Irwin matter below) pending
in the Eastern District of Kentucky. On May 4, 2006, the defendants moved to
consolidate the Isak and Fragnoli actions. On
March 23, 2006, a shareholder derivative action entitled Irwin v. Gemunder, et al., 2:06cv62, was filed in
the United States District Court For the Eastern District of Kentucky against
the members of Omnicares board of directors, individually, purporting to
assert claims for breach of fiduciary duty, abuse of control, gross
mismanagement, waste of corporate assets 22 and unjust enrichment
arising out of the Companys alleged violations of federal and state health
care laws based upon the purported improper substitution of generic drugs. The
complaint seeks, among other things, damages, restitution and injunctive
relief. The
Company believes the above-described purported class and derivative actions are
without merit and intends to vigorously defend the actions. Although
the Company cannot predict the ultimate outcome of the matters described in
the preceding paragraphs, there can be no assurance that the resolution of these
matters will not have a material adverse impact on the Companys consolidated
financial position, results of operations or cash flows or, in the case of the
investigations regarding certain drug substitutions, that these matters will
be resolved in an amount that would not exceed the amount of the pretax charge
recorded by the Company. 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 and cash flows in any one accounting period, outside of
the matters described in the preceding paragraphs, the Company is not aware
of any such matters whereby it is presently believed that the final disposition
will have a material adverse affect on the Companys overall consolidated
financial position. The
Company indemnifies the directors and officers of the Company for certain
liabilities that might arise from the performance of their job responsibilities
for the Company. Additionally, in the normal course of business, the Company
enters into contracts that contain a variety of representations and warranties
and which provide general indemnifications. The Companys maximum exposure
under these arrangements is unknown, as this involves the resolution of claims
made, or future claims that may be made, against the Company, its directors
and/or officers, the outcomes of which is unknown and not currently
predictable. 12. Segment Information Based
on the management approach, as defined by SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, Omnicare has two operating
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, medical supplies, and
distribution and patient assistance services for 23 specialty pharmaceuticals. The Companys customers are
primarily skilled nursing, assisted living, hospice and other providers of
healthcare services in 47 states in the United States of America (USA), the
District of Columbia and in Canada at March 31, 2006. The Companys other
segment is CRO Services, which provides comprehensive product development and
research services to client companies in pharmaceutical, biotechnology, medical
devices and diagnostics industries in 30 countries around the world at March
31, 2006, including the USA. The
table below presents information about the reportable segments as of and for
the three months ended March 31, 2006 and 2005 and should be read in conjunction
with the paragraph that follows (in thousands): Three
months ended March 31, 2006: Pharmacy CRO Corporate Consolidated Net sales $ 1,616,552 $ 42,046 $ $ 1,658,598 Depreciation and amortization 29,672 487 739 30,898 Restructuring and other related charges (5,316 ) (298 ) (2,099 ) (7,713 ) Litigation charge (34,100 ) (34,100 ) Operating income (expense) 150,506 1,163 (24,309 ) 127,360 Total assets 6,690,518 160,483 528,042 7,379,043 Capital expenditures 5,663 96 350 6,109 2005: Net sales $ 1,050,099 $ 46,047 $ $ 1,096,146 Depreciation and amortization 13,070 547 652 14,269 Operating income (expense) 124,903 2,559 (15,899 ) 111,563 Total assets 3,570,977 151,785 326,667 4,049,429 Capital expenditures 2,292 221 620 3,133 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 $6.2 million and $7.3 million for the three month
period ended March 31, 2006 and 2005, respectively. 24 13. 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 March 31, 2006
and December 31, 2005 for the balance sheets, as well as the statements of
income and the statements of cash flows for the three months ended March 31,
2006 and 2005. 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. Summary Consolidating Statements of Income (in thousands)
Three months ended March 31, 2006: Parent Guarantor Non-Guarantor Consolidating/ Omnicare, Inc. Net sales $ $ 1,566,726 $ 91,872 $ $ 1,658,598 Cost of sales 1,172,772 69,311 1,242,083 Gross profit 393,954 22,561 416,515 Selling, general and administrative expenses 1,981 232,855 12,506 247,342 Restructuring and other related charges 7,713 7,713 Litigations
charge 34,100 34,100 Operating income (loss) (1,981 ) 119,286 10,055 127,360 Investment income 991 808 1,799 Interest expense (41,192 ) (650 ) (570 ) (42,412 ) Income (loss) before income taxes (42,182 ) 119,444 9,485 86,747 Income tax (benefit) expense (15,228 ) 45,320 3,424 33,516 Equity in net income of subsidiaries 80,185 (80,185 ) Net income $ 53,231 $ 74,124 $ 6,061 $ (80,185 ) $ 53,231 2005: Net sales $ $ 1,053,679 $ 42,467 $ $ 1,096,146 Cost of sales 794,725 32,099 826,824 Gross profit 258,954 10,368 269,322 Selling, general and administrative expenses 1,820 149,811 6,128 157,759 Operating income (loss) (1,820 ) 109,143 4,240 111,563 Investment income 331 822 1,153 Interest expense (19,276 ) (229 ) (414 ) (19,919 ) Income (loss) before income taxes (20,765 ) 109,736 3,826 92,797 Income tax (benefit) expense (7,787 ) 41,154 1,435 34,802 Equity in net income of subsidiaries 70,973 (70,973 ) Net income $ 57,995 $ 68,582 $ 2,391 $ (70,973 ) $ 57,995 25 13. Guarantor Subsidiaries (Continued) Condensed Consolidating Balance Sheets (in thousands) As of March
31, 2006: Parent Guarantor Non-Guarantor Consolidating/ Omnicare, Inc. ASSETS Cash and cash equivalents $ 238,591 $ 48,619 $ 28,290 $ $ 315,500 Restricted cash 12,151 12,151 Deposits with drug wholesalers 44,740 44,740 Accounts receivable, net (including intercompany) 1,371,500 50,111 (26,639 ) 1,394,972 Unbilled receivables 20,828 20,828 Inventories 455,557 20,870 476,427 Deferred income tax benefits (liabilities), net-current (3,925 ) 120,183 299 116,557 Other current assets 1,643 170,765 3,914 176,322 Total current assets 236,309 2,244,343 103,484 (26,639 ) 2,557,497 Properties and equipment, net 206,916 15,854 222,770 Goodwill 3,969,895 101,819 4,071,714 Identifiable intangible assets, net 332,070 332,070 Other noncurrent assets 66,639 127,769 584 194,992 Investment in subsidiaries 5,804,269 (5,804,269 ) Total assets $ 6,107,217 $ 6,880,993 $ 221,741 $ (5,830,908 ) $ 7,379,043 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities
(including intercompany) - Note 7 $ 401,582 $ 658,801 $ 44,891 $ (26,639 ) $ 1,078,635 Long-term debt 700,000 4,925 46,043 750,968 8.125% senior subordinated notes, due 2011 8,225 8,225 6.125% senior subordinated notes, net, due 2013 224,401 224,401 6.75% senior subordinated notes, due 2013 225,000 225,000 6.875% senior subordinated notes, due 2015 525,000 525,000 3.25% convertible senior debentures, due 2035 977,500 977,500 Deferred income tax liabilities (benefits), net-noncurrent (34,150 ) 305,246 (6,022 ) 265,074 Other noncurrent liabilities 25,600 243,531 1,050 270,181 Stockholders equity 3,054,059 5,668,490 135,779 (5,804,269 ) 3,054,059 Total liabilities and stockholders
equity $ 6,107,217 $ 6,880,993 $ 221,741 $ (5,830,908 ) $ 7,379,043 As of December 31, 2005: ASSETS Cash and cash equivalents $ 143,227 $ 38,999 $ 33,195 $ $ 215,421 Restricted cash 2,674 2,674 Deposits with drug wholesalers 83,036 83,036 Accounts receivable, net (including intercompany) 1,244,234 43,332 (26,932 ) 1,260,634 Unbilled receivables 17,195 17,195 Inventories 457,072 16,870 473,942 Deferred income tax benefits (liabilities), net-current (369 ) 108,016 320 107,967 Other current assets 1,469 196,152 2,405 200,026 Total current assets 144,327 2,147,378 96,122 (26,932 ) 2,360,895 Properties and equipment, net 215,625 16,109 231,734 Goodwill 3,932,201 97,281 4,029,482 Identifiable intangible assets, net 339,474 339,474 Other noncurrent assets 68,616 126,775 429 195,820 Investment in subsidiaries 5,764,008 (5,764,008 ) Total assets $ 5,976,951 $ 6,761,453 $ 209,941 $ (5,790,940 ) $ 7,157,405 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities
(including intercompany) - Note 7 $ 377,269 $ 602,516 $ 47,651 $ (26,932 ) $ 1,000,504 Long-term debt 700,000 6,837 46,064 752,901 8.125% senior subordinated notes, due 2011 8,775 8,775 6.125% senior subordinated notes, net, due 2013 230,216 230,216 6.75% senior subordinated notes, due 2013 225,000 225,000 6.875% senior subordinated notes, due 2015 525,000 525,000 3.25% convertible senior debentures, due 2035 977,500 977,500 Deferred income tax liabilities (benefits),
net-noncurrent (28,639 ) 283,701 (6,028 ) 249,034 Other noncurrent liabilities 19,784 225,796 849 246,429 Stockholders equity 2,942,046 5,642,603 121,405 (5,764,008 ) 2,942,046 Total liabilities and stockholders
equity $ 5,976,951 $ 6,761,453 $ 209,941 $ (5,790,940 ) $ 7,157,405 26 13. Guarantor Subsidiaries (Continued) Condensed Consolidating Statements of Cash
Flows (in
thousands) Three months ended March 31, 2006: Parent Guarantor Non-Guarantor Omnicare, Inc. Cash flows from operating activities: Provision for doubtful accounts $ $ 16,784 $ 310 $ 17,094
Other (14,312 ) 89,871 (9,876 ) 65,683
Net cash flows from operating activities (14,312 ) 106,655 (9,566 ) 82,777
Cash flows from investing activities: Acquisition of businesses, net of cash received (24,047 ) 846 (23,201 ) Capital expenditures (6,009 ) (100 ) (6,109 ) Transfer of cash to trusts for employee health and severance costs,
net of payments out of the trust (9,871 ) (9,871 ) Other 82 82
Net cash flows from investing activities (39,845 ) 746 (39,099 ) Cash flows from financing activities: Borrowings on line of credit facilities and term A loan 133,000 133,000
Payments on line of credit facilities and term A loan (133,000 ) (133,000 ) (Payments on) / proceeds from long-term borrowings and
obligations (521 ) 21 (21 ) (521 ) Fees paid for financing arrangements (2,052 ) (2,052 ) Change in cash overdraft balance 2,164 6,259 8,423
Proceeds from stock offering, net of issuance costs 49,239 49,239
Proceeds from stock awards and exercise of stock options and
warrants, net of stock tendered in payment (6,030 ) (6,030 ) Excess tax benefits from stock-based compensation 10,021 10,021
Dividends paid (2,725 ) (2,725 ) Other 59,580 (63,470 ) 3,890 Net cash flows from financing activities 109,676 (57,190 ) 3,869 56,355
Effect of exchange rate changes on cash 46 46
Net increase
(decrease) in cash and cash equivalents 95,364 9,620 (4,905 ) 100,079
Cash and cash equivalents at beginning of year 143,227 38,999 33,195 215,421
Cash and cash equivalents at end of year $ 238,591 $ 48,619 $ 28,290 $ 315,500
27 13. Guarantor Subsidiaries (Continued) Condensed Consolidating Statements of Cash
Flows - Continued (in
thousands) Three months ended March 31, 2005: Parent Guarantor Non-Guarantor Omnicare, Inc. Cash flows from operating activities: Provision for doubtful accounts $ $ 12,174 $ 235 $ 12,409
Other (8,078 ) 98,205 (37,482 ) 52,645
Net cash flows from operating activities (8,078 ) 110,379 (37,247 ) 65,054
Cash flows from investing activities: Acquisition of businesses, net of cash received (27,059 ) (1,121 ) (28,180 ) Capital expenditures (3,088 ) (45 ) (3,133 ) Transfer of cash to trusts for employee health and severance costs,
net of payments out of the trust (5,522 ) (5,522 ) Other 34 34
Net cash flows from investing activities (35,635 ) (1,166 ) (36,801 ) Cash flows from financing activities: Borrowings on line of credit facilities 157,000 157,000
Payments on line of credit facilities and term A loan (163,154 ) (163,154 ) (Payments on)/proceeds from long-term borrowings and
obligations (83 ) 41,393 41,310
Fees paid for financing arrangements (1,454 ) (1,454 ) Change in cash overdraft balance (4,063 ) 2,418 (1,645 ) Proceeds from stock awards and exercise of stock options and
warrants, net of stock tendered in payment 605 605
Dividends paid (2,358 ) (2,358 ) Other 81,252 (81,252 ) Net cash flows from financing activities 67,745 (78,834 ) 41,393 30,304
Effect of exchange rate changes on cash 297 297
Net increase (decrease) in cash and cash equivalents 59,667 (4,090 ) 3,277 58,854
Cash and cash equivalents at beginning of period 46,569 32,453 5,147 84,169
Cash and cash equivalents at end of period $ 106,236 $ 28,363 $ 8,424 $ 143,023
28 13. Guarantor Subsidiaries (Continued) The
Companys 3.25% Convertible Debentures due 2035 are fully and unconditionally
guaranteed on an unsecured basis by Omnicare Purchasing Company, LP, a
wholly-owned subsidiary of the Company (the Guarantor Subsidiary). The
following condensed consolidating financial data illustrates the composition of
Omnicare, Inc. (Parent), the Guarantor Subsidiary and the Non-Guarantor
Subsidiaries as of March 31, 2006 and December 31, 2005 for the balance sheets,
as well as the statements of income and the statements of cash flows for each
of the three months ended March 31, 2006 and 2005. Separate complete financial
statements of the respective Guarantor Subsidiary would not provide additional
information that would be useful in assessing the financial condition of the
Guarantor Subsidiary and thus are not presented. The Guarantor Subsidiary does
not have any material net cash flows in the condensed consolidating statements
of cash flows. No eliminations column is presented for the condensed
consolidating statements of cash flows since there were no significant eliminating
amounts during the periods presented. Summary
Consolidating Statements of Income (in thousands) Three months
ended March 31, 2006: Parent Guarantor Non-Guarantor Consolidating/ Omnicare, Inc. Net
sales $ $ $ 1,658,598 $ $ 1,658,598
Cost
of sales 1,242,083 1,242,083 Gross
profit 416,515 416,515 Selling,
general and administrative expenses 1,981 261 245,100 247,342 Restructuring
and other related charges 7,713 7,713 Litigation
charge 34,100 34,100 Operating
income (loss) (1,981 ) (261 ) 129,602 127,360 Investment
income 991 808 1,799 Interest
expense (41,192 ) (1,220 ) (42,412 ) Income
(loss) before income taxes (42,182 ) (261 ) 129,190 86,747 Income
tax (benefit) expense (15,228 ) (94 ) 48,838 33,516 Equity
in net income of subsidiaries 80,185 (80,185 ) Net
income (loss) $ 53,231 $ (167 ) $ 80,352 $ (80,185 ) $ 53,231 2005: Net sales $ $ $ 1,096,146 $ $ 1,096,146
Cost of sales 826,824 826,824
Gross profit 269,322 269,322
Selling, general and administrative
expenses 1,820 227 155,712 157,759
Operating income (loss) (1,820 ) (227 ) 113,610 111,563
Investment income 331 822 1,153
Interest expense (19,276 ) (643 ) (19,919 ) Income (loss) before income taxes (20,765 ) (227 ) 113,789 92,797
Income tax (benefit) expense (7,787 ) (85 ) 42,674 34,802
Equity in net income of subsidiaries 70,973 (70,973 ) Net income (loss) $ 57,995 $ (142 ) $ 71,115 $ (70,973 ) $ 57,995
29 13. Guarantor Subsidiaries (Continued) Condensed Consolidating Balance Sheets (in thousands) As of March 31, 2006: Parent Guarantor Non-Guarantor Consolidating/ Omnicare, Inc. ASSETS Cash and cash equivalents $ 238,591 $ $ 76,909 $ $ 315,500 Restricted cash 12,151 12,151 Deposits with drug wholesalers 44,740 44,740 Accounts receivable, net (including
intercompany) 170 1,394,972 (170 ) 1,394,972 Unbilled receivables 20,828 20,828 Inventories 476,427 476,427 Deferred income tax benefits (liabilities),
net-current (3,925 ) 120,482 116,557 Other current assets 1,643 174,679 176,322 Total current assets 236,309 170 2,321,188 (170 ) 2,557,497 Properties and equipment, net 37 222,733 222,770 Goodwill 4,071,714 4,071,714 Identifiable intangible assets, net 332,070 332,070 Other noncurrent assets 66,639 19 128,334 194,992 Investment in subsidiaries 5,804,269 (5,804,269 ) Total assets $ 6,107,217 $ 226 $ 7,076,039 $ (5,804,439 ) $ 7,379,043 LIABILITIES AND STOCKHOLDERS
EQUITY Current liabilities
(including intercompany) - Note 7 $ 401,582 $ $ 677,223 $ (170 ) $ 1,078,635 Long-term debt 700,000 50,968 750,968 8.125% senior subordinated notes, due
2011 8,225 8,225 6.125% senior subordinated notes, net, due
2013 224,401 224,401 6.75% senior subordinated notes, due
2013 225,000 225,000 6.875% senior subordinated notes, due
2015 525,000 525,000 3.25% convertible senior debentures, due
2035 977,500 977,500 Deferred income tax liabilities (benefits),
net-noncurrent (34,150 ) 299,224 265,074 Other noncurrent liabilities 25,600 244,581 270,181 Stockholders equity 3,054,059 226 5,804,043 (5,804,269 ) 3,054,059 Total liabilities and
stockholders equity $ 6,107,217 $ 226 $ 7,076,039 $ (5,804,439 ) $ 7,379,043 As of December 31, 2005: ASSETS Cash and cash equivalents $ 143,227 $ $ 72,194 $ $ 215,421 Restricted cash 2,674 2,674 Deposits with drug wholesalers 83,036 83,036 Accounts receivable, net (including
intercompany) 169 1,260,634 (169 ) 1,260,634 Unbilled receivables 17,195 17,195 Inventories 473,942 473,942 Deferred income tax benefits (liabilities),
net-current (369 ) 108,336 107,967 Other current assets 1,469 198,557 200,026 Total current assets 144,327 169 2,216,568 (169 ) 2,360,895 Properties and equipment, net 38 231,696 231,734 Goodwill 4,029,482 4,029,482 Identifiable intangible assets, net 339,474 339,474 Other noncurrent assets 68,616 19 127,185 195,820 Investment in subsidiaries 5,764,008 (5,764,008 ) Total assets $ 5,976,951 $ 226 $ 6,944,405 $ (5,764,177 ) $ 7,157,405 LIABILITIES AND STOCKHOLDERS
EQUITY Current liabilities
(including intercompany) - Note 7 $ 377,269 $ $ 623,404 $ (169 ) $ 1,000,504 Long-term debt 700,000 52,901 752,901 8.125% senior subordinated notes, due
2011 8,775 8,775 6.125% senior subordinated notes, net, due
2013 230,216 230,216 6.75% senior subordinated notes, due
2013 225,000 225,000 6.875% senior subordinated notes, due
2015 525,000 525,000 3.25% convertible senior debentures, due
2035 977,500 977,500 Deferred income tax liabilities (benefits),
net-noncurrent (28,639 ) 277,673 249,034 Other noncurrent liabilities 19,784 226,645 246,429 Stockholders equity 2,942,046 226 5,763,782 (5,764,008 ) 2,942,046 Total liabilities and
stockholders equity $ 5,976,951 $ 226 $ 6,944,405 $ (5,764,177 ) $ 7,157,405 30 13. Guarantor Subsidiaries (Continued) Condensed Consolidating Statements of Cash
Flows (in
thousands) Three months
ended March 31, 2006: Parent Guarantor Non-Guarantor Omnicare,
Inc. Cash
flows from operating activities: Provision
for doubtful accounts $ $ $ 17,094 $ 17,094 Other (14,312 ) 79,995 65,683 Net
cash flows from operating activities (14,312 ) 97,089 82,777 Cash
flows from investing activities: Acquisition
of businesses, net of cash received (23,201 ) (23,201 ) Capital
expenditures (6,109 ) (6,109 ) Transfer
of cash to trusts for employee health and severance costs, net of payments
out of the trust (9,871 ) (9,871 ) Other 82 82 Net
cash flows from investing activities (39,099 ) (39,099 ) Cash
flows from financing activities: Borrowings
on line of credit facilities and term A loan 133,000 133,000 Payments
on line of credit facilities and term A loan (133,000 ) (133,000 ) Payments
on long-term borrowings and obligations (521 ) (521 ) Fees
paid for financing arrangements (2,052 ) (2,052 ) Change
in cash overdraft balance 2,164 6,259 8,423 Proceeds
from stock offering, net of issuance costs 49,239 49,239 Proceeds
from stock awards and exercise of stock options and warrants, net of stock
tendered in payment (6,030 ) (6,030 ) Excess
tax benefits from stock-based compensation 10,021 10,021 Dividends
paid (2,725 ) (2,725 ) Other 59,580 (59,580 ) Net
cash flows from financing activities 109,676 (53,321 ) 56,355 Effect
of exchange rate changes on cash 46 46 Net
increase in cash and cash equivalents 95,364 4,715 100,079 Cash
and cash equivalents at beginning of year 143,227 72,194 215,421 Cash
and cash equivalents at end of year $ 238,591 $ $ 76,909 $ 315,500 31 13. Guarantor Subsidiaries (Continued) Condensed Consolidating Statements of Cash
Flows - Continued (in
thousands) Three months ended March 31, 2005: Parent Guarantor Non-Guarantor Omnicare, Inc. Cash flows from operating activities: Provision for doubtful accounts $ $ $ 12,409 $ 12,409 Other (8,078 ) 60,723 52,645 Net cash flows from operating
activities (8,078 ) 73,132 65,054 Cash flows from investing activities: Acquisition of businesses, net of cash
received (28,180 ) (28,180 ) Capital expenditures (3,133 ) (3,133 ) Transfer of cash to trusts for employee health
and severance costs,
net of payments out of the trust (5,522 ) (5,522 ) Other 34 34 Net cash flows from investing
activities (36,801 ) (36,801 ) Cash flows from financing activities: Borrowings on line of credit
facilities 157,000 157,000 Payments on line of credit facilities and term A
loan (163,154 ) (163,154 ) (Payments on)/proceeds from long-term borrowings
and obligations (83 ) 41,393 41,310 Fees paid for financing arrangements (1,454 ) (1,454 ) Change in cash overdraft balance (4,063 ) 2,418 (1,645 ) Proceeds from stock awards and exercise of stock
options and
warrants, net of stock tendered in payment 605 605 Dividends paid (2,358 ) (2,358 ) Other 81,252 (81,252 ) Net cash flows from financing
activities 67,745 (37,441 ) 30,304 Effect of exchange rate changes on
cash 297 297 Net increase (decrease) in cash and cash
equivalents 59,667 (813 ) 58,854 Cash and cash equivalents at beginning of
period 46,569 37,600 84,169 Cash and cash equivalents at end of
period $ 106,236 $ $ 36,787 $ 143,023 32 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 MONTHS
ENDED MARCH 31, 2006 OVERVIEW Omnicare,
Inc. (Omnicare or the Company) is a leading geriatric pharmaceutical
services company. Omnicare is the nations largest provider of pharmaceuticals
and related ancillary pharmacy services to long-term healthcare institutions.
Omnicares clients include primarily skilled nursing facilities (SNFs),
assisted living facilities, retirement centers, independent living communities,
hospitals, hospice, and other healthcare settings and service providers.
Omnicare provides its pharmacy services to long-term care facilities and other
chronic care settings comprising approximately 1,437,000 beds in 47 states in
the United States (U.S.), the District of Columbia and Canada at March 31,
2006. As well, Omnicare provides operational software and support systems to
long-term care pharmacy providers across the U.S. Omnicares pharmacy services
also include distribution and patient assistance services for specialty
pharmaceuticals. Omnicare provides comprehensive product development and
research services for the pharmaceutical, biotechnology, medical device and
diagnostic industries in 30 countries worldwide. A
summary of the key operating results for the three months ended March 31, 2006
and 2005 follows (in thousands, except per share amounts): Three months ended 2006 2005 Consolidated: Net sales $ 1,658,598 $ 1,096,146 Net income $ 53,231 $ 57,995 Diluted earnings per share
(EPS) $ 0.43 $ 0.54 Operating
results for the three months ended March 31, 2006 also included restructuring
and other related charges of approximately $7.7 million pretax ($4.9 million
aftertax, or $0.04 per diluted share) in connection with the Companys
previously disclosed consolidation efforts associated primarily with the NeighborCare,
Inc. (NeighborCare) consolidation plan and other related productivity
initiatives to streamline operations, maximize workforce and asset utilization,
and produce a more cost-efficient, operating infrastructure. See further discussion
of the restructuring and other related charges at the Restructuring and
Other Related Charges section of this MD&A. In addition, the Company
recorded a charge of $6.1 million pretax ($3.9 million aftertax, or $0.03 per
diluted share) associated with retention payments for certain NeighborCare employees
as required under the acquisition agreement. 33 The
new prescription drug benefit under Medicare Part D (Part D) became
effective on January 1, 2006. As a result, Omnicare experienced a significant
shift in payor mix during the quarter ended March 31, 2006, as Part D currently
represents over 40% of Omnicares overall revenues. Prior to the implementation
of the new Medicare Part D program, most of these residents were reimbursed
under state Medicaid programs and, to a lesser extent, private pay sources.
As expected with such a significant change in payor source and reimbursement
system, the quarter ended March 31, 2006 was a transition quarter as the Company
devoted considerable time, effort and resources to addressing certain administrative,
operational and payment issues associated with the implementation of Part D.
As a result, the Company incurred incremental expenses of approximately $9.8
million during the first quarter of 2006, comprising temporary labor, administrative
and operating costs incurred in connection with the implementation of the new
Medicare Part D drug benefit. These expenditures were necessary to support the
billing and cash collection functions, as well as handle the disruption in the
timing of work flow and delivery of medications created by these implementation
issues. While considerable progress has been made in addressing many of the
Part D implementation issues, Omnicare continues to devote resources to the
ongoing resolution of these matters. Effective
January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R).
This Statement requires the Company to record compensation costs relating to
equity-based payments in its financial statements. Under the fair value
recognition provisions of SFAS 123R, equity-based compensation cost is
estimated at the grant date based on the value of the award and is recognized
as expense ratably over the requisite service period of the award (usually the
vesting period). The Company elected the modified prospective application
method of implementing SFAS 123R, which requires that SFAS 123R be applied to
all new awards whose 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 service has not been rendered (i.e., nonvested portion) and
were outstanding as of January 1, 2006. In accordance with the modified
prospective method, the Companys Consolidated Financial Statements for prior
periods have not been restated to reflect the adoption of SFAS 123R. Operating
income for the three months ended March 31, 2006 includes additional
equity-based compensation expense for stock options and stock awards of
approximately $2.9 million pretax ($1.8 million aftertax, or $0.015 per diluted
share) related to the adoption of SFAS 123R. Sales
and profitability results are discussed at the Pharmacy Services Segment and
CRO Services Segment captions below. Three months ended 2006 2005 Pharmacy Services Segment: Net sales $ 1,616,552 $ 1,050,099 Operating income $ 150,506 $ 124,903 34 The
sales growth for the three months ended March 31, 2006 was driven largely by
the ongoing execution of the Companys acquisition strategy, particularly
the contribution of the NeighborCare, excelleRx, Inc. (excelleRx)
and RxCrossroads, L.L.C. (RxCrossroads) acquisitions that were completed
in the third quarter of 2005. In addition, sales growth is also attributable
to higher acuity in certain areas, the expansion of the Companys clinical
and other service programs, especially growth in IV sales, a favorable payor
mix shift, drug price inflation and market penetration of newer branded drugs
targeted at the diseases of the elderly, which often carry higher prices, but
are more effective in reducing overall healthcare costs than those they replace.
These factors were partially offset by intense competitive pricing pressures,
the increasing use of generic drugs and the impact of prior-year Medicaid reimbursement
cuts, although the impact now is much lower than seen historically due to the
shift in payor mix largely from Medicaid to Medicare Part D. The increased operating
income was primarily the result of the aforementioned increase in sales, as
well as 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 Medicaid
reimbursement pressures, as well as the aforementioned Part D transition expenses.
In addition, operating income for the three months ended March 31, 2006 was
impacted by special charges of approximately $45.5 million, including the aforementioned
litigation charge of $34.1 million, a $6.1 million charge associated with retention
payments for certain NeighborCare employees as required under the acquisition
agreement and the previously mentioned restructuring and other related charges,
of which approximately $5.3 million was included in the Pharmacy Services segment.
Three months ended 2006 2005 CRO Services
Segment: Revenues $ 42,046 $ 46,047 Operating
income $ 1,163 $ 2,559 The
CRO Services segment revenues and operating income were lower for the three
months ended March 31, 2006 than in the comparable period of 2005 due primarily
to client-driven delays in the commencement of certain projects during the
first quarter of 2006. Operating income in the three months ended March 31,
2006 was also impacted by the previously mentioned restructuring and other
related charges, of which approximately $0.3 million was included in the CRO
Services segment. 35 RESULTS OF
OPERATIONS The
following table presents the consolidated net sales and results of operations
of Omnicare for the three months ended March 31, 2006 and 2005 (in thousands,
except per share amounts). Three months ended 2006 2005 Net sales $ 1,658,598 $ 1,096,146 Net income $ 53,231 $ 57,995 Earnings per share: Basic $ 0.45 $ 0.57 Diluted $ 0.43 $ 0.54 EBITDA(a) $ 158,258 $ 125,832 EBITDA reconciliation to
net cash flows from operating activities: EBITDA(a) $ 158,258 $ 125,832 (Subtract)/Add: Interest expense, net of
investment income (40,613 ) (18,766 ) Income tax provision (33,516 ) (34,802 ) Changes in assets and
liabilities, net of effects from acquisition of businesses (26,909 ) (33,687 ) Provision for doubtful
accounts 17,094 12,409 Deferred tax provision 8,463 14,068 Net cash flows from operating activities $ 82,777 $ 65,054 (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. Three Months Ended March 31, 2006 vs. 2005 Consolidated Net
sales for the three months ended March 31, 2006 rose to $1,658.6 million from
$1,096.1 million in the comparable prior year period. Net income for the three
months ended March 31, 2006 was $53.2 million versus $58.0 million earned in
the comparable 2005 period. 36 Diluted earnings per share for the three months ended March 31,
2006 were $0.43 versus $0.54 in the same prior year period. EBITDA totaled $158.3
million for the three months ended March 31, 2006 as compared with $125.8 million
for the same period of 2005. The
three months ended March 31, 2006 included the following charges that
management considers to be special charges: (i)
As previously discussed, on May 10, 2006, the Company announced that it has
recorded a special litigation charge of $34.1 million pretax ($24 million aftertax,
or $0.19 per diluted share) in its financial results for the quarter ended March 31,
2006 to establish a settlement reserve relating to previously disclosed inquiries
by the federal government and certain states relating to three generic pharmaceuticals
provided by the Company. This special litigation charge represents the Companys
current estimate of potential settlement amounts and associated costs. See further
discussion at the Commitments and Contingencies and Subsequent
Event notes of the Notes to Consolidated Financial Statements, and the
Legal Proceedings section at Part II, Item 1 of this Filing. (ii)
Operating income included restructuring and other related charges of
approximately $7.7 million pretax ($4.9 million aftertax, or $0.04 per diluted
share) in connection with the Companys previously disclosed consolidation and
productivity initiatives related, in part, to the integration of the
NeighborCare acquisition and other related activities. See further discussion
of the restructuring and other related charges at the Restructuring and Other
Related Charges section of this MD&A. (iii)
Operating income included a special charge of approximately $6.1 million pretax
($3.9 million aftertax or $0.03 per diluted share) associated with retention
payments for certain NeighborCare employees as required under the acquisition
agreement. The
three months ended March 31, 2005, included a special charge to operating expenses
totaling $1.2 million pretax ($0.8 million aftertax, or $0.01 per diluted share)
relating to professional fees and expenses incurred 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 this transaction, as well as the impact of Emerging
Issues Task Force (EITF) No. 04-8, The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share (EITF No.
04-8) on Omnicares first quarter 2005 earnings at the Disclosures
About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements
and Diluted Earnings Per Share sections, respectively, of this MD&A.
Pharmacy Services Segment Omnicares
Pharmacy Services segment recorded sales of $1,616.6 million for the three
months ended March 31, 2006, exceeding the 2005 amount of $1,050.1 million by
$566.5 million, or 54%. At March 31, 2006, Omnicare served long-term care facilities
and other chronic care settings comprising approximately 1,437,000 beds as
compared with approximately 1,090,000 beds served at March 31, 2005. The first
quarter 2006 bed count was impacted when a prime contractor did not renew an
agreement to provide services to an 18,000 bed prison system to which Omnicare
was subcontracted to provide pharmacy services; revenues and profits from this
arrangement were negligible. Contributing in large measure to the
year-over-year increase in sales and beds served was the completion of several
acquisitions, in particular, the acquisition of NeighborCare completed in the
third quarter of 2005. Further, the acquisitions of excelleRx and RxCrossroads
in August 2005 also contributed to the year-over-year sales increase. In
addition, Pharmacy Services sales increased due to higher acuity in certain
areas, the expansion of the Companys clinical and other service programs,
especially growth in IV sales, a favorable payor mix shift, drug price
inflation and market penetration of newer branded drugs 37 targeted at
the diseases of the elderly, which often carry higher prices, but are more
effective in reducing overall healthcare costs than those they replace. These
factors were partially offset by intense competitive pricing pressures, the
increasing use of generic drugs and the impact of prior-year Medicaid
reimbursement cuts, including overall reimbursement formula changes in certain
states, as well as drug-specific pricing reductions or limitations on certain
generic drugs. It should be noted, however, that the impact from Medicaid
reimbursement cuts now is much lower than seen historically due to the shift in
payor mix largely from Medicaid to Medicare Part D. 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 $150.5 million in the first quarter
of 2006, a $25.6 million improvement as compared with the $124.9 million earned
in the comparable period of 2005. The increased operating income was primarily
the result of the increased sales discussed above, the addition of NeighborCare,
excelleRx and RxCrossroads, the impact of productivity enhancement initiatives,
as well as the overall synergies from the integration of prior period acquisitions,
particularly the NeighborCare acquisition. Although operating margins are generally
unfavorably impacted by the initial 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 serve to leverage the Companys operating cost structure
and have historically resulted in improved operating margins in the long-term
as cost synergies are realized. The aforementioned positive factors were partially
offset by the previously mentioned intensified competitive pricing and Medicaid
reimbursement pressures, as well as, the aforementioned special litigation charge
of $34.1 million, restructuring and other related charges, of which approximately
$5.3 million pretax was included in the Pharmacy Services segment, and a special
charge of approximately $6.1 million pretax associated with retention payments
for certain NeighborCare employees as required under the acquisition agreement.
Also included in the results of the Pharmacy Services segment for the first
quarter of 2006 are the previously mentioned expenses totaling approximately
$9.8 million comprising temporary labor, administrative and operating costs
incurred in connection with the implementation of the new Medicare Part D drug
benefit, which went into effect on January 1, 2006. On
July 28, 2005, Omnicare completed its acquisition of NeighborCare. The
acquisition, accounted for as a purchase business combination, included cash
consideration 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 the Company immediately following the
acquisition. In addition, the Company completed a tender offer for and
subsequently purchased all of the $250 million outstanding principal amount of
NeighborCares 6.875% senior subordinated notes, due 2013 (the NeighborCare
Notes). The total consideration, excluding accrued and unpaid interest, paid
for the NeighborCare Notes was approximately $274.2 million. 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 38 District of
Columbia. NeighborCare also provided infusion therapy services, home medical
equipment, respiratory therapy services, community-based retail pharmacies and
group purchasing. The
NeighborCare acquisition has provided opportunities to achieve economies of
scale and cost synergies. The Company has implemented an integration plan under
which the processes have been put in place to achieve such savings in the
purchasing of pharmaceuticals, the elimination of redundant functions and the
consolidation of facilities in overlapping geographic territories. Historically,
the Company has derived approximately one-half of its revenues directly from
government sources, principally state Medicaid programs and to a lesser extent
the federal Medicare program, and one-half from the private sector (including
individual residents, third-party insurers, long-term care and other
institutional health care facilities and its contract research organization
business). 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 an important change for the skilled nursing
facility (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. In
1999 and 2000, Congress sought to restore some of the reductions in
reimbursement resulting from PPS. This legislation helped to improve the
financial condition of SNFs, motivated them to increase admissions,
particularly of higher acuity residents, and stabilized the unfavorable
operating trends attributable to PPS. One provision gave SNFs a temporary rate
increase for certain specific high-acuity patients beginning April 1, 2000, and
ending when Centers for Medicare & Medicaid Services (CMS) implements a
refined patient classification system under PPS. For several years, CMS did not
implement such refinements, thus continuing the additional rate increase for
certain high-acuity patients through federal fiscal year 2005. 39 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, the CMS
added nine patient classification categories to the PPS patient classification
system, thus triggering the expiration of the high-acuity payments add-ons.
However, CMS estimates that the rule will have a slightly positive 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 became 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 SNFs, the loss of revenues
associated with future changes in SNF payments could, in the future, have an
adverse effect on the financial condition of the Companys SNF clients which
could, in turn, adversely affect the timing or level of their payments to
Omnicare. Moreover,
on February 8, 2006, the President signed into law the Deficit Reform Act
(DRA), which will reduce net Medicare and Medicaid spending by approximately
$11 billion over five years. Among other things, the legislation reduces
Medicare SNF bad debt payments by 30 percent for those individuals who are not
dually eligible for Medicare and Medicaid. This provision is expected to reduce
payments to SNFs by $100 million over 5 years (fiscal years 2006-2010).
Further, on February 6, 2006, the Bush Administration released its fiscal year
2007 budget proposal, which would reduce Medicare spending by $2.5 billion in
fiscal year 2007 and $35.9 billion over 5 years. The budget would, among other
things, freeze payments to SNFs in fiscal year 2007, and limit the payment
update to market basket minus 0.4 percent in fiscal year 2008 and 2009. To
enhance the long-term financing of the Medicare program, the budget also
proposes automatic reductions in provider updates if general revenues are
projected to exceed 45 percent of total Medicare financing. To date,
congressional resolutions have not included these reimbursement cuts, and these
proposals would require legislation to be implemented. Nonetheless, Congress may
yet consider these and other proposals in the future that would further
restrict Medicare funding for SNFs. 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, effective
January 1, 2006. Prior to enrollment in Part D, beneficiaries have been able to
receive assistance with their outpatient prescription drug costs through a prescription
drug discount card program. This discount card program began in June 2004, and
has provided enrollees access to negotiated discounted prices for prescription
drugs. The discount card program ends May 15, 2006. Under
the new Part D prescription drug benefit, Medicare beneficiaries may enroll in
Part D Plans which provide coverage of outpatient prescription drugs. The
deadline for Part D enrollment for 2006 is generally May 15, 2006, although the
new benefits became available January 1, 2006 and nursing home residents may
enroll at any time. Medicare beneficiaries generally have to pay a premium to
enroll in a Part D Plan, with the premium amount varying from plan to plan,
although CMS is providing various federal subsidies to Part D Plans to reduce
the cost to beneficiaries. Medicare beneficiaries who are also entitled to
benefits under a state 40 Medicaid
program (so-called dual eligibles), including nursing home residents served
by the Company whose drug costs have been covered by state Medicaid programs,
now have their prescription drug costs covered by the new Medicare drug
benefit. (In 2005, approximately 46% of our revenue was derived from
beneficiaries covered under state Medicaid programs.) CMS
provides premium and cost-sharing subsidies to Part D Plans with respect to
dual eligible residents of nursing homes. Therefore, such dual eligibles are
not 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, nor are they required to meet deductibles or pay co-payment
amounts. Further, all dual eligibles who had not affirmatively enrolled in a
Part D Plan as of December 31, 2005 were automatically enrolled into a PDP by
CMS on a random basis from among those PDPs meeting CMS criteria for low-income
premiums in the PDP region. As is the case for any nursing home beneficiary,
such dual eligible beneficiaries may change Part D Plans at any time through
the established Part D enrollment process. In sum, dual eligible residents of
nursing homes are entitled to have their 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 requires the formularies of Part D Plans to include the types
of drugs most commonly needed by Medicare beneficiaries, and that plans
formulary exceptions criteria provide for coverage of drugs determined by the
plan to be medically appropriate for the enrollee. The MMA also makes available
partial premium and cost-sharing subsidies for certain other classes of
low-income enrollees who do not qualify for Medicaid. Pursuant
to the final Part D rule, effective January 1, 2006, the Company obtains
reimbursement for drugs it provides to enrollees of a given Part D Plan in
accordance with the terms of agreements negotiated between it and that Part D
Plan. The Company has entered into such agreements with nearly all Part D Plan
sponsors under which it will provide drugs and associated services to their
enrollees. The Company continues to negotiate agreements with Part D Plans.
Moreover, as expected in the transition to a new program of this magnitude, certain
administrative and payment issues have arisen. Until all such agreements are
finalized and Medicare beneficiaries complete enrollment in the Plans, and
until these administrative and payment issues have been resolved, the Company
will not be able to determine the impact of the new Part D Drug Benefit on the
Companys results of operation, financial condition and cash flows. The
MMA does not change the manner in which Medicare pays for drugs for Medicare
beneficiaries covered under a Medicare Part A stay. The Company will continue
to receive reimbursement for drugs provided to such residents from the SNFs
pursuant to the contracts it has negotiated with each SNF. The Company will
also continue to receive reimbursement from the state Medicaid programs, albeit
to a greatly reduced extent, for those Medicaid beneficiaries not eligible for
the Part D program, including those under age 65, and for certain drugs
specifically excluded from Medicare Part D. CMS
has issued subregulatory guidance on many aspects of the final Part D rule
including the provision of pharmacy services to long-term care residents. CMS
has also expressed some concerns about pharmacies receipt of discounts,
rebates and other price 41 concessions
from drug manufacturers. Specifically, in a finalized Call Letter for the
2007 calendar year, CMS indicated that while such rebates could create
significant fraud and abuse concerns, they are not prohibited. For 2007, CMS
will require Part D sponsors to have policies and systems in place, as part of
their drug utilization management programs, to protect beneficiaries and reduce
costs when long-term care pharmacies are subject to incentives to move market
share through access/performance rebates from drug manufacturers. For the
purposes of managing and monitoring drug utilization, especially where such
rebates exist, CMS instructs Part D Plan sponsors, to require pharmacies to
disclose to the Part D Plan sponsor any discounts, rebates and other direct or
indirect remuneration designed to directly or indirectly influence or impact
utilization of Part D drugs. CMS stated that Plan sponsors should provide
assurances that such information will remain confidential. CMS appears to have
withdrawn a proposed requirement that would have required that certain rebates
provided to long-term care pharmacies be treated as having been provided to the
Plans and netted against Plans costs for purposes of certain Part D subsidy
calculations. CMS will specify in further guidelines the specific information
that CMS will require from Plan sponsors concerning the procedures and
performance of this aspect of the sponsors drug utilization management
program. CMS
has indicated it will continue to issue guidance on the Part D program as it is
implemented. The Company is continuing to monitor implementation of the new
Part D benefit, and until further agency guidance is known and until the
administrative and payment issues associated with the transition to this
massive program have been resolved, the Company cannot predict the ultimate
effect of the final rule or the outcome of other potential developments related
to its implementation on our business, results of operations, financial
position or cash flows. The MMA also reforms the Medicare Part B prescription
drug payment methodology, although the Companys revenues for drugs dispensed
under Medicare Part B are not significant in comparison to total revenues. The
MMA also includes administrative reforms designed to improve Medicare program
operations. It is uncertain at this time the impact that the MMAs legislative
reforms ultimately will have on the Company. Other
healthcare funding issues remain, including pressures on federal and state
Medicaid budgets, and most states are taking steps to implement cost controls
within their Medicaid programs. Some states continue to experience budget
shortfalls, which may prompt them to consider implementing reductions in
Medicaid reimbursement and other cost control measures. Likewise, the DRA
includes several changes to the Medicaid program designed to rein in program
spending. These include, among others, strengthening the Medicaid asset
transfer restrictions for persons seeking to qualify for Medicaid long-term
care coverage, which could, due to the timing of the penalty period, increase
facilities exposure to uncompensated care. This provision is expected to
reduce Medicaid spending by an estimated $2.4 billion over 5 years. The law
also gives states greater flexibility to expand access to home and community
based services by allowing states to provide these services as an optional
benefit without undergoing the waiver approval process, and includes a new
demonstration to encourage states to provide long-term care services in a
community setting to individuals who currently receive Medicaid services in
nursing homes. Together these provisions could increase state funding for home
and community based services, while prompting states to cut funding for nursing
facilities. The DRA also changes the so-called Medicaid upper limit rules for
prescription drugs, effective January 1, 2007. Like the current upper limit, it
only applies to drugs ingredient costs and does 42 not include
dispensing fees, which will continue to be determined by the states. With the
advent of Medicare Part D, the Companys revenue from state Medicaid programs
will be substantially less than has been the case previously. However, some of
the Companys agreements with Part D Plans have incorporated the Medicaid upper
limit rules into the pricing mechanisms for prescription drugs. In
addition, the Presidents proposed fiscal year 2007 budget includes a series of
proposals impacting Medicaid and the State Childrens Health Insurance Program
(SCHIP), including administrative changes to the financing structure of
Medicaid that would save more than $12 billion over five years. These changes
include further reductions in Medicaid drug reimbursement, reforms to Medicaid
drug rebate requirements, allowing states to use managed drug formularies, and
reforms to Medicaid provider taxes. While the Company has endeavored to adjust
to these types of funding pressures in the past, there can be no assurance that
these or future changes in Medicaid payments to nursing facilities, pharmacies,
or managed care systems, or their potential impact on payments under agreements
with Part D Plans, will not have an adverse impact on the Companys
business. Longer
term, funding for federal and state healthcare programs must consider the aging
of the population and the growth in enrollees as eligibility is expanded; the
escalation in drug costs owing to higher drug utilization among seniors and the
introduction of new, more efficacious but also more expensive medications; and
the long-term financing of the Medicare and Medicaid programs. Given competing
national priorities, it remains difficult to predict the outcome and impact on
the Company of any changes in healthcare policy relating to the future funding
of the Medicare and Medicaid programs. Demographic
trends indicate that demand for long-term care will increase well into the
middle of this century as the elderly population grows significantly. Moreover,
those over 65 consume a disproportionately high level of healthcare services,
including prescription drugs, when compared with the under-65 population. There
is widespread consensus that appropriate pharmaceutical care is generally
considered the most cost-effective form of treatment for the chronic ailments
afflicting the elderly and also one that is able to improve the quality of
life. Further, the pace and quality of new drug development is yielding many
promising new drugs targeted at the diseases of the elderly. These new drugs
may be more expensive than older, less effective drug therapies due to rising
research costs. However, they are significantly more effective in curing or
ameliorating illness and in lowering overall healthcare costs by reducing,
among other things, hospitalizations, physician visits, nursing time and lab
tests. These trends not only support long-term growth for the geriatric
pharmaceutical industry but also containment of healthcare costs and the
well-being of the nations growing elderly population. In
order to fund this growing demand, the Company anticipates that the government
and the private sector will continue to review, assess and possibly alter
healthcare delivery systems and payment methodologies. While it cannot at this
time predict the effect of the new Medicare Part D drug benefit or any further
initiatives on Omnicares business, management believes that the Companys
expertise in geriatric pharmaceutical care and pharmaceutical cost management
position Omnicare to help meet the challenges of todays healthcare environment.
Further, while volatility can occur from time to time in the contract research
business owing to factors such as 43 the success or
failure of its clients compounds, the timing or budgetary constraints of its
clients, or consolidation within our client base, new drug discovery remains an
important priority of drug manufacturers. Drug manufacturers, in order to
optimize their research and development efforts, will continue to turn to
contract research organizations to assist them in accelerating drug research
development and commercialization. CRO Services Segment Omnicares
CRO Services segment earned revenues of $42.0 million for the three months
ended March 31, 2006, which were 9% lower than the $46.0 million recorded in
the same prior year period. In accordance with EITF Issue No. 01-14, Income
Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred (EITF No. 01-14), the Company included $6.2 million and
$7.3 million of reimbursable out-of-pockets in its CRO Services segment
reported revenues and cost of sales for the quarters ended March 31, 2006 and
2005, respectively. Revenues were lower for the three months ended March 31,
2006 than in the comparable period of 2005 primarily due to the aforementioned
decrease in reimbursable out-of-pockets of $1.1 million and client-driven
delays in the commencement of certain projects during the first quarter of
2006. Operating
income in the CRO Services segment was $1.2 million in the first quarter of
2006 compared with $2.6 million in the same 2005 period. The decrease is
attributable to the previously mentioned restructuring and other related
charges, of which approximately $0.3 million was included in the CRO Services
segment, and the client-driven delays in commencement of certain projects as
discussed above. Backlog at March 31, 2006 was $277.8 million, representing an
increase of $8.9 million from the December 31, 2005 backlog of $268.9 million
and an increase of $15.9 million from the March 31, 2005 backlog of $261.9
million. Consolidated The
Companys consolidated gross profit of $416.5 million increased $147.2 million
during the first quarter of 2006 from the same prior-year period amount of
$269.3 million. Gross profit as a percentage of total net sales of 25.1% in the
three months ended March 31, 2006, was higher than the 24.6% experienced during
the same period of 2005. Positively impacting overall gross profit margin were
the Companys purchasing leverage associated with the procurement of
pharmaceuticals and benefits realized from compliance with clinical programs,
the increased use of generic drugs, the impact of productivity enhancements, a
favorable payor mix shift, growth in higher margin IV sales, cost savings
associated with the integration of NeighborCare, and the addition of the
higher-margin RxCrossroads and excelleRx businesses. These favorable
year-over-year factors were partially offset by the previously mentioned
intensified competitive pricing and reimbursement pressures, the aforementioned
Part D transition expenses, 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 March 31, 2006 of $247.3 million were higher than the comparable year
amount of $157.8 million by $89.5 million, due primarily to the aforementioned
completion of several acquisitions, 44 including NeighborCare, excelleRx and RxCrossroads in the third
quarter of 2005. Operating expenses as a percentage of net sales amounted to
14.9% in the first quarter of 2006, representing an increase from the 14.4%
experienced in the comparable prior-year period. Operating expenses for the
quarter ended March 31, 2006 were unfavorably impacted by a $13.8 million increase
in amortization and depreciation expenses largely related to the 2005 acquisitions,
the aforementioned $6.1 million charge associated with retention payments for
certain NeighborCare employees, $2.9 million of additional equity-based compensation
expense for stock options and stock awards related to the adoption of SFAS 123R,
and the previously discussed temporary costs associated with the implementation
of the new Medicare Part D drug benefit. Partially offsetting the increased
operating expenses were the favorable impact of leveraging of fixed (e.g., rents)
and variable (e.g., utilities) overhead costs over a larger sales base in 2006
than that which existed in 2005 and the Companys continued productivity
enhancements, including the ongoing restructuring program commenced in connection
with the NeighborCare acquisition. In addition, the quarter ended March 31,
2005 included the aforementioned $1.2 million special charge for professional
fees and expenses related to the first quarter 2005 trust PIERS exchange offering. As
previously discussed, on May 10, 2006, the Company announced that it has recorded
a special litigation charge of $34.1 million pretax ($24 million aftertax, or
$0.19 per diluted share) in its financial results for the quarter ended March
31, 2006 to establish a settlement reserve relating to previously disclosed
inquiries by the federal government and certain states relating to three generic
pharmaceuticals provided by the Company. This special litigation charge represents
the Companys current estimate of potential settlement amounts and associated
costs. See further discussion at the Commitments and Contingencies
and Subsequent Event notes of the Notes to Consolidated Financial
Statements, and the Legal Proceedings section at Part II, Item 1
of this Filing. Investment
income for the three months ended March 31, 2006 of $1.8 million was
approximately $0.6 million greater than the $1.2 million earned in the
comparable prior year quarter, primarily due to higher interest rates and
average invested cash and plan asset balances in comparison to the same prior
year quarter. Interest
expense for the three months ended March 31, 2006 of $42.4 million was higher
than the $19.9 million in the comparable prior-year period due to increased
overall borrowings resulting from the new debt issuances completed in the
latter half of 2005 in connection with the previously mentioned acquisitions,
and increased interest rates for variable rate loans. The
effective income tax rate was 38.6% in the first quarter of 2006, modestly higher
than the comparable prior year period rate of 37.5% due primarily to certain
nondeductible litigation costs, partially offset by the completion of routine
taxing authority examinations in the quarter. The Company expects its effective
tax rate, excluding the impact of the nondeductible portion of the litigation
costs, to return to a range of approximately 37% to 38% during the remainder
of 2006. The effective tax rates in 2006 and 2005 are higher than the federal
statutory rate largely as a result of the combined impact of state and local
income taxes, various nondeductible expenses and tax-accrual adjustments. Restructuring and Other Related Charges In
the third quarter of 2005, the Company announced the implementation of certain
consolidation plans and other productivity initiatives to streamline pharmacy
services and contract research organization operations, including maximizing
workforce and operating asset utilization, and producing a more cost-efficient,
operating infrastructure (the 2005 Program). These consolidation and
productivity initiatives are related, in part, to the integration of
NeighborCare. Given the geographic overlap of the NeighborCare and Omnicare
pharmacies, substantial opportunities for consolidation existed at the time of
acquisition. While the majority of consolidations have resulted in NeighborCare
pharmacies being consolidated into Omnicare pharmacies, depending on location,
capacity and operating performance, certain Omnicare 45 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 31 Omnicare facilities,
of which 28 are pharmacy operations. It will also lead to a net reduction in
force of approximately 900 positions. Of this reduction in force, approximately
96% are in pharmacy operations and the remaining reductions are at the corporate
headquarters or the Companys contract research operations. Approximately
600 of these positions have been eliminated as of March 31, 2006. Restructuring
activities in the contract research organization segment relate primarily to
facility lease obligations. In
connection with this program, these particular consolidation and productivity
initiatives are expected to be completed within 12 months of commencement of
the 2005 Program. The Company expects to generate in excess of $40 million in
pretax savings from pharmacy closures and other consolidation and productivity
initiatives implemented in connection with these activities. These initiatives
are currently estimated to require total restructuring and other related
charges of approximately $30 million before taxes, which relate to the costs
associated with the consolidation of Omnicare pharmacies and the other
consolidation and productivity initiatives described above. The Company
recorded restructuring and other related charges of approximately $19 million
pretax (approximately $12 million aftertax, or $0.11 per diluted share) during
the year ended December 31, 2005. Additionally, the Company recorded
restructuring and other related charges of approximately $8 million pretax
(approximately $5 million aftertax, or $0.04 per diluted share) during the
quarter ended March 31, 2006. The Company expects charges of approximately $3
million before taxes during the remainder of the program. 46 The
restructuring charges primarily include severance pay, the buy-out of
employment agreements, lease terminations and other assets, fees and facility
exit costs. The other related charges consist of professional fees associated
with certain productivity initiatives. Details of the restructuring and other
related charges follow (in thousands): Balance at 2006 Utilized Balance at Restructuring charges: Employee
severance $ 2,809 $ 2,445 $ (499 ) $ 4,755 Employment
agreement buy-outs 734 933 (963 ) 704 Lease
terminations 9,833 874 (1,694 ) 9,013 Other assets,
fees and facility exit costs 1,335 931 (1,486 ) 780 Total
restructuring charges $ 14,711 $ 5,183 $ (4,642 ) $ 15,252 Other related charges 2,530 Total restructuring and other related charges $ 7,713 As
of March 31, 2006, the Company had paid approximately $3.9 million of severance
and other employee-related costs. The remaining liabilities at March 31, 2006
represent amounts not yet paid relating to actions taken in connection with
the program (primarily severance payments and lease payments), and will be settled
as these matters are finalized. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash
and cash equivalents at March 31, 2006 were $327.7 million compared with $218.1
million at December 31, 2005 (including restricted cash amounts of $12.2
million and $2.7 million, respectively). The
Company generated positive net cash flows from operating activities of $82.8
million during the three months ended March 31, 2006, compared with net cash
flows from operating activities of $65.1 million during the three months ended
March 31, 2005. Largely contributing to net cash flows from operating
activities during the three months ended March 31, 2006 was earnings during the
period. Compared to the same prior year period, cash flow from operating
activities was impacted by an increase in accounts receivable due to increased
revenue, administrative and payment issues associated with the implementation
of the new Medicare Part D drug benefit, and an approximately $20 million
unfavorable impact due to a significant increase in accounts receivable days
outstanding with the Illinois Department of Public Aid (Illinois Medicaid).
These unfavorable impacts were partially offset by the return of a $38.3 47 million deposit from one of
the Companys drug wholesalers. Operating cash flows, as well as proceeds from
the issuance of common stock, were used primarily for acquisition-related
payments, capital expenditures, dividend payments and to increase the Companys
cash position as compared with December 31, 2005. Net
cash used in investing activities was $39.1 million and $36.8 million for the
three months ended March 31, 2006 and 2005, respectively. Acquisitions of
businesses required cash payments of $23.2 million (including amounts payable
pursuant to acquisition agreements relating to pre-2006 acquisitions) in 2006,
which were primarily funded by proceeds from the issuance of common stock and
operating cash flows. Acquisitions of businesses during the first three months
of 2005 required $28.2 million of cash payments (including amounts payable
pursuant to acquisition agreements relating to pre-2005 acquisitions) which
were primarily funded by long-term debt borrowings. Omnicares capital
requirements, in addition to the payment of debt and dividends, 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 $56.4 million for the three months
ended March 31, 2006 as compared to $30.3 million for the comparable prior year
period. In January 2006, the underwriters of the common stock offering completed
by the Company in December 2005 exercised their option, in part, to purchase
an additional 850,000 shares of common stock at $59.72 per share, for gross
cash proceeds of approximately $51 million. Borrowings of long-term debt totaled
approximately $41 million during the first quarter of 2005 and, as previously
stated, were primarily used for payments relating to the acquisition of businesses. At
March 31, 2006, there were no outstanding borrowings under the $800 million
revolving credit facility, and $700 million in borrowings were outstanding
under the senior term A loan facility due 2010. As of March 31, 2006, the
Company had approximately $23.8 million outstanding relating to standby letters
of credit, substantially all of which are subject to automatic annual renewals. In
addition, at March 31, 2006, the contingent conversion threshold of the 4.00% junior subordinated convertible
debentures due 2033 (the 4.00% Convertible Debentures) had been attained (as the closing sales price of
Omnicare common stock exceeded 130% of the applicable conversion price of
$40.82, or was above $53.07, for the twenty trading days prior to quarter end).
As a result, the 4.00% Convertible Debentures were convertible by the debt
holders to cash and common stock, and have been classified as current versus
long-term on the consolidated balance sheet at March 31, 2006. On
February 16, 2006, 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 2006, which is consistent with the dividends paid in 2005.
Aggregate dividends of $2.7 million and $2.4 million were paid during the three
month periods ended March 31, 2006 and 2005, respectively. There
were no known material commitments and contingencies outstanding at March 31,
2006, other than the contractual obligations summarized in the Disclosures
About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements
caption below, certain 48 acquisition-related payments potentially due in the future, including
deferred payments, indemnification payments and payments originating from earnout
provisions that may become payable, and the matters discussed in the Commitments
and Contingencies and “Subsequent Event” notes of the Notes
to Consolidated Financial Statements, and the “Legal Proceedings”
section at Part II, Item 1 of this filing. The
Company believes that net cash flows from operating activities, credit
facilities and 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. Although the Company has no current
plans to refinance its indebtedness, issue additional indebtedness, or issue
additional equity, the Company believes that external sources of financing are
readily available and will access them as deemed appropriate (although no
assurances can be given regarding the Companys ability to obtain additional
financing in the future). Disclosures
About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements Aggregate
Contractual Obligations: Total Less Than 1 1-3 Years 4-5 Years After 5 Years Debt obligations(a) $ 3,073,570 $ 345,000 $ $ 742,845 $ 1,985,725 Capital lease
obligations(a) 20,977 12,854 7,788 335 Operating lease
obligations 186,522 44,402 66,573 56,716 18,831 Purchase obligations(b) 97,863 92,844 5,019 Other current
obligations(c) 426,725 426,725 Other long-term
obligations(d) 270,181 104,615 46,260 119,306 Subtotal 4,075,838 921,825 183,995 846,156 2,123,862 Future interest
relating to debt and capital lease obligations(e) 2,063,939 151,726 301,776 274,706 1,335,731 Total
contractual cash obligations $ 6,139,777 $ 1,073,551 $ 485,771 $ 1,120,862 $ 3,459,593 (a) The noted 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 discussed
below. (e) Represents estimated future interest costs based on
the stated fixed interest rate of the debt, or the variable interest rate in
effect at period end for variable interest rate debt. The estimated future
interest costs presented in this table do not include any amounts potentially
payable associated with the contingent interest and interest reset provisions
of 49 the Companys convertible debentures. To the extent
that any debt would be paid off by Omnicare prior to the stated due date, the
estimated future interest costs would change accordingly. As
of March 31, 2006, the Company had approximately $23.8 million outstanding
relating to standby letters of credit, substantially all of which are subject
to automatic annual renewals. 2005 Refinancing During
the latter half of 2005, the Company entered into a new $3.4 billion Credit
Agreement (Credit Agreement) consisting of a $1.9 billion 364-day loan
facility, with original maturity dates spanning from July 26, 2006 through
August 17, 2006 (the 364-Day Loans), a five year $800 million revolving
credit facility, maturing on July 28, 2010 (the Revolving Loans) and a five
year $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 was 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. The
364-Day Loans were repaid in full with proceeds from a major refinancing
completed in late 2005, as further described below. 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 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. The interest rate on the
Revolving Loans and the Term Loans was 5.47% at March 31, 2006. The Credit
Agreement requires the Company to comply with 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, as of July 28, 2005, 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. As of March 31,
2006, there was no amount drawn under the Revolving Loans and $700 million
outstanding under the Term Loans due 2010. As of March 31, 2006, the Company
had approximately $23.8 million outstanding relating to standby letters of
credit, substantially all of which are subject to automatic annual renewals. In
connection with the execution of the new Credit Agreement, the Company has
deferred debt issuance costs of $11.7 million, and has amortized approximately
$0.6 million of these deferred issuance costs during the quarter ended March
31, 2006. On
December 15, 2005, the Company completed its offering of $225 million aggregate
principal amount of 6.75% senior subordinated notes due 2013 (the 6.75% Senior
Notes), and its offering of $525 million aggregate principal amount of 6.875%
senior subordinated notes due 2015 (the 6.875% Senior Notes). In connection
with the issuance of the 6.75% Senior Notes 50 and the 6.875% Senior Notes, the Company has deferred
$15.3 million of debt issuance costs, of which approximately $0.4 million was
amortized in the quarter ended March 31, 2006. On
December 15, 2005, Omnicare also completed its offering of $977.5 million
aggregate principal amount of 3.25% convertible senior debentures due 2035 (the
3.25% Convertible Debentures), including the exercise in full by the
underwriters of their option to purchase additional debentures. The 3.25%
Convertible Debentures have an initial conversion price of approximately $79.73
per share under a contingent conversion feature whereby the holders may convert
their 3.25% Convertible Debentures, prior to December 15, 2033, on any date
during any fiscal quarter beginning after March 31, 2006 (and only during such
fiscal quarter) if the closing sales price of the Companys common stock was
more than 130% of the then current conversion price for at least 20 trading
days in the period of the 30 consecutive trading days ending on the last
trading day of the previous fiscal quarter and in certain other circumstances.
The 3.25% Convertible Debentures bear interest at a rate of 3.25% per year,
subject to an upward adjustment on and after December 15, 2015 in certain
circumstances. The 3.25% Convertible Debentures also will pay contingent
interest in cash, beginning with the six-month interest period commencing
December 15, 2015, during any six-month period in which the trading price of
the 3.25% Convertible Debentures for each of the five trading days ending on
the second trading day immediately preceding the first day of the applicable
six-month interest period equals or exceeds 120% of the principal amount of the
3.25% Convertible Debentures. Embedded in the 3.25% Convertible Debentures are
three derivative instruments, specifically, a contingent interest provision, an
interest reset provision and a contingent conversion parity provision. The
embedded derivatives are valued periodically by a third-party advisor, and at
March 31, 2006, the values of the derivatives 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.
In connection with the issuance of the 3.25% Convertible Debentures, the
Company has deferred $26.9 million of debt issuance costs, of which
approximately $0.7 million was amortized in the quarter ended March 31, 2006. Also
on December 15, 2005, the Company completed an offering of 12,825,000 shares of
common stock (not including the underwriters option to purchase additional
shares), $1 par value, at $59.72 per share for gross proceeds of approximately
$766 million (the 2005 Common Stock Offering). In January 2006, the
underwriters exercised their option, in part, to purchase an additional 850,000
shares of common stock at $59.72 for additional gross proceeds of approximately
$51 million. On
December 5, 2005, Omnicare commenced a tender offer (the Tender Offer) for
cash to purchase any and all of the $375 million outstanding principal amount
of its 8.125% senior subordinated notes due 2011 (the 8.125% Senior Notes),
originally issued, at par value, in 2001. In connection with the Tender Offer,
the Company solicited consents to effect certain proposed amendments to the
indenture governing the 8.125% Senior Notes. On December 16, 2005 (the Consent
Payment Deadline), tenders and consents had been received with respect to
$366.2 million aggregate principal amount of the 8.125% Senior Notes
(approximately 98% of the total outstanding principal amount). The total
consideration, excluding accrued and unpaid interest, for each $1,000 principal
amount of 8.125% Senior Notes validly tendered prior to December 16, 2005 was
$1,048.91, which included a $20 consent payment. Subsequent to the 51 Consent Payment Deadline and December 31, 2005, and
prior to the Tender Offer expiration of midnight, New York City time, on
January 3, 2006, an additional $0.6 million aggregate principal amount was
validly tendered. The total consideration, excluding accrued and unpaid
interest, for each $1,000 principal amount of 8.125% Senior Notes validly
tendered subsequent to the Consent Payment Deadline and prior to expiration was
$1,028.91, which did not include a $20 consent payment. As of March 31, 2006,
approximately $8.2 million of the 8.125% Senior Notes remained outstanding. The
Company had additional borrowings of long-term debt during the quarter ended
March 31, 2005 approximating $41 million, primarily consisting of a note payable
carrying a five-year term and a variable interest rate, listed at 4.82% per
annum as of March 31, 2006. 4.00% Junior Subordinated
Convertible Debentures 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. In
connection with the exchange offer, the composition of the Companys 4.00%
junior subordinated convertible debentures underlying the trust PIERS was
impacted. Additional information regarding the 4.00% junior subordinated
convertible debentures underlying the Old Trust PIERS and the New Trust PIERS
is summarized below. 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 4.00% junior subordinated
convertible debentures (the 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 Company 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) and in certain other circumstances.
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 valued periodically by a third-party advisor, and at March 31, 2006, 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 52 quarter 2005 exchange offering 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
period end. 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 New Trust PIERS of 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 (the New 4.00% Debentures) issued by the
Company 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 period end, 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 Company common stock, whereas the outstanding Old
Trust PIERS are convertible only into Company common stock (except for cash in
lieu of fractional shares). As
of March 31, 2006, the aforementioned contingent conversion threshold of the Old
4.00% Debentures and the New 4.00% Debentures had been attained (as the closing
sales price of Omnicare common stock exceeded 130% of the applicable conversion
price of $40.82, or was above $53.07, for the twenty trading days prior to
quarter end). As a result, the Old 4.00% Debentures and the New 4.00%
Debentures were convertible by the debt holders to cash and to common stock,
and have been classified as current versus long-term debt on the consolidated
balance sheet as of March 31, 2006. 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 was amortized in each of the quarters ended
March 31, 2006 and 2005. As previously disclosed, the quarter ended March 31,
2005 included a special charge to 53 operating expenses totaling $1.2 million pretax in
connection with professional fees and expenses incurred relating to the
issuance of the New Trust PIERS. The
Credit Agreement, the 8.125% Senior Notes, the 6.125% senior subordinated
notes, due 2013 (6.125% Senior Notes), the 6.75% Senior Notes, the 6.875%
Senior Notes, the Old and New 4.00% Debentures, and the 3.25% Convertible
Debentures contain representations and warranties, covenants and events of
default customary for such facilities. Interest rates charged on borrowings
outstanding under the Credit Agreement are based on prevailing market rates as
further discussed in the Quantitative and Qualitative Disclosures About Market
Risk section below. Off-Balance
Sheet Arrangements: As
of period end, 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 the Company. 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. As
of period end, 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. Critical
Accounting Policies Stock-Based
Compensation Effective
January 1, 2006, the Company adopted the provisions of SFAS 123R, which replaced
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123) and supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25). Prior to the adoption of SFAS 123R,
the Company accounted for stock incentive plans under the recognition and measurement principles of APB 25, and related Interpretations
(intrinsic value method). As a result, no stock-based employee compensation
cost for stock options was 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. As further described in the
Recently Issued Accounting Standards section of this MD&A, and
in the Stock-Based Employee Compensation note of the Notes to the
Consolidated Financial Statements, SFAS 123R requires the Company to record
compensation costs relating to share-based payment transactions in its financial
statements. Under the fair value recognition 54 provisions of SFAS 123R,
share-based compensation cost is measured at the grant date based on the fair
value of the award and is recognized as expense ratably over the requisite
service period of the award (usually the vesting period). The
Company currently uses the Black-Scholes options pricing model to determine
the fair value of stock options on the grant date, which is affected by Omnicares
stock price as well as assumptions regarding a number of complex and subjective
variables, as further discussed below. These variables include Omnicares
expected stock price volatility over the expected term of the awards, actual
and projected employee exercise behaviors, the risk-free interest rate and the
stocks dividend yield. The expected term of stock options granted represents
the period of time that stock options granted are expected to be outstanding
and is estimated based on historical stock option exercise experience. The expected
volatility is based on the historical volatility of the Companys stock
over a period generally commensurate with the expected term of the stock options.
The risk-free interest rate used in the option valuation model is based on United
States Treasury Strip (stripped coupon interest) issues with remaining
terms similar to the expected term of the stock options. The expected dividend
yield is based on the current Omnicare stock yield. The Company is required
to estimate forfeitures at the time of the grant and revise those estimates
in subsequent periods if actual forfeitures differ from those estimates. Omnicare
uses historical data to estimate pre-vesting stock option forfeitures and records
stock-based compensation expense only for those awards that are expected to
vest. All stock option awards are amortized on a straight-line basis over the
requisite service periods of the awards, which are generally the vesting period.
Considering the importance of each of the above assumptions in the calculation
of fair value, the Company re-evaluates the estimate of these assumptions on
a quarterly basis. While the Company believes its stock option fair value calculations
are materially accurate, a one percentage point change in any of the individual
aforementioned assumptions, holding all other assumptions constant, would not
have a material impact on the fair value calculated by the Company. 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 and
financial condition. Omnicares primary collection risk generally relates to
facility and private pay customers. The Company provides a reserve 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 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 55 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 92 days to
derive the DSO amount. Omnicares DSO was approximately 74 days at March 31,
2006, which was slightly higher than the December 31, 2005 DSO of approximately
72 days largely due to the shift in payor mix from Medicaid to Medicare Part D.
The allowance for doubtful accounts as of March 31, 2006 was $170.0 million
compared with $169.4 million at December 31, 2005. These allowances represent
10.9% and 11.8% of gross receivables (net of contractual allowances) as of
March 31, 2006 and December 31, 2005, respectively. Although no significant
changes are expected, unforeseen changes to future allowance for doubtful
accounts percentages could materially impact the overall financial results
and/or financial position of the Company. For example, a one percentage point
increase in the allowance for doubtful accounts as a percentage of gross
receivables as of March 31, 2006 would result in an increase to the allowance
for doubtful accounts, as well as bad debt expense, of approximately $15.6
million pretax. The
following table is an aging of the Companys March 31, 2006 and December 31,
2005 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): March 31,
2006 Current and 181 Days and Total Medicaid,
Medicare Part B, Medicare Part D and Third-Party payors $ 588,472 $ 22,218 $ 610,690 Facility payors 534,679 168,453 703,132 Private Pay
payors 157,499 79,330 236,829 CRO 14,058 268 14,326 Total gross
accounts receivable (net of contractual allowance adjustments) $ 1,294,708 $ 270,269 $ 1,564,977 December
31, 2005 Current and 181 Days and Total Medicaid,
Medicare Part B and Third-Party payors $ 409,383 $ 37,883 $ 447,266 Facility payors 549,186 170,752 719,938 Private Pay
payors 171,907 71,740 243,647 CRO 18,816 357 19,173 Total gross
accounts receivable (net of contractual allowance adjustments) $ 1,149,292 $ 280,732 $ 1,430,024 56 Legal
Contingencies The
status of certain legal proceedings has been updated at the Commitments
and Contingencies and “Subsequent Event” notes of the Notes
to Consolidated Financial Statements, and the Part II, Item 1 Legal Proceedings
section of this Filing. DILUTED EARNINGS PER SHARE In
October 2004, the Financial Accounting Standards Board (FASB) ratified 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 threshold has been attained. 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. As further discussed in the Debt note of the Notes to
Consolidated Financial Statements, the Company completed the exchange offer
relating to the 4.00% junior subordinated convertible debentures on March 8,
2005. Accordingly, the effect of EITF No. 04-8 on the Companys first quarter
2005 earnings results prior to the trust PIERS exchange offer was to decrease
diluted earnings per share $0.02. For purposes of the if-converted
calculation, 6.3 million shares were assumed to be converted for the three
months ended March 31, 2005 (primarily relating to the period from January 1,
2005 through the exchange offering completion date of March 8, 2005). Additionally,
interest expense net of taxes, of $1.7 million for the three months ended March
31, 2005, was added back to net income for purposes of calculating diluted
earnings per share using this method. There was no impact relating to this
change on reported diluted earnings per share for the three months ended March
31, 2006. See further discussion of the trust PIERS exchange offering in the
Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet
Arrangements section of this MD&A. RECENTLY ISSUED ACCOUNTING
STANDARDS In
December 2004, the FASB issued SFAS 123R which the Company adopted effective
January 1, 2006. This statement requires the Company to record compensation
costs relating to equity-based payments in its financial statements. Under the
fair value recognition provisions of SFAS 123R, equity-based compensation cost
is estimated at the grant date based on the value of the award and is recognized
as expense ratably over the requisite service period of the award (usually the
vesting period). The Company elected the modified prospective application
method of implementing SFAS 123R, which requires that SFAS 123R be applied to
all new awards whose 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 service has not been rendered (i.e., nonvested portion)
and were outstanding as of January 1, 2006. In accordance with the modified
prospective method, the Companys Consolidated Financial Statements for
prior periods have not been restated to reflect the adoption of SFAS 123R. Prior
to January 1, 2006, the Company accounted for stock incentive plans under the
recognition and measurement provisions of APB 25, and
related Interpretations (intrinsic value method). As a result, no stock-based employee compensation cost
for stock options was 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. Operating income for the three
months ended March 31, 2006 includes additional equity-based compensation expense
for stock options and stock awards of approximately $2.9 million pretax ($1.8
million aftertax, or $0.015 per diluted share) related to the adoption of SFAS
123R. As of March 31, 2006, there was approximately $93 million of 57 total unrecognized
compensation cost related to nonvested stock awards and stock options granted
to Omnicare employees. That cost is expected to be recognized over a
weighted-average period of approximately 5.1 years. Omnicare currently expects
the dilutive impact of this new standard on its financial results for the full
year 2006 to reduce diluted earnings per share by approximately $0.05, based on
first quarter 2006 actual experience and outstanding stock options and
restricted stock awards at March 31, 2006. To the extent that any new stock
options or stock awards are granted subsequent to March 31, 2006, the estimated
dilutive impact to Omnicares 2006 diluted earnings per share and thereafter
would change accordingly. In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments (SFAS 155) which nullifies and amends various
accounting guidance related to accounting for derivative instruments and
securitization transactions. The intent of this guidance is primarily to reduce
operational complexity associated with bifurcating embedded derivatives, among
other items. SFAS 155 is effective for new instruments issued by the Company
beginning January 1, 2007. The Company currently does not expect that the initial adoption of
SFAS 155 will have a material impact on its consolidated financial position,
results of operations or cash flows. Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995 Regarding Forward-Looking Information In
addition to historical information, this report contains certain statements
that constitute “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are made on the basis of management’s views and assumptions
regarding business performance as of the time the statements are made, and management
does not undertake any obligation to update these statements. These forward-looking
statements include, but are not limited to, all statements regarding the intent,
belief or current expectations regarding the matters discussed or incorporated
by reference in this document (including statements as to “beliefs,” “expectations,”
“anticipations,” “intentions” or similar words) and all statements which are
not statements of historical fact. Forward-looking
statements in this report include, but are not limited to, the following: expectations
concerning the Company’s financial performance, results of operations, sales,
earnings or business outlook; expectations regarding acquisitions; trends in
the long-term healthcare and contract research industries generally; the impact
of the NeighborCare, excelleRx and RxCrossroads acquisitions and the continued
successful integration of acquired companies; 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; 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 2006; 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 the increasing use
of generic medications; the impact of any changes in healthcare policy relating
to the future funding of the Medicaid and Medicare programs; the cost-effectiveness
of pharmaceuticals in treating chronic illnesses for the elderly; the impact
of the Medicare drug benefit, its implementing regulations and CMS subregulatory
policies; the ability of the Company to deal with administrative, payment and
other issues brought about by the 58
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
incorporation or organization)
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Shares
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
March 31,
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
2006
2005
(2005-$252,489)
(2005-$45,153)
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
March 31,
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
March 31,
March 31,
(primarily prior actuarial losses)
December 31,
2005
Provision/
Accrual
during
2006
March 31,
2006
Services
Services
and
Consolidating
Totals
Subsidiaries
Subsidiaries
Eliminating
Adjustments
and
Subsidiaries
Subsidiaries
Subsidiaries
Eliminating
Adjustments
and
Subsidiaries
Subsidiaries
Subsidiaries
and
Subsidiaries
Subsidiaries
Subsidiaries
and
Subsidiaries
Subsidiary
Subsidiaries
Eliminating
Adjustments
and
Subsidiaries
Subsidiary
Subsidiaries
Eliminating
Adjustments
and
Subsidiaries
Subsidiary
Subsidiaries
and
Subsidiaries
Subsidiaries
Subsidiaries
and
Subsidiaries
March 31,
Subsequent Event
On
May 10, 2006, the Company announced that it has recorded a special litigation
charge of $34.1 million pretax ($24 million aftertax, or $0.19 per diluted
share) in its financial results for the quarter ended March 31, 2006 to
establish a settlement reserve relating to previously disclosed inquiries
by the federal government and certain states relating to three generic pharmaceuticals
provided by the Company, based on recent discussions between these government
representatives and the Companys legal counsel during May 2006. As
previously disclosed, the inquiries relate to the substitution of capsules
for tablets (Ranitidine), tablets for capsules (Fluoxetine) and two 7.5
mg tablets for one 15 mg tablet (Buspirone). This special litigation charge
represents the Companys current estimate of potential settlement amounts
and associated costs. The Company cannot predict the ultimate outcome of
this matter. See further discussion at the Subsequent Event
and Commitments and Contingencies notes of the Notes to Consolidated
Financial Statements, and the Legal Proceedings section at Part
II, Item 1 of this Filing.
March 31,
March 31,
March 31,
December 31,
2005
Provision/
Accrual
during
2006
March 31,
2006
Year
0-180 Days
Past Due
Over
Past Due
0-180 Days
Past Due
Over
Past Due
These forward-looking statements, together with other statements that are not historical, involve known and unknown risks, uncertainties, contingencies and other
59
factors that could cause results, performance or achievements to differ materially from those stated. Such risks, uncertainties, contingencies and other factors, many of which are beyond the control of the Company, include, but are not limited to: overall economic, financial, political and business conditions; trends in the long-term healthcare and contract research industries; competition in the pharmaceutical, long-term care and contract research industries; the impact of consolidation in the pharmaceutical and long-term care industries; trends in long-term care occupancy rates and demographics; the ability to attract new clients and service contracts and retain existing clients and service contracts; the ability to consummate pending acquisitions; trends for the continued growth of the Company’s businesses; expectations concerning the development and performance of the Company’s informatics business; the effectiveness of the Company’s compliance with clinical programs; 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 Company’s customers; the ability of the Company to assess and react to the financial condition of its customers; the effectiveness of the Company’s pharmaceutical purchasing programs and its ability to obtain discounts and manage pharmaceutical costs; the ability of vendors and business partners to continue to provide products and services to the Company; the continued successful integration of acquired companies and the ability to realize anticipated sales, economies of scale, cost synergies and profitability; the continued availability of suitable acquisition candidates; pricing and other competitive factors in the industry; increases or decreases in reimbursement rates and the impact of other cost control measures; the impact on the Company’s sales, profits and margins resulting from market trends in the use of newer branded drugs versus generic drugs; the number and usage of generic drugs and price competition in the drug marketplace; the ability to attract and retain needed management; competition for qualified staff in the healthcare industry; the impact and pace of technological advances; the ability to obtain or maintain rights to data, technology and other intellectual property; the demand for the Company’s products and services; variations in costs or expenses; the ability to implement productivity, consolidation and cost reduction efforts and to realize anticipated benefits; the ability of clinical research projects to produce revenues in future periods; the ability to benefit from streamlining and globalization efforts at the CRO; trends concerning CRO backlog; the effectiveness of the Company’s implementation and expansion of its clinical and other service programs; the effect of new legislation, government regulations, and/or executive orders, including those relating to reimbursement and drug pricing policies and changes in the interpretation and application of such policies; the impact of the Medicare drug benefit, its implementing regulations and CMS subregulatory policies; legislation and regulations affecting payment and reimbursement rates for SNFs; trends in federal and state budgets and their impact on Medicaid reimbursement rates; government budgetary pressures and shifting priorities; the Company’s ability to adjust to federal and state budget shortfalls; efforts by payors to control costs; changes to or termination of the Companys contracts with Medicare Part D plan sponsors; 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 CRO business for regulatory or other reasons; the
60
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 and share-based payments; the impact of consolidation in the pharmaceutical and long-term care industries; 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 Company's stock and in the financial markets generally; access to adequate capital and financing; changes in international economic and political conditions and currency fluctuations between the U.S. dollar and other currencies; changes in tax laws, regulations and effective tax rates; changes in accounting rules and standards; and other risks and uncertainties described in the Company's reports and filings with the Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, the Company's actual results, performance or achievements could differ materially from those expressed in, or implied by, such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date 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 March 31, 2006 include $700.0 million outstanding under the variable-rate term A loan at an interest rate of 5.47% at March 31, 2006 (a 100 basis-point change in the interest rate would increase or decrease pretax interest expense by approximately $7.0 million per year); $42.8 million borrowed on a variable-rate term loan at an interest rate of 4.82% at March 31, 2006 (a 100 basis-point change in the interest rate would increase or decrease pretax interest expense by approximately $0.4 million per year); $8.2 million
61
outstanding under its fixed-rate 8.125% Senior Notes, due 2011; $250.0 million outstanding under its fixed-rate 6.125% Senior Notes, due 2013; $225.0 million outstanding under its fixed-rate 6.75% Senior Notes, due 2013; $525 million outstanding under its fixed-rate 6.875% Senior Notes, due 2015; $345.0 million outstanding under its fixed-rate 4.00% Convertible Debentures, due 2033; and $977.5 million outstanding under its fixed-rate 3.25% Convertible Debentures, due 2035 (with an optional repurchase right of holders on December 15, 2015). 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 receives a fixed rate of 6.125% and pays a floating rate based on LIBOR with a maturity of six months, plus a spread of 2.27%. The estimated LIBOR-based floating rate (including the 2.27% spread) was 7.41% at March 31, 2006 (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 $25.6 million at March 31, 2006 is recorded as a noncurrent liability and a reduction to the book carrying value of the related 6.125% Senior Notes. At March 31, 2006, the fair value of Omnicares variable rate debt facilities approximates the carrying value, as the effective interest rates fluctuate with changes in market rates.
The fair value of the Companys fixed-rate debt facilities is based on quoted market prices and is summarized as follows (in thousands):
Fair Value of Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
||||||||
|
|
|
|
|
|
||||||||
Financial Instrument: |
|
Book Value |
|
Market Value |
|
Book Value |
|
Market Value |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
8.125% senior subordinated notes, due 2011 |
|
$ |
8,225 |
|
$ |
8,600 |
|
$ |
8,775 |
|
$ |
9,200 |
|
6.125% senior subordinated notes, due 2013 |
|
|
250,000 |
|
|
240,000 |
|
|
250,000 |
|
|
245,600 |
|
6.75% senior subordinated notes, due 2013 |
|
|
225,000 |
|
|
225,000 |
|
|
225,000 |
|
|
230,900 |
|
6.875% senior subordinated notes, due 2015 |
|
|
525,000 |
|
|
526,700 |
|
|
525,000 |
|
|
538,100 |
|
4.00% junior subordinated convertible debentures, due 2033 |
|
|
345,000 |
|
|
503,600 |
|
|
345,000 |
|
|
512,800 |
|
3.25% convertible senior debentures, due 2035 |
|
|
977,500 |
|
|
933,500 |
|
|
977,500 |
|
|
972,000 |
|
Embedded in the Old Trust PIERS, the New Trust PIERS and the 3.25% Convertible Debentures are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision. In addition, the 3.25% Convertible Debentures include an interest reset provision. The embedded derivatives are periodically valued by a third-party advisor, and at period end, the values of the derivatives embedded in the Old Trust PIERS, the New Trust PIERS and the 3.25% Convertible Debentures were not material. However, the
62
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 U.S. and transactions that are settled in currencies other than the U.S. dollar, exposing it to market risk related to changes in foreign currency exchange rates. However, the substantial portion of the 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 Company.
The Company does not have any financial instruments held for trading purposes.
ITEM 4. CONTROLS AND PROCEDURES
(a) Based on a recent evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in periodic reports filed or submitted under the Securities Exchange Act of 1934. Omnicare is an acquisitive company that continuously acquires and integrates new businesses. Throughout and following an acquisition, Omnicare focuses on analyzing the acquirees procedures and controls to determine their effectiveness and, where appropriate, implements changes to conform them to the Companys disclosure controls and procedures.
(b) There were no changes in the Companys internal control over financial reporting that occurred during the Companys fiscal quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
63
As disclosed in the Companys 2005 Annual Report on Form 10-K, the federal government and certain states are investigating allegations relating to three generic pharmaceuticals provided by the Company in connection with the substitution of capsules for tablets (Ranitidine), tablets for capsules (Fluoxetine) and two 7.5 mg tablets for one 15 mg tablet (Buspirone). The Company is cooperating fully in these matters. See further discussion at the Subsequent Event caption below.
On March 23, 2006, a shareholder derivative action entitled Irwin v. Gemunder, et al., 2:06cv62, was filed in the United States District Court For the Eastern District of Kentucky against the members of Omnicares board of directors, individually, purporting to assert claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment arising out of the Companys alleged violations of federal and state health care laws based upon the purported improper substitution of generic drugs. The complaint seeks, among other things, damages, restitution and injunctive relief.
The Company believes the above-described derivative action is without merit and intends to vigorously defend the action.
64
Although the Company cannot predict the ultimate outcome of the matters described in the preceding paragraphs, there can be no assurance that the resolution of these matters will not have a material adverse impact on the Companys consolidated financial position, results of operations or cash flows or, in the case of the investigations regarding certain drug substitutions, that these matters will be resolved in an amount that would not exceed the amount of the pretax charge recorded by the Company.
As part of its ongoing operations, the Company is subject to various inspections, audits, inquiries and similar actions by governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Company is subject, including reviews of individual Omnicare pharmacys reimbursement documentation and administrative practices.
Subsequent Event |
On May 10, 2006, the Company announced that it has recorded a special litigation charge of $34.1 million pretax ($24 million aftertax, or $0.19 per diluted share) in its financial results for the quarter ended March 31, 2006 to establish a settlement reserve relating to previously disclosed inquiries by the federal government and certain states relating to three generic pharmaceuticals provided by the Company, based on recent discussions between these government representatives and the Companys legal counsel during May 2006. As previously disclosed, the inquiries relate to the substitution of capsules for tablets (Ranitidine), tablets for capsules (Fluoxetine) and two 7.5 mg tablets for one 15 mg tablet (Buspirone). This special litigation charge represents the Companys current estimate of potential settlement amounts and associated costs. The Company cannot predict the ultimate outcome of this matter. See further discussion at the Commitments and Contingencies note of the Notes to Consolidated Financial Statements. |
Our 2005 Annual Report on Form 10-K includes a detailed discussion of our risk factors. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.
Risks Relating to Our Business
If we or our client facilities fail to comply with Medicaid and Medicare reimbursement regulations, our revenue could be reduced, we could be subject to penalties and we could lose our eligibility to participate in these programs.
Historically, approximately one-half of our pharmacy services billings have been directly reimbursed by government sponsored programs (including Medicaid and, to a lesser extent, Medicare). Beginning January 1, 2006, the new prescription drug benefit under Medicare Part D became effective. As a result, we experienced a shift in payor mix during the quarter ended March 31, 2006 such that payments under Part D currently represent over 40% of our overall revenues. In particular, Medicare beneficiaries who are also entitled to benefits under a state Medicaid program (so-called dual eligibles), including the nursing home residents we serve whose drug costs were previously covered by state Medicaid programs, now have their outpatient prescription drug costs covered by the new Medicare drug benefit. (In 2005, approximately 46% of our revenue was derived from beneficiaries covered under state Medicaid programs.) Under the new Part D benefit, payment is determined in accordance with the agreements we have negotiated with the Part D Plans. The remainder of our billings are paid or reimbursed by individual residents, long-term care facilities and other third party payors, including private insurers. A portion of these revenues also are indirectly dependent on government programs.
The Medicaid and Medicare programs are highly regulated. The failure, even if inadvertent, of us and/or our client facilities to comply with applicable reimbursement regulations could adversely affect our reimbursement under these programs and our ability to continue to participate in these programs. In addition, our failure to comply with these regulations could subject us to other penalties. See Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
65
Federal and state healthcare legislation has significantly impacted our business, and future legislation and regulations are likely to affect us.
In recent years, federal legislation has resulted in major changes in the healthcare system, which significantly affected healthcare providers. The Balanced Budget Act of 1997, or BBA, sought to achieve a balanced federal budget by, among other things, changing the reimbursement policies applicable to various healthcare providers. In an important change for the SNF industry, the BBA provided for the introduction in 1998 of the prospective payment system, or PPS, for Medicare-eligible residents of SNFs. 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 initially resulted in a significant reduction of reimbursement to SNFs. Subsequent legislation in 1999 and 2000 sought to restore some of the reductions in reimbursement resulting from PPS. We believe this legislation improved the financial condition of SNFs and provided incentives to increase occupancy and Medicare admissions, particularly among the more acutely ill. This legislation included a temporary rate increase for certain high-acuity patients, including medically-complex patients with generally higher pharmacy costs, beginning April 1, 2000 through September 30, 2005 when the Centers for Medicare & Medicaid Services, or CMS, implemented a refined resource utilization group, or RUG, patient classification system that is intended to better account for medically-complex patients. The final SNF PPS rule for fiscal year 2006 added nine patient classification categories to the PPS patient classification system, and increased the nursing case-mix weight for all of the RUG categories, resulting in a $20 million overall increase in payments for fiscal year 2006. The new patient classification refinements became 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 SNFs, the loss of revenues associated with future changes in SNF payment rates could, in the future, have an adverse effect on the financial condition of our SNF clients which could, in turn, adversely affect the timing or level of their payments to us. In that regard, on February 8, 2006, the President signed into law the Deficit Reduction Act, or DRA, which will reduce net Medicare and Medicaid spending by approximately $11 billion over five years. Among other things, the legislation reduces Medicare SNF bad debt payments by 30 percent for those individuals who are not dually eligible for Medicare and Medicaid. Further, on February 6, 2006, the Bush Administration released its fiscal year 2007 budget proposal, which would reduce Medicare spending by $2.5 billion in fiscal year 2007 and $35.9 billion over 5 years. The budget would, among other things, freeze payments to SNFs in fiscal year 2007, and limit the payment update to market basket minus 0.4 percent in fiscal year 2008 and 2009. To enhance the long-term financing of the Medicare program, the budget also proposes automatic reductions in provider updates if general revenues are projected to exceed 45 percent of total Medicare financing. To date, congressional resolutions have not included these reimbursement cuts, and these proposals would require legislation to be implemented. Nonetheless, Congress may consider these and other proposals in the future that would further restrict Medicare funding for SNFs. See MD&A.
In December 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA, which includes a major expansion of the Medicare prescription drug benefit under a new Medicare Part D. Prior to enrollment in Part D, Medicare beneficiaries have been able to receive assistance with their outpatient prescription drug costs through a prescription drug discount card program. This discount card program began in June 2004, and has provided enrollees access to negotiated discounted prices for prescription drugs. The discount card program ends May 15, 2006.
66
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 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 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) now have their prescription drug costs covered by the new Medicare drug benefit, including the nursing home residents Omnicare serves, whose drug costs were previously covered by state Medicaid programs. (In 2005, approximately 46% of Omnicares revenue was derived from beneficiaries covered under state Medicaid programs.)
CMS provides premium and cost-sharing subsidies to Part D Plans with respect to dual eligible residents of nursing homes. Such dual eligibles are not 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, nor are they required to meet deductibles or pay copayment amounts. Further, all dual eligibles who had not affirmatively enrolled in a Part D plan as of December 31, 2005 were automatically enrolled into a PDP by CMS on a random basis from among those PDPs meeting CMS criteria for low-income premiums in the PDP region. As is the case for any nursing home beneficiary, such dual eligible beneficiaries may select a different Part D Plan at any time through the Part D enrollment process. In sum, dual eligible residents of nursing homes are entitled to have their 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 requires the formularies of Part D Plans to include the types of drugs most commonly needed by Medicare beneficiaries and an exceptions process to provide coverage for medically necessary drugs.
Pursuant to the Part D final rule, effective January 1, 2006, we obtain reimbursement for drugs we provide to enrollees of a given Part D Plan in accordance with the terms of agreements negotiated between us and that Part D Plan. We have entered into such agreements with nearly all Part D Plan sponsors under which we provide drugs and associated services to their enrollees. We continue to negotiate agreements with Part D Plans. Moreover, as expected in the transition to a new program of this magnitude, certain administrative and payment issues have arisen. Until all such agreements are finalized and Medicare beneficiaries complete enrollment in the Plans, and until these administrative and payment issues have been resolved, we will not be able to determine the impact of the new Part D drug benefit on our results of operations, financial condition and cash flows.
The MMA does not change the manner in which Medicare pays for drugs for Medicare beneficiaries covered in a Part A stay. We will continue to receive reimbursement for drugs provided to such residents from the SNFs, in accordance with the terms of the agreements we have negotiated with each SNF. We will also continue to receive reimbursement from the state Medicaid programs, albeit to a greatly reduced extent, for those Medicaid beneficiaries not eligible for the Part D program, including those under age 65, and for certain drugs specifically excluded from Medicare Part D.
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. CMS has also expressed some concerns bout pharmacies receipt of discounts, rebates and other price concessions from drug manufacturers. Specifically, in a finalized Call Letter for the 2007 calendar year, CMS indicated that while such rebates could create significant fraud and abuse concerns, they are not prohibited. For 2007, CMS will require Part D sponsors to have policies and systems in place, as part of their drug utilization management programs, to protect beneficiaries and reduce costs when long-term care pharmacies are subject to incentives to move market share through access/performance rebates from drug manufacturers. For the purposes of managing and monitoring drug utilization, especially where such rebates exist, CMS instructs Part D Plan sponsors to require pharmacies to disclose to the Part D Plan sponsor any discounts, rebates and other direct or indirect remuneration designed to directly or indirectly influence or impact utilization of Part D drugs. CMS stated that Plan sponsors should provide assurances that such information will remain confidential. CMS appears to have withdrawn a proposed requirement that would have required that certain rebates provided to long-term care pharmacies be treated as having been provided to the Plans and netted against Plans costs for purposes of certain Part D subsidy calculations. CMS will specify in further guidelines the specific information that CMS will require from Plan sponsors concerning the procedures and performance of this aspect of the sponsors drug utilization management program.
67
CMS has indicated it will continue to issue guidance on the Part D program as it is implemented. We are continuing to monitor implementation of the new Part D benefit, and until further agency guidance is known and until the administrative and payment issues associated with the transition to this massive program have been resolved, we cannot predict the ultimate effect of the final rule or the outcome of other potential developments relating to its implementation on our business, results of operations, financial position, or cash flows.
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 or pharmacy services. In addition, some states continue to face budget shortfalls, which may prompt them to take steps to implement reductions in Medicaid reimbursement and other cost control measures. Likewise, the DRA includes several changes to the Medicaid program designed to rein in program spending. These include, among others: strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities exposure to uncompensated care. This provision is expected to reduce Medicaid spending by an estimated $2.4 billion over 5 years. The law also gives states greater flexibility to expand access to home and community based services by allowing states to provide these services as an optional benefit without undergoing the waiver approval process, and includes a new demonstration to encourage states to provide long-term care services in a community setting to individuals who currently receive Medicaid services in nursing homes. Together, these provisions could increase state funding for home and community based services, while prompting states to cut funding for nursing facilities.
The law also changes the so-called Medicaid upper limit rules for prescription drugs. With the advent of Medicare Part D, our revenues from state Medicaid programs will be substantially lower than has been the case previously. However, some of our agreements with Part D Plans have incorporated the Medicaid upper limit rules into the pricing mechanisms for our prescription drugs. There can be no assurance that future changes in Medicaid payments to pharmacies, nursing facilities or managed care systems, or their potential impact on payments under agreements with Part D Plans, will not have an adverse impact on our business.
In addition, the Presidents proposed fiscal year 2007 budget includes a series of proposals impacting Medicaid and the State Childrens Health Insurance Program (SCHIP), including administrative changes to the financing structure of Medicaid that would save more than $12 billion over five years. These changes include further reductions in Medicaid drug reimbursement, reforms to Medicaid drug rebate requirements, allowing states to use managed drug formularies, and reforms to Medicaid provider taxes. While we have endeavored to adjust to these types of funding pressures in the past, there can be no assurance that these or future changes in Medicaid payments to nursing facilities, pharmacies, or managed care systems, or their potential impact on payments under agreements with Part D Plans, will not have an adverse impact on our business.
Further, in order to rein in healthcare costs, we anticipate 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, we 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 our business. Longer term, funding for federal and state healthcare programs must consider the aging of the population and the growth in enrollees as eligibility is expanded; the escalation in drug costs owing to higher drug utilization among seniors and the introduction of new, more efficacious but also more expensive medications; the impact of the Medicare Part D 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 us of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs. Further, Medicare, Medicaid and/or private payor 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 our business.
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 March 31, 2006 is as follows (in thousands, except per share data):
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Period |
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Total Number |
|
Average Price |
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Total Number of |
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Maximum Number (or |
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||||
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|
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||||
January 1 - 31, 2006 |
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15 |
|
$ |
58.52 |
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|
|
|
|
|
|
February 1 - 28, 2006 |
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50 |
|
|
52.13 |
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|
|
|
|
|
March 1 - 31, 2006 |
|
|
145 |
|
|
60.35 |
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|
|
|
|
|
|
|
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|
|
|
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Total |
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210 |
|
$ |
58.28 |
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(a) During the first quarter of 2006, the Company purchased 210 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.
68
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.
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Omnicare, Inc. |
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Registrant |
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Date: May 10, 2006 |
By: |
/s/ David W. Froesel, Jr. |
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David W. Froesel, Jr. |
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Senior Vice President and |
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Chief Financial Officer |
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(Principal Financial and |
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Accounting Officer) |
69
INDEX OF EXHIBITS
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Number and
Description of Exhibit |
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Document Incorporated by Reference from a Previous Filing, Filed Herewith or Furnished Herewith, as Indicated Below |
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(3.1) |
Restated Certificate of Incorporation of Omnicare, Inc. (as amended) |
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Form 10-K |
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(3.3) |
Second Amended and Restated By-Laws of Omnicare, Inc. |
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Form 10-Q |
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|||
(10.24) |
Amendment to Employment Agreement with J.F. Gemunder dated as of April 6, 2006* |
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Form 8-K |
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(10.25) |
Amendment to Employment Agreement with P.E. Keefe dated as of April 6, 2006* |
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Form 8-K |
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(10.26) |
Amendment to Employment Agreement with C.D. Hodges dated as of April 6, 2006* |
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Form 8-K |
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(12) |
Statement of Computation of Ratio of Earnings to Fixed Charges |
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Filed Herewith |
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(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 |
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Filed Herewith |
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(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 |
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Filed Herewith |
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(32.1) |
Section 1350 Certification of Chief Executive Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002** |
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Furnished Herewith |
E-1
INDEX OF EXHIBITS
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Number and
Description of Exhibit |
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Document Incorporated by Reference from a Previous Filing, Filed Herewith or Furnished Herewith, as Indicated Below |
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||
(32.2) |
Section 1350 Certification of Chief Financial Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002** |
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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-2
EXHIBIT 12
Statement of Computation of Ratio of Earnings
to Fixed Charges
Omnicare, Inc. and Subsidiary Companies
(in thousands, except ratio)
Unaudited
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Three months ended |
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||||
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||||
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2006 |
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2005 |
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||
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Income before income taxes |
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$ |
86,747 |
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$ |
92,797 |
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Add fixed charges: |
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Interest expense |
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40,432 |
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18,746 |
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Amortization of debt expense |
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|
1,980 |
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1,173 |
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Interest portion of rent expense |
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5,730 |
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4,378 |
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Adjusted income |
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$ |
134,889 |
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$ |
117,094 |
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Fixed charges: |
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Interest expense |
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$ |
40,432 |
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$ |
18,746 |
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Amortization of debt expense |
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1,980 |
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1,173 |
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Interest portion of rent expense |
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5,730 |
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4,378 |
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Fixed charges |
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$ |
48,142 |
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$ |
24,297 |
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Ratio of earnings to fixed charges(1) |
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2.8 |
x |
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4.8 |
x |
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(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:
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1. |
I have reviewed this report on Form 10-Q of the Company; |
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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; |
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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; |
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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: |
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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; |
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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; |
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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 |
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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 |
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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: |
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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 |
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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. |
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Date: May 10, 2006 |
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/s/ Joel F. Gemunder |
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Joel F. Gemunder |
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President and Chief Executive Officer |
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:
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1. |
I have reviewed this report on Form 10-Q of the Company; |
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|
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; |
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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; |
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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: |
|
|
|
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|
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; |
|
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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; |
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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 |
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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 |
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|
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: |
|
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|
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 |
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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. |
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Date: May 10, 2006 |
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/s/ David W. Froesel, Jr. |
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David W. Froesel, Jr. |
|
|
Senior Vice President and |
|
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Chief Financial Officer |
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:
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|
1. |
The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2006 (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 |
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|
2. |
The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
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|
Date: May
10, 2006 |
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/s/ Joel F. Gemunder |
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Joel F. Gemunder |
|
|
President and Chief Executive Officer |
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 of the Company for the period ended March 31, 2006 (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 |
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|
2. |
The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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|
Date: May 10, 2006 |
|
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|
|
/s/ David W. Froesel, Jr. |
|
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|
|
David W. Froesel, Jr. |
|
|
Senior Vice President and |
|
|
Chief Financial Officer |