Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 1-8269
OMNICARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1001351
(State of Incorporation) (I.R.S. Employer Identification No.)
OMNICARE, INC.
1600 RIVERCENTER II
100 EAST RIVERCENTER BOULEVARD
COVINGTON, KENTUCKY 41011
(Address of principal executive offices)
Registrant's telephone number, including area code: 859-392-3300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
Common Stock ($1.00 Par Value) New York Stock Exchange
Preferred Share Purchase Rights (No Par Value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Aggregate market value of the registrant's voting stock held by non-affiliates,
based upon the closing price of said stock on the New York Stock Exchange
Composite Transaction Listing on the last business day of the registrant's most
recently completed second fiscal quarter (i.e., June 28, 2002) ($26.26 per
share): $2,401,474,742.
As of February 28, 2003, the registrant had 94,200,104 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Omnicare, Inc.'s ("Omnicare", the "Company" or the "Registrant")
definitive Proxy Statement for its 2003 Annual Meeting of Stockholders, to be
held May 19, 2003, are incorporated by reference into Part III of this report.
Definitive copies of its 2003 Proxy Statement will be filed with the Securities
and Exchange Commission within 120 days of the end of the Company's fiscal year.
OMNICARE, INC.
2002 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
PAGE
----
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 19
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
Executive Officers of the Company.......................... 25
PART II
Item 5. Market for the Company's Common Equity and
Related Stockholder Matters .................................. 26
Item 6. Selected Financial Data ...................................... 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 50
Item 8. Financial Statements and Supplementary Data................... 51
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 92
PART III
Item 10. Directors and Executive Officers of the Registrant............ 92
Item 11. Executive Compensation........................................ 92
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................. 92
Item 13. Certain Relationships and Related Transactions................ 93
Item 14. Controls and Procedures....................................... 93
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 93
As used in this document, unless otherwise specified or the context otherwise
requires, the terms "Omnicare," "Company," "its," "we," "our" and "us" refer to
Omnicare, Inc. and its consolidated subsidiaries.
PART I
ITEM 1 - BUSINESS
Background
Omnicare, Inc. is a leading provider of pharmacy services to long-term care
institutions such as skilled nursing facilities ("SNFs"), assisted living
facilities ("ALFs") and other institutional health care facilities. We also
provide comprehensive clinical research for the pharmaceutical and biotechnology
industries.
We operate in two business segments. The largest segment, Pharmacy Services,
provides distribution of pharmaceuticals, related pharmacy consulting, data
management services and medical supplies to long-term care facilities. Pharmacy
Services purchases, repackages and dispenses pharmaceuticals, both prescription
and non-prescription, and provides computerized medical record-keeping and
third-party billing for residents in such facilities. We also provide consultant
pharmacist services, including evaluating residents' drug therapy, monitoring
the control, distribution and administration of drugs within the nursing
facility and assisting in compliance with state and federal regulations. In
addition, we provide ancillary services, such as infusion therapy and dialysis,
distribute medical supplies and offer clinical and financial software
information systems to our client long-term care facilities. At December 31,
2002, we served long-term care facilities comprising approximately 754,000 beds
in 45 states. We also provide pharmaceutical case management services for those
over 55 who have drug benefits under corporate-sponsored benefit programs.
The Pharmacy Services segment provides no services outside of the United States
of America ("United States").
Our other business segment is contract research organization services ("CRO
Services"). CRO Services is a leading international provider of comprehensive
product development and research services to client companies in the
pharmaceutical, biotechnology, medical device and diagnostics industries,
operating in 28 countries around the world at December 31, 2002. Financial
information regarding our business segments is presented at Note 16 (Segment
Information) of the Notes to our 2002 Consolidated Financial Statements,
included at Item 8 of this Filing.
Pharmacy Services
We purchase, repackage and dispense prescription and non-prescription medication
in accordance with physician orders and deliver such prescriptions to the
nursing facility for administration to individual residents by the facility's
nursing staff. We typically service nursing homes within a 150-mile radius of
our pharmacy locations. We maintain a 24-hour, seven-day per week, on-call
pharmacist service for emergency dispensing and delivery or for consultation
with the facility's staff or the resident's attending physician.
Upon receipt of a prescription, the relevant resident information is entered
into our computerized dispensing and billing systems. At that time, the
dispensing system checks the prescription for any
3
potentially adverse drug interactions or resident sensitivity. When required
and/or specifically requested by the physician or patient, branded drugs are
dispensed; generic drugs are substituted in accordance with applicable state and
federal laws and as requested by the physician or resident. We also provide
therapeutic interchange, with physician approval, in accordance with our
pharmaceutical care guidelines. See "The Omnicare Geriatric Pharmaceutical Care
Guidelines'r'" below for further discussion.
We provide a "unit dose" distribution system. Most of our prescriptions are
filled utilizing specialized unit-of-use packaging and delivery systems.
Maintenance medications are typically provided in 30-day supplies utilizing
either a box unit dose system or unit dose punch card system. We believe the
unit dose system, preferred over the bulk delivery systems employed by retail
pharmacies, improves control over drugs in the nursing facility and improves
resident compliance with drug therapy by increasing the accuracy and timeliness
of drug administration.
Integral to our drug distribution system is our computerized medical records and
documentation system. We provide to the facility computerized medication
administration records and physician's order sheets and treatment records for
each resident. Data extracted from these computerized records is also formulated
into monthly management reports on resident care and quality assurance. We
believe the computerized documentation system, in combination with the unit dose
drug delivery system, results in greater efficiency in nursing time, improved
control, reduced drug waste in the facility and lower error rates in both
dispensing and administration. We believe these benefits improve drug efficacy
and result in fewer drug-related hospitalizations.
Consultant Pharmacist Services
Federal and state regulations mandate that long-term care facilities, in
addition to providing a source of pharmaceuticals, retain consultant pharmacist
services to monitor and report on prescription drug therapy in order to maintain
and improve the quality of resident care. The Omnibus Budget Reconciliation Act
("OBRA") implemented in 1990 seeks to further upgrade and standardize care by
setting forth more stringent standards relating to planning, monitoring and
reporting on the progress of prescription drug therapy as well as facility-wide
drug usage. We provide consultant pharmacist services which help clients comply
with the federal and state regulations applicable to nursing homes. The services
offered by our consultant pharmacists include:
o comprehensive, monthly drug regimen reviews for each resident in the
facility to assess the appropriateness and efficacy of drug therapies,
including a review of the resident's medical records, monitoring drug
reactions to other drugs or food, monitoring lab results and
recommending alternate therapies or discontinuing unnecessary drugs;
o participation on the pharmacy and therapeutics, quality assurance and
other committees of client facilities as well as periodic involvement
in staff meetings;
o monitoring and monthly reporting on facility-wide drug usage;
o development and maintenance of pharmaceutical policy and procedures
manuals; and
o assistance to the nursing facility in complying with state and federal
regulations as they pertain to patient care.
4
We have also developed a proprietary software system for the use of our
consultant pharmacists. The system, called OSC2OR'r' (Omnicare System of
Clinical and Cost Outcomes Retrieval), enables our pharmacists not only to
perform their above described functions efficiently but also provides the
platform for consistent data retrieval for health outcomes research and
management.
Additionally, we offer a specialized line of consulting services which help
long-term care facilities to enhance care and reduce and contain costs as well
as to comply with state and federal regulations. Under this service line, we
provide:
o data required for OBRA and other regulatory purposes, including
reports on psychotropic drug usage (chemical restraints), antibiotic
usage (infection control) and other drug usage;
o plan of care programs which assess each patient's state of health upon
admission and monitor progress and outcomes using data on drug usage
as well as dietary, physical therapy and social service inputs;
o counseling related to appropriate drug usage and implementation of
drug protocols;
o on-site educational seminars for the nursing facility staff on topics
such as drug information relating to clinical indications, adverse
drug reactions, drug protocols and special geriatric considerations in
drug therapy, and information and training on intravenous drug therapy
and updates on OBRA and other regulatory compliance issues;
o mock regulatory reviews for nursing staffs; and
o nurse consultant services and consulting for dietary, social services
and medical records.
The Omnicare Geriatric Pharmaceutical Care Guidelines'r'
In June 1994, to enhance the pharmaceutical care management services that we
offer, we introduced to our client facilities and their attending physicians the
Omnicare Geriatric Pharmaceutical Care Guidelines'r' ("Omnicare Guidelines'r'")
which we believe is the first clinically-based formulary for the elderly
residing in long-term care institutions. The Omnicare Guidelines'r' presents an
analysis ranking specific drugs in therapeutic classes as preferred, acceptable
or unacceptable based solely on their disease-specific clinical effectiveness in
treating the elderly. The formulary takes into account such factors as
pharmacology, safety and toxicity, efficacy, drug administration, quality of
life and other considerations specific to the frail elderly population residing
in facilities and for those living independently. The clinical evaluations and
rankings were developed exclusively for us by the University of the Sciences in
Philadelphia (formerly the Philadelphia College of Pharmacy), an academic
institution recognized for its expertise in geriatric long-term care. In
addition, the Omnicare Guidelines'r' provides relative cost information
comparing the prices of the drugs to patients, their insurers or other payors
of the pharmacy bill.
As the Omnicare Guidelines'r' focuses on health benefits, rather than solely on
cost, in assigning rankings, we believe that use of the Omnicare Guidelines'r'
assists physicians in making the best clinical choices of drug therapy for the
patient at the lowest cost to the payor of the pharmacy bill.
5
Accordingly, we believe that the development of and compliance with the Omnicare
Guidelines'r' is important in lowering costs for SNFs operating under the
federal government's Prospective Payment System ("PPS") as well as state
Medicaid programs, managed care and other payors, including residents or their
families.
Health and Outcomes Management
We have expanded upon the data in the Omnicare Guidelines'r' to develop health
and outcomes management programs targeted at major categories of disease
commonly found in the elderly, such as congestive heart failure, osteoporosis
and atrial fibrillation. Such programs seek to identify patients who may be
candidates for more clinically efficacious drug therapy and to work with
physicians to optimize pharmaceutical care for these geriatric patients. We
believe these programs enhance the quality of care of elderly patients while
reducing costs to the healthcare system which arise from the adverse outcomes of
sub-optimal or inappropriate drug therapy.
Outcomes-based Algorithm Technology
Combining data provided by our proprietary systems, the Omnicare Guidelines'r'
and health management programs, our pharmacists seek to determine the best
clinical and most cost-effective drug therapies and make recommendations for the
most appropriate pharmaceutical treatment. Since late 1997, we have augmented
their efforts with the development of proprietary, outcomes-based algorithm
technology which electronically screens and identifies patients at risk for
certain diseases and assists in determining treatment protocols. This system
combines pharmaceutical, clinical, care planning and research data, and screens
such data through nearly 4,000 diseased-based algorithms, allowing our
pharmacists to make recommendations to improve the effectiveness of drug therapy
in seniors, including identifying potentially underdiagnosed and undertreated
conditions.
Pharmaceutical Case Management
Combining our clinical resources, including the Omnicare Guidelines'r', health
and outcomes management programs and our comprehensive database of medical and
pharmacy data, we have begun to provide pharmaceutical case management services
to seniors living independently who receive drug benefits under
employer-sponsored benefit programs. Because seniors living independently are
often under the care of multiple practitioners with no coordination of
prescribing, this population is highly susceptible to drug-related problems.
Omnicare Senior Health Outcomes addresses this need through programs designed to
reduce unnecessary and inappropriate drug use, to optimize therapy for certain
at-risk groups and to make therapeutic interventions in accordance with the
Omnicare Guidelines'r' and health management programs. These services are
provided on behalf of large corporate employers sponsoring health care
benefits that seek to protect the safety and quality of healthcare for their
retirees, employees and dependents while containing or reducing their costs.
Ancillary Services
We provide the following ancillary products and services to long-term care
facilities:
6
Infusion Therapy Products and Services. With cost containment pressures in
healthcare, SNFs and nursing facilities ("NFs") are called upon to treat
moderately acute but stabilized patients that would otherwise be treated in the
more costly hospital environment, provided that the nursing staff and pharmacy
are capable of supporting higher degrees of acuity. We provide infusion therapy
support services for such client facilities and, to a lesser extent, hospice and
home care patients. Infusion therapy consists of the product (a nutrient,
antibiotic, chemotherapy or other drugs in solution) and the intravenous
administration of the product.
We prepare the product to be administered using proper equipment in a sterile
environment and then deliver the product to the nursing home for administration
by the nursing staff. Proper administration of intravenous ("IV") drug therapy
requires a highly trained nursing staff. Our consultant pharmacists and nurse
consultants operate an education and certification program on IV therapy to
assure proper staff training and compliance with regulatory requirements in
client facilities offering an IV program.
By providing an infusion therapy program, we enable our client SNFs and NFs to
admit and retain patients who otherwise would need to be cared for in an
acute-care facility. The most common infusion therapies we provide are total
parenteral nutrition, antibiotic therapy, pain management and hydration.
Wholesale Medical Supplies/Medicare Part B Billing. We distribute disposable
medical supplies, including urological, ostomy, nutritional support and wound
care products and other disposables needed in the nursing home environment. In
addition, we provide direct Medicare billing services for certain of these
product lines for patients eligible under the Medicare Part B program. As part
of this service, we determine patient eligibility, obtain certifications, order
products and maintain inventory on behalf of the nursing facility. We also
contract to act as billing agent for certain nursing homes that supply these
products directly to the patient.
Other Services. We provide clinical care plan and financial information
systems to our client facilities to assist them in determining appropriate care
as well as in predicting and tracking costs. We also offer respiratory therapy
products and durable medical equipment. We also offer respiratory therapy
products and durable medical equipment. We provide comprehensive dialysis
services on site in certain client long-term care facilities for residents with
kidney failure or end-stage renal disease. Such services eliminate the need for
transport of residents to off-site clinics for treatment, reducing trauma for
the resident and costs for our client facilities. We continue to review the
expansion of these as well as other products and services that may further
enhance the ability of our client SNFs and NFs to care for their patients in a
cost-effective manner.
Contract Research Organization Services
Our CRO Services segment provides comprehensive product development services
globally to client companies in the pharmaceutical, biotechnology, medical
devices and diagnostics industries.
CRO Services provides support for the design of regulatory strategy and clinical
development (phases I through IV) of pharmaceuticals by offering comprehensive
and fully integrated clinical monitoring, quality assurance, data management,
statistical analysis, medical writing and regulatory support for our clients'
drug development programs. CRO Services has also provided
7
certain pharmaceutics services, in parallel with the stages described above,
including product dose form development, clinical manufacturing and process
development for commercial manufacturing, the development of analytical
methodology, execution of analytical tests, as well as stability testing,
clinical packaging, storage, labeling and distribution. CRO Services operated
in 28 countries at December 31, 2002, including the United States.
We believe that our involvement in the CRO business is a logical adjunct to our
core institutional pharmacy business and will serve to leverage our assets and
strengths, including our access to a large geriatric population and our ability
to collect data for health and outcomes management. We believe such assets and
strengths will be of significant value in developing new drugs targeted at
diseases of the elderly and in meeting the Food and Drug Administration's
geriatric dosing and labeling requirements for all prescription drugs provided
to the elderly, as well as in documenting health outcomes to payors and plan
sponsors in a managed care environment.
Product and Market Development
Our Pharmacy Services and CRO Services businesses engage in a continuing program
for the development of new services and for marketing these services. While new
service and new market development are important factors for the growth of these
businesses, we do not expect that any new service or marketing efforts,
including those in the developmental stage, will require the investment of a
significant portion of our assets.
Materials/Supply
We purchase pharmaceuticals through a wholesale distributor with whom we have a
prime vendor contract, at prices based primarily upon contracts negotiated by us
directly with pharmaceutical manufacturers. We also are a member of industry
buying groups which contract with manufacturers for discounted prices based on
volume which are passed through to us by our wholesale distributor. We have
numerous sources of supply available to us and have not experienced any
difficulty in obtaining pharmaceuticals or other products and supplies used in
the conduct of our business.
Patents, Trademarks, and Licenses
Our business operations are not dependent upon any material patents, trademarks
or licenses.
Seasonality
Our business operations are not significantly impacted by seasonality.
8
Inventories
We seek to maintain adequate on site inventories of pharmaceuticals and supplies
to ensure prompt delivery service to our customers. Our primary wholesale
distributor also maintains local warehousing in most major geographic markets in
which we operate.
Competition
By its nature, the long-term care pharmacy business is highly regionalized and,
within a given geographic region of operations, highly competitive. We are the
nation's largest provider of pharmaceuticals and related pharmacy services to
long-term care institutions such as SNFs, ALFs, retirement centers and other
institutional healthcare facilities. In the geographic regions we serve, we
compete with local, regional and other national institutional pharmacies,
pharmacies owned by long-term care facilities and numerous local retail
pharmacies. We compete in these markets on the basis of quality, cost-
effectiveness and the increasingly comprehensive and specialized nature of
our services, along with the clinical expertise, pharmaceutical technology and
professional support we offer. Our CRO business competes against other
full-service CROs and client internal resources. The CRO industry is highly
fragmented with a number of full-service CROs and many small, limited-service
providers, some of which serve only local markets. Clients choose a CRO based
on, among other reasons, reputation, references from existing clients, the
client's relationship with the CRO, the CRO's experience with the particular
type of project and/or therapeutic area of clinical development, the CRO's
ability to add value to the client's development plan, the CRO's financial
stability and the CRO's ability to provide the full range of services on a
global basis as required by the client. We believe that we compete favorably in
these respects.
Backlog
Backlog is not a relevant factor in our Pharmacy Services segment since this
segment's products and services are sold promptly on an as ordered basis. Our
CRO Services segment reports backlog based on anticipated net revenue from
uncompleted projects that have been authorized by the customer, through signed
contracts, letter agreements and certain verbal commitments. Once work begins on
a project, net revenue is recognized over the duration of the project. Using
this method of reporting backlog, at December 31, 2002, backlog was
approximately $181.6 million, as compared with approximately $195.5 million at
December 31, 2001.
We believe that backlog may not be a consistent indicator of future results of
our CRO Services segment because it can be affected by a number of factors,
including the variable size and duration of projects, many of which are
performed over several years. Additionally, projects may be delayed or
terminated by the customer, or delayed by regulatory authorities. Moreover, the
scope of work can be increased or decreased during the course of a project.
Customers
At December 31, 2002, our Pharmacy Services segment served long-term care
facilities comprising approximately 754,000 beds in 45 states.
9
Our CRO Services segment serves a broad range of clients, including many of the
major multi-national pharmaceutical and biotechnology companies as well as
smaller companies in the pharmaceutical and biotechnology industries.
No single customer comprised more than 10% of consolidated revenues in 2002 or
2001.
Government Regulation
Institutional pharmacies, as well as the long-term care facilities they serve,
are subject to extensive federal, state and local regulation. These regulations
cover required qualifications, day-to-day operations, reimbursement and the
documentation of activities. In addition, our CRO Services are subject to
substantial regulation, both domestically and abroad. We continuously monitor
the effects of regulatory activity on our operations.
Licensure, Certification and Regulation. States generally require that companies
operating a pharmacy within the state be licensed by the state board of
pharmacy. At December 31, 2002, we had pharmacy licenses for each pharmacy we
operate. In addition, at December 31, 2002, we delivered prescription products
from our licensed pharmacies to seven states in which we do not operate a
pharmacy. These states regulate out-of-state pharmacies, however, as a condition
to the delivery of prescription products to patients in these states. Our
pharmacies hold the requisite licenses applicable in these states. In addition,
our pharmacies are registered with the appropriate state and federal authorities
pursuant to statutes governing the regulation of controlled substances.
Client long-term care facilities are also separately required to be licensed in
the states in which they operate and, if serving Medicare or Medicaid patients,
must be certified to be in compliance with applicable program participation
requirements. Client facilities are also subject to the nursing home reforms of
the OBRA of 1987, which imposed strict compliance standards relating to quality
of care for nursing home operations, including vastly increased documentation
and reporting requirements. In addition, pharmacists, nurses and other
healthcare professionals who provide services on our behalf are in most cases
required to obtain and maintain professional licenses and are subject to state
regulation regarding professional standards of conduct.
Federal and State Laws Affecting the Repackaging, Labeling and Interstate
Shipping of Drugs. Federal and state laws impose certain repackaging, labeling
and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail outlets. A drug repackager must register with the Food and
Drug Administration ("FDA") as a manufacturing establishment, and is subject to
FDA inspection for compliance with relevant good manufacturing practices
("GMPs"). We hold all required registrations and licenses, and we believe our
repackaging operations are in compliance with applicable state and federal GMP
requirements. In addition, we believe we comply with all relevant requirements
of the Prescription Drug Marketing Act for the transfer and shipment of
pharmaceuticals.
State Laws Affecting Access to Services. Some states have enacted "freedom of
choice" or "any willing provider" requirements as part of their state Medicaid
programs or in separate legislation. These laws and regulations may prohibit a
third-party payor from restricting the pharmacies from
10
which their participants may purchase pharmaceuticals. Similarly, these laws
may preclude a nursing facility from requiring their patients to purchase
pharmacy or other ancillary medical services or supplies from particular
providers that deal with the nursing home. Such limitations may increase the
competition which we face in providing services to nursing facility residents.
Medicare and Medicaid. The nursing home pharmacy business has long operated
under regulatory and cost containment pressures from state and federal
legislation primarily affecting Medicaid and, to a lesser extent, Medicare.
As is the case for nursing home services generally, we receive reimbursement
from the Medicaid and Medicare programs, directly from individual residents
(private pay), and from other payors such as third-party insurers. We believe
that our reimbursement mix is in line with nursing home expenditures nationally.
The table below represents our approximated payor mix for the last three years:
2002 2001 2000
---- ---- ----
State Medicaid programs 46% 44% 43%
Private pay and long-term care facilities(a) 44% 44% 46%
Federal Medicare programs(b) 2% 3% 3%
Other private sources(c) 8% 9% 8%
---- ---- ----
Totals 100% 100% 100%
==== ==== ====
(a) Includes payments from skilled nursing facilities on behalf of their
federal Medicare program-eligible residents.
(b) Includes direct billing for medical supplies.
(c) Includes our contract research organization revenues.
For those patients who are not covered by government-sponsored programs or
private insurance, we generally directly bill the patient or the patient's
responsible party on a monthly basis. Depending upon local market practices, we
may alternatively bill private patients through the nursing facility. Pricing
for private pay patients is based on prevailing regional market rates or "usual
and customary" charges.
The Medicaid program is a cooperative federal-state program designed to enable
states to provide medical assistance to aged, blind, or disabled individuals, or
members of families with dependent children whose income and resources are
insufficient to meet the costs of necessary medical services. State
participation in the Medicaid program is voluntary. To become eligible to
receive federal funds, a state must submit a Medicaid "state plan" to the
Secretary of the Department of Health and Human Services ("HHS") for approval.
The federal Medicaid statute specifies a variety of requirements which the state
plan must meet, including requirements relating to eligibility, coverage of
services, payment and administration.
Federal law and regulations contain a variety of requirements relating to the
furnishing of prescription drugs under Medicaid. First, states are given
authority, subject to certain standards, to limit or specify conditions for the
coverage of particular drugs. Second, federal Medicaid law establishes standards
affecting pharmacy practice. These standards include general requirements
relating to patient counseling and drug utilization review and more specific
standards for SNFs and
11
NFs relating to drug regimen reviews for Medicaid patients in such facilities.
Regulations clarify that, under federal law, a pharmacy is not required to meet
the general requirements for drugs dispensed to nursing facility residents if
the nursing facility complies with the drug regimen review standards. However,
the regulations indicate that states may nevertheless require pharmacies to
comply with the general requirements, regardless of whether the nursing facility
satisfies the drug regimen review requirement, and the states in which we
operate currently do require our pharmacies to comply with these general
standards. Third, federal regulations impose certain requirements relating to
reimbursement for prescription drugs furnished to Medicaid patients. Among other
things, regulations establish "upper limits" on payment levels. In addition to
requirements imposed by federal law, states have substantial discretion to
determine administrative, coverage, eligibility and payment policies under their
state Medicaid programs that may affect our operations.
The Medicare program is a federally funded and administered health insurance
program for individuals age 65 and over or who are disabled. The Medicare
program consists of three parts: Part A, which covers, among other things,
inpatient hospital, skilled nursing facility, home healthcare and certain other
types of healthcare services; Medicare Part B, which covers physicians'
services, outpatient services, items and services provided by medical suppliers,
and a limited number of specifically designated prescription drugs; and Medicare
Part C, established by The Balanced Budget Act of 1997 ("BBA"), which generally
allows beneficiaries to enroll in additional types of managed care programs
beyond the traditional Medicare fee for service program. Part C is generally
referred to as "Medicare+Choice." Many Medicare beneficiaries are being served
through such Medicare+Choice organizations. In addition to the limited Medicare
coverage for specified products described above, some Medicare+Choice
organizations providing healthcare benefits to Medicare beneficiaries offer
expanded drug coverage. The Medicare program establishes certain requirements
for participation of providers and suppliers in the Medicare program. Pharmacies
are not subject to such certification requirements. SNFs and suppliers of
medical equipment and supplies, however, are subject to specified standards.
Failure to comply with these requirements and standards may adversely affect an
entity's ability to participate in the Medicare program and receive
reimbursement for services provided to Medicare beneficiaries.
Medicare and Medicaid providers and suppliers are subject to inquiries or audits
to evaluate their compliance with requirements and standards set forth under
these government-sponsored programs. Such audits and inquiries, as well as our
own internal compliance program, from time to time have identified overpayment
and other billing errors resulting in repayment or self-reporting. We believe
that our billing practices materially comply with applicable state and federal
requirements. However, there can be no assurance that in the future such
requirements will be interpreted in a manner consistent with our interpretation
and application.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings,
executive orders and freezes and funding reductions, all of which may adversely
affect our business. There can be no assurance that payments for pharmaceutical
supplies and services under the Medicare and Medicaid programs will continue to
be based on current methodologies or remain comparable to present levels. In
this regard, we may be subject to rate reductions as a result of federal
budgetary or other legislation
12
related to the Medicare and Medicaid programs. In addition, various state
Medicaid programs periodically experience budgetary shortfalls which may
result in Medicaid payment reductions and delays in payment to us.
In addition, the failure, even if inadvertent, of our and/or our client
institutions to comply with applicable reimbursement regulations could adversely
affect our business. Additionally, changes in such reimbursement programs or in
regulations related thereto, such as reductions in the allowable reimbursement
levels, modifications in the timing or processing of payments and other changes
intended to limit or decrease the growth of Medicaid and Medicare expenditures,
could adversely affect our business.
Referral Restrictions. We are subject to federal and state laws which govern
financial and other arrangements between healthcare providers. These laws
include the federal anti-kickback statute, which prohibits, among other things,
knowingly and willfully soliciting, receiving, offering or paying any
remuneration directly or indirectly in return for or to induce the referral of
an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under federal healthcare programs. We
are also subject to the federal physician self-referral statute, which prohibits
physicians from referring Medicare and Medicaid patients for certain "designated
health services," including outpatient prescription drugs, durable medical
equipment, and enteral supplies and equipment to an entity if the referring
physician (or a member of the physician's immediate family) has a "financial
relationship," through ownership or compensation with the entity. Many states
have enacted similar statutes which are not necessarily limited to items and
services for which payment is made by federal healthcare programs. Violations of
these laws may result in fines, imprisonment, denial of payment for services,
and exclusion from the federal programs or other state-funded programs.
Other provisions in the Social Security Act and in other federal and state laws
authorize the imposition of penalties, including criminal and civil fines and
exclusions from participation in Medicare and Medicaid, for false claims,
improper billing and other offenses.
In addition, a number of states have undertaken enforcement actions against
pharmaceutical manufacturers involving pharmaceutical marketing programs,
including programs containing incentives to pharmacists to dispense one
particular product rather than another. These enforcement actions arose under
state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like.
We believe our contract arrangements with other healthcare providers, our
pharmaceutical suppliers and our pharmacy practices are in compliance with
applicable federal and state laws. There can be no assurance that such laws
will, however, be interpreted in the future in a manner consistent with our
interpretation and application.
Healthcare Reform and Federal Budget Legislation. In recent years, federal
legislation has resulted in major changes in the healthcare system, and included
other provisions which significantly affected healthcare providers, either
nationally or at the state level. The BBA sought to achieve a balanced federal
budget by, among other things, reducing federal spending on the Medicare and
Medicaid programs. With respect to Medicare, the law mandated establishment of a
PPS for SNFs
13
under which facilities are paid a federal per diem rate for virtually all
covered SNF services, including ancillary services such as pharmacy. Payment
is determined by one of 44 resource utilization group ("RUG") categories. PPS
was implemented for cost reporting periods beginning on or after July 1, 1998.
The BBA also imposed numerous other cost savings measures affecting Medicare
SNF services.
The Medicare, Medicaid, SCHIP Balanced Budget Refinement Act of 1999 ("BBRA")
and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of
2000 ("BIPA") sought to mitigate the impact of the reimbursement cuts resulting
from the BBA. While certain of the payment increases mandated by these two laws
expired October 1, 2002, SNFs continue to benefit from a BBRA provision
(subsequently modified by BIPA) that temporarily increases the PPS per diem
rates for certain high-acuity patients, including medically-complex patients
with generally higher pharmacy costs, pending revisions to the PPS. The
increases will continue until the Centers for Medicare & Medicaid Services
(formerly the Health Care Financing Administration) implements a refined RUG
system that better accounts for medically-complex patients. The Secretary of HHS
did not implement such refinements in fiscal year 2003, and the Bush
Administration has indicated that the refinements will not be implemented in
fiscal year 2004. The revised rates may be more or less than the temporary
statutory increases. The BBRA also provided for a 4% increase in payments
otherwise determined under the BBA for all patient acuity categories for fiscal
years 2001 and 2002. In addition, BIPA increased payment for the nursing
component of each RUG category by 16.66% for services furnished between April 1,
2001 and October 1, 2002, and increased payment rates by 3.16% for all patients
for fiscal year 2001. We believe these provisions of the BBRA and BIPA improved
the financial condition of SNFs and provided incentives to increase occupancy
and Medicare admissions, particularly among the more acutely ill.
Moreover, BIPA further refined the consolidated billing requirements enacted
under the BBA. Specifically, effective January 1, 2001, the law limits
consolidated billing requirements to items and services furnished to SNF
residents in a Medicare Part A covered stay and to therapy services covered
under Part B. In other words, for residents not covered under a Part A stay,
SNFs may choose to bill for non-therapy Part B services and supplies, or they
may elect to have suppliers continue to bill Medicare directly for these
services.
As noted, certain payment increases in Medicare reimbursement for SNFs provided
under the BBRA and BIPA expired on October 1, 2002 with no further action taken
by Congress to date. Congress may consider these funding issues in 2003. If no
additional legislation is enacted, the loss of revenues associated with this
occurrence could have an adverse effect on the financial condition of the
Company's SNF customers which, in turn, could adversely impact the timing or
level of their payments to us. While it is hoped that Congress will restore
some or all of these reimbursement amounts, no assurances can be given as to
whether Congress will take action, the timing of any action or the form of
such action, if any, that may be enacted.
Moreover, for several years, the federal government has examined the
appropriateness of the "average wholesale price" ("AWP") as a basis for
reimbursement of outpatient prescription drugs under Part B of the Medicare
program and certain state Medicaid programs. AWP is an industry term that
typically is understood to represent a suggested resale price for wholesale
sales
14
to pharmacies. The Company's revenues for drugs dispensed under Medicare Part B
are not significant in comparison to total revenues. Discounted AWP plus a
dispensing fee is also the basis for many state Medicaid programs' reimbursement
of drugs to pharmacy providers for Medicaid beneficiaries generally as well as
under certain private reimbursement programs. If government or private health
insurance programs discontinue or modify the use of AWP or otherwise implement
payment methods that reduce the reimbursement for drugs and biologicals, it
could adversely affect the Company's reimbursement.
With respect to Medicaid, the BBA repealed the "Boren Amendment" federal payment
standard for Medicaid payments to Medicaid NFs effective October 1, 1997, giving
states greater latitude in setting payment rates for such facilities. The law
also granted states greater flexibility to establish Medicaid managed care
programs without the need to obtain a federal waiver. Although these waiver
programs generally exempt institutional care, including NFs and institutional
pharmacy services, some states do use managed care principles in their long-term
care programs. Moreover, no assurances can be given that additional Medicaid
programs ultimately will not change the reimbursement system for long-term care,
including pharmacy services, from fee-for-service to managed care negotiated or
capitated rates. Our operations have not been adversely affected in states with
managed care programs in effect. Many states, however, are facing significant
budget shortfalls, and most states are taking steps to implement cost controls
within their Medicaid programs. There can be no assurance that future changes
in Medicaid payments to pharmacies, NFs or managed care systems will not have
an adverse impact on our business.
It is uncertain at this time what additional healthcare reform initiatives,
including an expanded Medicare prescription drug benefit, if any, will be
implemented, or whether there will be other changes in the administration of
governmental healthcare programs or interpretation of governmental policies or
other changes affecting the healthcare system. There can be no assurance that
future healthcare or budget legislation or other changes will not have an
adverse effect on our business.
Contract Research Organization Services. The preclinical, clinical,
manufacturing, analytical and clinical trial supply services performed by our
CRO Services are subject to various regulatory requirements designed to ensure
the quality and integrity of the data or products made as a result of these
services.
The industry standard for conducting clinical testing is embodied in the good
clinical practice ("GCP") and Investigational New Drugs ("IND") regulations
administered by the FDA. Research conducted at institutions supported by funds
from the National Institutes of Health ("NIH") must also comply with multiple
project assurance agreements and guidelines administered by NIH and the HHS
Office of Research Protection. The requirements for facilities engaging in
pharmaceutical, analytical, manufacturing, clinical trial, supply preparation,
labeling and distribution are set forth in the GMP regulations and in GCP
guidelines. The U.S. and European Union ("EU") also recognize the Guidelines for
Good Clinical Practice adopted by the International Conference on Harmonisation
("ICH"). GCP, IND and GMP regulations, and ICH guidelines, have been mandated by
the FDA and the European Medicines Evaluation Agency (the "EMEA") and have been
adopted by similar regulatory authorities in other countries. GCP, IND and GMP
regulations, and ICH guidelines, stipulate requirements for facilities,
equipment, supplies
15
and personnel engaged in the conduct of studies to which these regulations
apply. The regulations require that written, standard operating procedures
("SOPs") are followed during the conduct of studies and for the recording,
reporting and retention of study data and records. To help assure compliance,
our CRO Services has a worldwide staff of experienced quality assurance
professionals which monitor ongoing compliance with these regulations and
guidelines by auditing study data and conducting regular inspections of
testing procedures and facilities. The FDA and other regulatory authorities
require that study results and data submitted to such authorities are based
on studies conducted in accordance with GCP and IND provisions. These
provisions include:
o complying with specific regulations governing the selection of
qualified investigators;
o obtaining specific written commitments from the investigators;
o disclosure of financial conflicts of interest;
o verifying that patient informed consent is obtained;
o instructing investigators to maintain records and reports;
o verifying drug or device accountability; and
o permitting appropriate governmental authorities access to data and
study sites for their review and inspection.
Records for clinical studies must be maintained for specific periods for
inspection by the FDA, EU or other authorities during audits. Non-compliance
with GCP or IND requirements can result in the disqualification of data
collected during the clinical trial and may lead to debarment of an investigator
or CRO if fraud is detected.
CRO Services' SOPs related to clinical studies are written in accordance with
regulations and guidelines appropriate to a global standard with regional
variations in the regions where they will be used, thus helping to ensure
compliance with GCP. CRO Services also generally complies with a reasonable
interpretation of the ICH Guideline for Good Clinical Practice, EU GCP
regulations and U.S. GCP regulations for North America.
Manufacturing, analytical and other laboratories in the United States are
subject to licensing and regulation under federal, state and local laws relating
to maintenance of appropriate processes and procedures under the Clinical
Laboratories Improvement Act ("CLIA"), hazard communication and employee
right-to-know regulations, the handling and disposal of medical specimens and
hazardous waste and radioactive materials, as well as the safety and health of
laboratory employees. All of our laboratories operated in material compliance
with applicable federal and state laws and regulations relating to maintenance
of trained personnel, proper equipment processes and procedures required by
CLIA regulations of HHS, and the storage and disposal of all laboratory
specimens including the regulations of the Environmental Protection Agency and
the Occupational Safety and Health Administration. Certain of our facilities
engaged in drug development activities involving controlled substances. The use
of, and accountability for, controlled substances are regulated by the United
States Drug Enforcement Administration. Our relevant employees received initial
and periodic training to ensure compliance with applicable hazardous material
regulations and health and safety guidelines.
16
Although we believe that we are in compliance in all material respects with such
federal, state and local laws, failure to comply could subject us to denial of
the right to conduct business, fines, criminal penalties and other enforcement
actions.
Health Information Practices. The Company and the healthcare industry generally
also are impacted by the Health Insurance Portability and Accountability Act of
1996 ("HIPAA"), which mandates, among other things, the adoption of standards
for the exchange of electronic health information in an effort to enhance the
efficiency and simplify the administration of the healthcare system. In
addition, HIPAA requires HHS to adopt standards for electronic transactions and
code sets; unique identifiers for providers, employers, health plans and
individuals; security and electronic signatures; privacy; and enforcement. While
HIPAA ultimately is designed to reduce administrative expenses within the
healthcare system, the law likely will initially require significant, and
possibly costly, changes for the industry. The Electronic Healthcare
Transactions and Code Sets have gone into effect, but entities have until
October 16, 2003 to comply with them, as long as they filed for a compliance
extension. The Company filed for such an extension. Most entities, including the
Company, must comply with the HIPAA privacy standards by April 14, 2003. On
February 20, 2003, HHS published standards for the security of electronic health
information. The Company must comply with the requirements of the security
standards by April 21, 2005. Based on current information, we believe we will be
able to fully comply with HIPAA requirements; however, we cannot at this time
estimate the cost of compliance or if implementation of the HIPAA standards will
result in an adverse effect on the Company's operations or profitability, or
that of its customers.
Compliance Program and Corporate Integrity Agreement. The Office of Inspector
General ("OIG") has issued guidance to various sectors of the healthcare
industry to help providers design effective voluntary compliance programs to
prevent fraud, waste and abuse in healthcare programs, including Medicare and
Medicaid. In 1998, Omnicare voluntarily adopted a compliance program to assist
us in complying with applicable government regulations. In addition, in April
1998, Home Pharmacy Services, Inc. ("Home"), one of our wholly-owned
subsidiaries, entered into a settlement agreement with the U.S. Department of
Justice and the State of Illinois regarding certain practices involving refunds
for returned drugs. Under the Settlement Agreement, Home paid $5.3 million in
fines and restitution to the United States and Illinois, and Omnicare and Home
agreed to a corporate integrity program for four years, which includes annual
reporting obligations. The terms of the corporate integrity agreement expired in
April 2002. Neither Omnicare nor any of its other operating units were
implicated in the government investigation. The Company is continuing to
maintain its compliance program.
Environmental Matters
In operating our facilities, historically we have not encountered any major
difficulties in effecting compliance with applicable pollution control laws. No
material capital expenditures for environmental control facilities are expected.
While we cannot predict the effect which any future legislation, regulations, or
interpretations may have upon our operations, we do not anticipate any changes
that would have a material adverse impact on our operations.
17
Employees
At December 31, 2002, we employed approximately 9,500 persons (including 3,600
part-time employees), approximately 9,100 and 400 of whom were located within
and outside the United States, respectively.
Available Information
We make available free of charge on or through our Internet Web site, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and all amendments to those reports as soon as reasonably practicable after
such material is electronically filed with the Securities and Exchange
Commission. Our Corporate Web site address is http://www.omnicare.com.
18
ITEM 2 - PROPERTIES
We have offices, distribution centers and other key operating facilities in
various locations in and outside the United States. As of December 31, 2002, we
operated a total of 155 facilities, five of which we owned. A list of the 75
more significant facilities (defined as having at least 10,000 square feet) we
operated as of December 31, 2002 follows, grouped by segment and summarized by
location. The owned properties are held in fee and are not subject to any
material encumbrance. We consider all of these facilities to be in good
operating condition and generally to be adequate for present and anticipated
needs.
Owned Area Leased Area
-----------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------- ---------- --------- -----------------
Pharmacy Services:
Livonia, Michigan Offices and -- 50,438 May 31, 2007
Distribution Center
Des Plaines, Illinois Offices and -- 47,971 May 31, 2008
Distribution Center
Milwaukee, Wisconsin Offices and -- 41,816 March 31, 2009
Distribution Center
Perrysburg, Ohio Offices and 40,500 -- --
Distribution Center
Kirkland, Washington Offices and -- 38,689 April 14, 2008
Distribution Center
Cheshire, Connecticut Offices and -- 38,400 June 30, 2010
Distribution Center
Louisville, Kentucky Offices and 38,275 Month-to-Month
Distribution Center --
Florissant, Missouri Offices and 38,014 -- --
Distribution Center
Kansas City, Missouri Offices and -- 36,048 October 21, 2009
Distribution Center
Toledo, Ohio Distribution Center -- 36,039 March 31, 2004
Hunt Valley, Maryland Offices and -- 30,600 January 31, 2007
Distribution Center
Rockford, Illinois Offices and -- 29,100 November 30, 2009
Distribution Center
19
Owned Area Leased Area
------------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------- ---------- --------- ------------------
Salt Lake City, Utah Offices and -- 28,400 January 31, 2009
Distribution Center
Crystal, Minnesota Offices and -- 28,255 January 31, 2008
Distribution Center
Portland, Oregon Offices and -- 28,150 April 30, 2008
Distribution Center
Decatur, Illinois Offices and 21,070 6,600 Month-to-Month
Distribution Center
Des Plaines, Illinois Offices and -- 26,673 May 31, 2008
Distribution Center
Plainview, New York Offices and -- 25,500 June 30, 2005
Distribution Center
Indianapolis, Indiana Distribution Center -- 25,500 July 31, 2005
Chestnut Ridge, New York Offices and -- 24,429 May 31, 2009
Distribution Center
Cincinnati, Ohio Offices and -- 24,375 September 30, 2009
Distribution Center
Oklahoma City, Oklahoma Offices and -- 24,000 Month-to-Month
Distribution Center
Hickory, North Carolina Offices and 24,000 -- --
Distribution Center
Indianapolis, Indiana Offices and -- 23,740 June 30, 2010
Distribution Center
Griffith, Indiana Offices and -- 23,600 April 1, 2012
Distribution Center
Wadsworth, Ohio Offices and -- 22,960 June 30, 2006
Distribution Center
Pittsburgh, Pennsylvania Offices and -- 22,677 January 31, 2009
Distribution Center
Mentor, Ohio Offices and -- 22,364 August 1, 2007
Distribution Center
20
Owned Area Leased Area
------------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------- ---------- --------- ------------------
Rochester, New York Offices and -- 22,240 June 30, 2006
Distribution Center
Milford, Ohio Offices and -- 22,000 December 31, 2007
Distribution Center
Malta, New York Offices and -- 20,930 October 31, 2004
Distribution Center
Maumee, Ohio Distribution Center -- 20,692 Month-to-Month
Greensburg, Pennsylvania Offices and -- 20,000 February 3, 2006
Distribution Center
Henderson, Kentucky Offices and -- 20,000 December 31, 2007
Distribution Center
St. Petersburg, Florida Offices and -- 19,835 April 30, 2007
Distribution Center
Spartanburg, South Carolina Offices and 9,500 10,000 Month-to-Month
Distribution Center
Longwood, Florida Offices and -- 19,200 December 31, 2003
Distribution Center
Boca Raton, Florida Offices and -- 18,661 December 31, 2007
Distribution Center
Springfield, Ohio Offices and -- 18,000 December 31, 2003
Distribution Center
Peabody, Massachusetts Offices and -- 17,500 April 30, 2007
Distribution Center
Naperville, Illinois Offices -- 17,400 October 31, 2004
Springfield, Missouri Offices and -- 17,000 September 30, 2003
Distribution Center
Pompton Plains, New Jersey Offices and -- 16,041 August 5, 2003
Distribution Center
Englewood, Ohio Offices and -- 15,000 January 31, 2004
Distribution Center
West Seneca, New York Offices and -- 15,000 August 31, 2004
Distribution Center
21
Owned Area Leased Area
------------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------- ---------- --------- ------------------
West Boylston, Massachusetts Offices and -- 14,800 May 3, 2003
Distribution Center
Fort Worth, Texas Offices and -- 14,500 June 30, 2004
Distribution Center
Ashland, Kentucky Offices and -- 14,000 October 31, 2003
Distribution Center
Sioux Falls, South Dakota Offices and -- 13,921 May 31, 2004
Distribution Center
Spokane, Washington Offices and -- 13,750 October 31, 2006
Distribution Center
Columbus, Ohio Offices and -- 13,600 June 30, 2004
Distribution Center
Dixon, Illinois Offices and -- 13,445 June 30, 2004
Distribution Center
Houston, Texas Offices and -- 13,235 September 30, 2004
Distribution Center
Garndiner, Maine Offices and -- 13,000 October 31, 2007
Distribution Center
Van Nuys, California Offices and -- 12,555 Month-to-Month
Distribution Center
Alexandria, Louisiana Offices and -- 12,000 May 7, 2004
Distribution Center
Prattville, Alabama Offices and -- 11,881 August 28, 2008
Distribution Center
Yakima, Washington Offices and -- 11,500 February 28, 2005
Distribution Center
Thomasville, North Carolina Offices and -- 11,325 Month-to-Month
Distribution Center
South Elgin, Illinois Offices and -- 11,175 August 1, 2007
Distribution Center
22
Owned Area Leased Area
------------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------- ---------- --------- ------------------
Peoria, Illinois Offices and -- 11,022 July 31, 2004
Distribution Center
West Branch, Michigan Offices and -- 10,950 May 31, 2011
Distribution Center
Wilson, North Carolina Offices and -- 10,800 June 15, 2004
Distribution Center
Marion, Indiana Offices and -- 10,320 February 23, 2006
Distribution Center
Cherry Hill, New Jersey Offices and -- 10,000 July 31, 2010
Distribution Center
Cleveland, Tennessee Offices and -- 10,000 July 1, 2015
Distribution Center
CRO Services:
King of Prussia, Pennsylvania Offices -- 150,000 June 30, 2010
Cologne, Germany Offices -- 27,028 March 31, 2003
Troy, New York Offices -- 25,124 March 31, 2005
Chippenham, Offices -- 20,000 June 23, 2016
United Kingdom
Schwalbach, Germany Offices -- 16,533 August 31, 2003
Bad Soden, Germany Offices and -- 12,712 June 30, 2004
Laboratories
Deerfield, Illinois Offices -- 10,000 September 30, 2007
Corporate:
Covington, Kentucky Offices -- 42,795 December 31, 2012
Fort Wright, Kentucky Offices -- 14,237 March 31, 2008
23
ITEM 3 - LEGAL PROCEEDINGS
There are no pending legal or governmental proceedings to which we are a party
or to which any of our property is subject that we believe would have a material
adverse effect on us.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers as of February 28, 2003 are as follows:
Name Age Office First Elected
- --------------------- --- --------------------------- ------------------
Edward L. Hutton 83 Chairman May 20, l98l
Joel F. Gemunder 63 President and May 20, l98l
Chief Executive Officer
Patrick E. Keefe 57 Executive Vice April 11, 1993
President - Operations
Timothy E. Bien 52 Senior Vice President - May 20, 1996
Professional Services
and Purchasing
Jack M. Clark, Jr. 52 Senior Vice President - September 25, 2002
Sales and Marketing
David W. Froesel, Jr. 51 Senior Vice President March 4, 1996
and Chief Financial Officer
Cheryl D. Hodges 51 Senior Vice President August 4, l982
and Secretary
Peter Laterza 45 Vice President and August 5, 1998
General Counsel
All of the executive officers listed above have been actively engaged in our
business for the past five years, with the exceptions of Mr. Laterza and Mr.
Clark. Mr. Laterza was Assistant General Counsel of The Pittston Company from
October 1993 to June 1998. Mr. Clark was Vice President - Field Sales for Fisher
Scientific International, Inc. from August 2001 to August 2002. Prior to that,
Mr. Clark was Senior Vice President - Sales and Marketing and later Group Vice
President of Owens & Minor, Inc. from November 1997 to November 2000, and
November 2000 to August 2001, respectively. Mr. Clark's preceding experience
includes sales and marketing positions of increasing responsibility with The
Coca-Cola Company and the Procter & Gamble Company.
Executive officers are elected for one-year terms at the annual organizational
meeting of the Board of Directors which follows the annual meeting of
stockholders each year.
25
PART II
ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock; Holders of Record
Our Common Stock is listed on the New York Stock Exchange, and the following
table sets forth the ranges of high and low closing prices during each of the
calendar quarters of 2002 and 2001.
2002 2001
---------------- ----------------
High Low High Low
------ ------ ------ ------
First Quarter $25.89 $20.85 $22.99 $17.75
Second Quarter $28.35 $23.84 $22.65 $18.75
Third Quarter $25.44 $18.41 $26.00 $19.00
Fourth Quarter $24.22 $19.52 $25.01 $18.30
The number of holders of record of our Common Stock on February 28, 2003 was
2,444. This amount does not include stockholders with shares held under
beneficial ownership in nominee name or within clearinghouse positions of
brokerage firms and banks.
Dividends
On February 6, 2003, the Board of Directors approved a quarterly cash dividend
of $0.0225, for an indicated annual rate of $0.09 per common share for 2003,
which is consistent with annual dividends paid per common share for the 2002 and
2001 years. It is presently intended that cash dividends on common shares will
continue to be paid on a quarterly basis; however, future dividends are
necessarily dependent upon our earnings and financial condition and other
factors not currently determinable.
Recent Sales of Unregistered Securities
We, as part of our acquisition program, have historically issued our common
shares and warrants ("Securities") from time to time in private transactions not
registered under the Securities Act of 1933 in connection with the purchase of
the assets or stock of businesses acquired. During the quarter and year ended
December 31, 2002, no transactions were completed involving unregistered
Securities. When such Securities are issued, they are issued in reliance on the
exemption from registration contained at Section 4(2) of the Securities Act.
26
ITEM 6 - SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data, which should be
read in conjunction with our Consolidated Financial Statements and related
Notes, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included at Items 8 and 7, respectively, of this Filing.
Five-Year Summary of Selected Financial Data
Omnicare, Inc. and Subsidiary Companies
(in thousands, except per share data)
For the years ended and at December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA: (a)(b)(c)
Total net sales (d) $2,632,754 $2,183,036 $1,987,839 $1,880,998 $1,536,224
========== ========== ========== ========== ==========
Net income $ 125,906 $ 74,271 $ 48,817 $ 57,721 $ 80,379
========== ========== ========== ========== ==========
Earnings per share data:
Basic $ 1.34 $ 0.80 $ 0.53 $ 0.63 $ 0.90
========== ========== ========== ========== ==========
Diluted $ 1.33 $ 0.79 $ 0.53 $ 0.63 $ 0.90
========== ========== ========== ========== ==========
Dividends per share $ 0.09 $ 0.09 $ 0.09 $ 0.09 $ 0.08
========== ========== ========== ========== ==========
Weighted average number of
common shares outstanding:
Basic 94,168 93,124 92,012 90,999 89,081
========== ========== ========== ========== ==========
Diluted 94,905 93,758 92,012 91,238 89,786
========== ========== ========== ========== ==========
BALANCE SHEET DATA: (a)
Cash and cash equivalents (including
restricted cash) $ 141,083 $ 171,318 $ 113,907 $ 97,267 $ 54,312
Working capital 704,908 658,321 560,729 430,102 369,749
Total assets 2,427,585 2,290,276 2,210,218 2,167,973 1,903,829
Long-term debt (excluding current portion) (e) 720,187 750,669 780,706 736,944 651,556
Stockholders' equity 1,275,062 1,149,783 1,068,423 1,028,380 963,471
OTHER FINANCIAL DATA: (a)
EBITDA (f) $ 301,849 $ 247,564 $ 204,660 $ 205,669 $ 203,757
Net cash flows from operating activities 159,109 153,087 132,701 101,114 89,507
Net cash flows from investing activities (152,383) (46,802) (76,116) (203,517) (449,718)
Capital expenditures (g) 24,648 26,222 32,423 58,749 53,179
Net cash flows from financing activities (37,966) (49,555) (41,777) 145,502 276,652
27
The financial information above should be read in conjunction with the Notes to
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(a) Omnicare, Inc. ("Omnicare" or the "Company") has had an active acquisition
program in effect since 1989. See Note 2 of the Notes to Consolidated
Financial Statements for information concerning these acquisitions.
(b) Included in the net income amounts are the following aftertax charges
(credits) (in thousands):
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Restructuring and other related charges $14,381(1) $11,374(1) $17,135(1) $22,698 $ 2,689
Other expense -- 2,987(2) -- -- --
Acquisition expenses, pooling-of-interests -- -- -- (376) 13,869
------- ------- ------- ------- -------
Total $14,381 $14,361 $17,135 $22,322 $16,558
======= ======= ======= ======= =======
(1) See Note 13 of the Notes to Consolidated Financial Statements.
(2) See Note 14 of the Notes to Consolidated Financial Statements.
(c) In accordance with the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
Omnicare discontinued amortization of goodwill as of January 1, 2002.
Accordingly, no goodwill amortization was recorded during the year ended
December 31, 2002. Included in the net income amounts are the following
aftertax goodwill amortization expense amounts (in thousands):
2002 2001 2000 1999 1998
---- ------- ------- ------- -------
Goodwill amortization $-- $20,583 $20,582 $19,675 $13,649
==== ======= ======= ======= =======
(d) In accordance with the adoption of Emerging Issues Task Force ("EITF")
Issue No. 01-14, "Income Statement Characterization of Reimbursements
Received for 'Out-of-Pocket' Expenses Incurred" ("EITF No. 01-14"),
Omnicare has recorded reimbursements received for "out-of-pocket" expenses
on a grossed-up basis in the income statement as revenues and direct costs.
EITF No. 01-14 relates solely to the Company's contract research services
business. The prior year income statements have also been adjusted to
reflect the impact of EITF No. 01-14, as required per U.S. Generally
Accepted Accounting Principles ("GAAP").
(e) In 2001, the Company issued $375.0 million of Senior Subordinated Notes due
2011. See Note 7 of the Notes to Consolidated Financial Statements.
(f) "EBITDA" represents earnings before interest, income taxes, depreciation
and amortization. Omnicare believes that certain investors find EBITDA to
be a useful tool for measuring a company's ability to service its debt;
however, EBITDA does not represent net cash flows from operating
activities, as defined by U.S. GAAP, and should not be considered as a
substitute for net income as an indicator of Omnicare's operating
performance or operating cash flows as a measure of liquidity.
Omnicare's calculation of EBITDA may differ from the calculation of
EBITDA by others. The following is a reconciliation of the EBITDA
calculation (in thousands):
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Net income $125,906 $ 74,271 $ 48,817 $ 57,721 $ 80,379
Add: Income taxes 77,145 45,514 28,706 33,950 55,487
Interest expense, net of investment income 53,535 53,709 53,164 44,634 20,255
Depreciation and amortization 45,263 74,070 73,973 69,364 47,636
-------- -------- -------- -------- --------
EBITDA 301,849 247,564 204,660 205,669 203,757
Subtract: Income taxes (77,145) (45,514) (28,706) (33,950) (55,487)
Interest expense, net of
investment income (53,535) (53,709) (53,164) (44,634) (20,255)
Changes in assets and liabilities,
net of effects from acquisition
of businesses (67,711) (40,860) (43,389) (75,298) (60,440)
Add: Deferred tax provision 15,428 17,305 19,767 23,073 7,579
Provision for doubtful accounts 31,163 25,490 26,729 22,056 12,405
Non-cash portion of restructuring
charges 9,060 2,811 6,804 4,198 1,948
-------- -------- -------- -------- --------
Net cash flows from operating activities $159,109 $153,087 $132,701 $101,114 $ 89,507
======== ======== ======== ======== ========
(g) Primarily represents the purchase of computer equipment and software,
machinery and equipment, and furniture, fixtures and leasehold
improvements.
28
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements, related notes and other financial information appearing
elsewhere in this report. In addition, see "Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking
Information."
Results of Operations
- --------------------------------------------------------------------------------
The following table presents net sales and results of operations for Omnicare,
Inc. ("Omnicare" or the "Company"), for each of the years ended December 31,
2002, 2001 and 2000 (in thousands, except per share amounts). In accordance with
the SEC's recent release entitled "Conditions for Use of Non-GAAP Financial
Measures," the Company has disclosed in this report, with the exception of
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
(discussed below), only those measures that are in accordance with United States
("U.S.") Generally Accepted Accounting Principles ("GAAP").
For the years ended December 31,
------------------------------------
2002 2001 2000
------------------------------------
Total net sales $2,632,754 $2,183,036 $1,987,839
========== ========== ==========
Net income $ 125,906 $ 74,271 $ 48,817
========== ========== ==========
Earnings per share:
Basic $ 1.34 $ 0.80 $ 0.53
========== ========== ==========
Diluted $ 1.33 $ 0.79 $ 0.53
========== ========== ==========
EBITDA(a) $ 301,849 $ 247,564 $ 204,660
========== ========== ==========
(a) See Five-Year Summary of Selected Financial Data for a reconciliation of
EBITDA to net cash flows from operating activities.
The Company believes that certain investors find EBITDA to be a useful tool for
measuring a company's ability to service its debt; however, EBITDA does not
represent net cash flows from operating activities, as defined by U.S. GAAP,
and should not be considered as a substitute for net earnings as an indicator of
the Company's operating performance or operating cash flows as a measure of
liquidity. The Company's calculation of EBITDA may differ from the calculation
of EBITDA by others.
The Company adopted Emerging Issues Task Force ("EITF") Issue No. 01-14, "Income
Statement Characterization of Reimbursements Received for 'Out-of-Pocket'
Expenses Incurred" ("EITF No. 01-14"), which requires that, in cases where a
company acts as a principal, reimbursements received for "out-of-pocket"
expenses incurred be characterized as revenue and the associated costs be
included as expenses in the Company's income statement. As a result of
29
this accounting pronouncement, which affects only the Company's Contract
Research Organization ("CRO") business, CRO revenues and direct costs may
fluctuate significantly based on the timing of when reimbursable expenses are
incurred. EITF No. 01-14 had the effect of increasing both sales and cost of
sales by $26.3 million, $23.9 million and $16.5 million pretax for the years
ended December 31, 2002, 2001 and 2000, respectively. Accordingly, it had no
impact on operating or net income.
Effective January 1, 2002, in accordance with U.S. GAAP, the Company adopted
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
eliminating the amortization of goodwill related to acquisitions. Accordingly,
no goodwill amortization was recorded during the 2002 year. This accounting
standard would have had the effect of adding approximately $33.2 million pretax
($20.6 million aftertax, or $0.22 per diluted share) and $32.7 million pretax
($20.6 million aftertax, or $0.22 per diluted share) to net income for the years
ended December 31, 2001 and 2000, respectively.
2002 vs. 2001
- --------------------------------------------------------------------------------
Consolidated
Total net sales for 2002 increased to $2,632.8 million from $2,183.0 million in
2001. Diluted earnings per share were $1.33 for the year ended December 31, 2002
versus $0.79 in 2001. Net income for 2002 was $125.9 million versus $74.3
million in 2001. EBITDA for 2002 totaled $301.8 million in comparison with
$247.6 million for 2001.
Included in 2002 and 2001 were aggregate charges of $23.2 million and $18.3
million pretax, respectively ($14.4 million and $11.4 million aftertax, or $0.15
and $0.12 per diluted share, respectively), relating to the Phase II
productivity and consolidation program described hereafter under "Restructuring
and Other Related Charges." The charges were primarily comprised of employee
severance pay, employment agreement buy-out costs, lease termination costs, the
write-off of leasehold improvements and other assets, and professional fees and
other facility exit costs.
Included in the 2001 results are other expense items totaling $4.8 million
pretax ($3.0 million aftertax, or $0.03 per diluted share). Specifically, in
early 2001, Omnicare recorded a $1.8 million pretax special charge representing
a repayment to the Medicare program of overpayments made to one of the Company's
pharmacy units during the period from January 1997 through April 1998. As part
of its corporate compliance program, the Company learned of the overpayments,
which related to Medicare Part B claims that contained documentation errors, and
notified the Health Care Financing Administration (now known as the Centers for
Medicare & Medicaid Services) for review and determination of the amount of
overpayment. Further, the Company recorded a $3.0 million pretax special charge
in mid 2001, representing a settlement in June 2001 of certain contractual
issues with a customer, which issues and amount relate to prior year periods.
30
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $2,467.2 million for the
year ended December 31, 2002, exceeding the 2001 amount of $2,033.8 million by
$433.4 million, or 21.3%. At December 31, 2002, Omnicare served long-term care
facilities comprising approximately 754,000 beds as compared with approximately
662,000 beds served at December 31, 2001. The increase in beds served was a
result of the acquisition of American Pharmaceutical Services, Inc. and other
related entities (collectively, "APS"), as discussed below, and the efforts of
the Company's National Sales & Marketing Group and pharmacy staff to develop new
contracts with long-term care facilities. The increase in sales relating to the
APS acquisition approximated $240 million. Additionally, Pharmacy Services sales
increased due to the continued implementation and expansion of the Company's
clinical and other service programs, drug price inflation, and the increased
market penetration of newer drugs, which often carry higher prices but are
significantly more effective in reducing overall healthcare costs than those
they replace. Lower government reimbursement formulas in some states partially
offset the increase in pharmacy sales. The Company estimates that drug price
inflation for its highest dollar volume products in 2002 was approximately 5%.
Operating profit of the Pharmacy Services segment was $288.2 million in 2002, an
$87.4 million improvement as compared with the $200.8 million earned in 2001. As
a percentage of the segment's sales, operating profit was 11.7% in 2002,
compared with 9.9% in 2001. The improved operating profit was primarily the
result of increased sales, as discussed above, a lower operating cost structure
reflecting principally the impact of the productivity and consolidation
initiative started in the third quarter of 2001 (the "Phase II Program"), the
overall synergies realized from the APS integration (although margins were
initially unfavorably impacted early in 2002 by the addition of the lower margin
APS business), the exclusion of goodwill amortization in 2002 as previously
discussed (an expense that totaled $32.1 million pretax in 2001), the
year-to-year $1.7 million favorable impact of restructuring charges (which
totaled $6.8 million pretax in 2002 compared with $8.5 million pretax in 2001),
and other expense items in 2001 totaling $4.8 million pretax. Improvement in
operating performance in 2002 was also attributable to a more stable and
gradually improving operating environment in the skilled nursing facility
("SNF") market, a result of enactment of the Medicare, Medicaid and SCHIP
Balanced Budget Refinement Act of 1999 ("BBRA") and the Medicare, Medicaid and
SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"). However,
certain payment increases provided under these acts expired on October 1, 2002
with no further action taken by Congress to date. The impact of these
expirations on the Company's customers did not result in a significant
impact to Omnicare in 2002. Congress may consider these funding issues in 2003,
however, if no additional legislation is enacted, the loss of revenues
associated with this occurrence could have an adverse effect on the financial
condition of the Company's SNF clients which could, in turn, adversely affect
the timing or level of their payments to Omnicare. Other healthcare funding
issues remain, including pressures on federal and state Medicaid budgets due
to the economic downturn which has led to decreasing reimbursement rates in
certain states. While the Company has managed to adjust to these pricing
pressures to date, such pressures are likely to continue or escalate if economic
recovery does not emerge and there can be no assurance that such occurrence will
not have an adverse impact on the Company's business.
31
In January 2002, Omnicare completed the acquisition of the assets comprising the
pharmaceutical business of APS. The acquisition, accounted for as a purchase
business combination, included cash consideration and transaction costs which
aggregated approximately $114 million (including an adjustment based on the
closing balance sheet review). Up to an additional $18.0 million in total
deferred payments may become payable in annual increments of up to $6.0 million
each, contingent upon future performance, as evaluated in the first quarter of
each of the next three years.
At the time of the acquisition, APS provided professional pharmacy and related
consulting services to approximately 60,000 residents of skilled nursing and
assisted living facilities through its network of 32 pharmacies in 15 states, as
well as respiratory and Medicare Part B services for residents of long-term care
facilities. The net assets and operating results of APS have been included in
the Company's financial statements beginning in the first quarter of 2002.
On January 15, 2003, Omnicare closed its $5.50 per share cash tender offer
for all of the issued and outstanding shares of Class A common stock and Class B
common stock of NCS HealthCare, Inc. ("NCS"). Omnicare accepted, on January 15,
2003, all validly tendered shares for payment (totaling 17,510,126 shares of
Class A common stock, representing approximately 94% of the then-outstanding
Class A common stock, and 5,038,996 shares of Class B common stock, representing
100% of the then-outstanding Class B common stock). Omincare subsequently
acquired the remaining shares of Class A Common Stock of NCS.
The acquisition of NCS, to be accounted for as a purchase business combination,
included cash consideration and transaction costs of approximately $493
million. The cash consideration included the payoff of certain NCS debt totaling
approximately $325.5 million, which was retired by Omnicare immediately
following the acquisition. The Company financed the acquisition with available
cash, working capital and borrowings under its three-year, $500.0 million
revolving credit facility.
At the time of the acquisition, NCS provided professional pharmacy and related
services to long-term care facilities, including skilled nursing centers and
assisted living facilities comprising approximately 199,000 beds in 33 states
and managed hospital pharmacies in 10 states. Omnicare expects to achieve
certain economies of scale and operational efficiencies from the acquisition,
while broadening Omnicare's geographical reach. The net assets and operating
results of NCS will be included from the date of acquisition in the Company's
financial statements beginning in the first quarter of 2003.
CRO Services Segment
Omnicare's CRO Services segment recorded revenues of $165.5 million for the year
ended December 31, 2002, which were $16.2 million, or 10.9%, greater than the
$149.3 million recorded in 2001. In accordance with EITF No. 01-14, the Company
included $26.3 million and $23.9 million of reimbursable out-of-pockets in its
CRO Services segment reported revenue and direct cost amounts for the years
ended December 31, 2002 and 2001, respectively. Despite volatility in revenues
in the latter half of 2002 related to client-driven delays or cancellations
of certain projects, the increase in CRO Services revenue was achieved due to
solid business gains
32
arising from the efforts of the Company's integrated global selling efforts
and relative stability in the overall drug research market. Higher levels
of demand were recognized from both major pharmaceutical manufacturers
and biotechnology companies, and the Company's expanding presence throughout
the world. Operating income in the CRO Services segment was $4.6 million in
2002 compared with $2.5 million in 2001. As a percentage of the segment's
revenue, operating profit was 2.8% in 2002 compared with 1.7% in 2001. The
improvement in operating performance was attributable to the favorable impact
of the aforementioned increase in revenues, the realization of benefits from
the Company's initiatives to integrate and streamline the organization, and
the exclusion of goodwill amortization in 2002 (which totaled $1.1 million
pretax in 2001). Offsetting the improvement in operating performance was the
$6.6 million year-to-year impact of restructuring charges associated with the
Phase II productivity and consolidation program, which totaled $16.4 million
pretax in 2002 compared with $9.8 million in 2001. Backlog at December 31,
2002 was $181.6 million, representing a decrease of $13.9 million from
December 31, 2001 backlog of $195.5 million due to projects moving out of
backlog, as well as the cancellation of certain projects in 2002.
Consolidated
The Company's consolidated gross profit of $691.1 million increased $111.7
million in 2002 from the prior year amount of $579.4 million. Gross profit as a
percentage of total net sales of 26.2% in the year ended December 31, 2002, was
slightly lower than the 26.5% experienced during 2001. Positively impacting
overall gross profit was the Company's purchasing leverage associated with the
procurement of pharmaceuticals, due in part to efforts in integrating the APS
business and benefits realized from the Company's formulary compliance program,
as well as the leveraging of fixed and variable overhead costs at the Company's
pharmacies through the reduced cost structure brought about by the Phase II
Program. These favorable factors were offset primarily by the initial impact of
the lower-margin APS business and, to a lesser extent, the previously mentioned
shift in mix towards newer, branded drugs which typically produce higher gross
profit, but lower gross profit margins, and the effects of lower government
reimbursement formulas in some states.
Sales mix for the Company also impacts gross profit and includes primarily sales
of pharmaceuticals and, to a lesser extent, contract research services, infusion
therapy products and services, medical supplies, and other miscellaneous
products and services. Sales of pharmaceuticals account for the majority of the
Company's sales and gross profit. Contract research services and infusion
therapy gross profits are typically higher than gross profits associated with
sales of pharmaceuticals.
Increased leverage in purchasing favorably impacts gross profit and is primarily
derived through discounts from suppliers. Leveraging of fixed and variable
overhead costs primarily relates to generating higher sales volumes from
pharmacy facilities with no increase in fixed costs (e.g., rent) and minimal
increases in variable costs (e.g., utilities), as well as the elimination of
pharmacies through the Company's productivity and consolidation initiatives,
further discussed
33
below. The Company believes it will be able to continue to leverage fixed and
variable overhead costs through internal and acquired growth. The Company
is generally able to obtain price increases to cover drug price inflation.
In order to enhance its gross profit margins, the Company strategically
allocates its resources to those activities that will increase internal sales
growth and favorably impact sales mix, or will lower costs. In addition,
through the ongoing development of its pharmaceutical purchasing programs,
the Company is able to obtain discounts and thereby manage its pharmaceutical
costs.
Omnicare's selling, general and administrative ("operating") expenses for the
year ended December 31, 2002 of $411.3 million were higher than the 2001 amount
of $349.5 million, by $61.8 million, due to the overall growth of the business,
including the acquisition of APS. Operating expenses as a percentage of total
net sales, however, totaled 15.6% in 2002, representing a decline from the 16.0%
experienced in 2001. This decline is due to the year-over-year favorable impact
of the Phase II Program and the leveraging of fixed and variable overhead costs
over a larger sales base in 2002 than that which existed in 2001.
Investment income for the year ended December 31, 2002 was $3.3 million, an
improvement of $0.7 million over the 2001 year. Larger average invested cash
balances during 2002 as compared with 2001, partially offset by the impact of
lower interest rates in 2002 versus 2001, was the primary driver of the slight
increase in investment income.
Interest expense during 2002 of $56.8 million was relatively consistent with the
comparable prior year amount of $56.3 million.
The effective income tax rate was 38% in 2002, consistent with the prior year.
The effective tax rates in 2002 and 2001 are higher than the federal statutory
rate largely as a result of the combined impact of state and local income taxes,
various nondeductible expenses and tax-accrual adjustments.
2001 vs. 2000
- --------------------------------------------------------------------------------
Consolidated
Total net sales for 2001 increased to $2,183.0 million from $1,987.8 million in
2000. Diluted earnings per share were $0.79 for the year ended December 31, 2001
versus $0.53 in 2000. Net income for 2001 was $74.3 million versus $48.8 million
in 2000. EBITDA for 2001 was $247.6 million in comparison to $204.7 million for
2000.
Included in 2001 and 2000 were aggregate charges of $18.3 million and $27.2
million pretax ($11.4 million and $17.1 million aftertax, or $0.12 and $0.19 per
diluted share, respectively) relating to certain productivity and consolidation
programs described hereafter under "Restructuring and Other Related Charges."
Additionally, included in the 2001 period were other expense items totaling $4.8
million pretax ($3.0 million aftertax), described in detail above.
34
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $2,033.8 million for the
year ended December 31, 2001, exceeding the 2000 amount of $1,858.7 million by
$175.1 million, or 9.4%. The increase represents the continued internal growth
of the Pharmacy Services business, due primarily to net growth in the number of
nursing facility residents serviced, the expansion of clinical programs, and a
favorable shift in the mix toward new, higher-priced branded pharmaceuticals.
The growth in the number of residents serviced was generated through the
efforts of the Company's National Sales & Marketing Group and pharmacy staff
in developing new pharmacy contracts with long-term care facilities, net of
the elimination of certain high credit risk or uneconomic accounts. At
December 31, 2001, Omnicare served long-term care facilities comprising
approximately 662,000 beds as compared with approximately 636,500 beds served
at December 31, 2000, a net increase during 2001 of 25,500 beds, which was
nearly five times greater than the net increase experienced during 2000. The
increasing market penetration of newer drugs, which often carry higher prices
but are more effective in reducing overall healthcare costs than those they
replace, also served to increase Pharmacy Services sales. The Company
estimates that drug price inflation for its highest dollar volume products in
2001 was 5%. The factors favorably impacting sales growth in 2001 were offset in
part by a decrease of $6.2 million in infusion therapy sales as compared with
2000, a result of the decrease in the number of higher acuity patients serviced.
Operating profit of the Pharmacy Services segment was $200.8 million in 2001, a
$44.2 million improvement as compared with the $156.6 million in 2000. As a
percentage of the segment's sales, operating profit was 9.9% in 2001, compared
to 8.4% in 2000. The improved operating profit was primarily the result of
increased sales, as discussed above, the $13.1 million year-to-year favorable
impact of restructuring charges associated with the productivity and
consolidation programs, which totaled $8.5 million pretax in the 2001 year
compared with $21.6 million pretax in 2000, and a lower operating cost
structure reflecting principally the full period impact of the productivity
and consolidation initiative completed in 2000 (the "Phase I Program").
Improvement in operating performance in 2001 was also attributable to a more
stable and gradually improving operating environment in the skilled nursing
facility market, a result of enactment of the BBRA and the BIPA. During 2001,
many of the customers of the Company's Pharmacy Services segment realized the
benefits of higher statutory reimbursement rates in conjunction with the
implementation of the BBRA and BIPA. Offsetting the improvement in operating
profit were the $4.8 million other expense items, discussed above.
CRO Services Segment
Omnicare's CRO Services segment recorded revenues of $149.3 million for the year
ended December 31, 2001, which were $20.2 million, or 15.6%, greater than the
$129.1 million recorded in 2000. In accordance with EITF No. 01-14, the Company
included $23.9 million and $16.5 million of reimbursable out-of-pockets in its
CRO Services segment reported revenue and direct costs amounts for the years
ended December 31, 2001 and 2000, respectively. The increase in CRO Services
revenue was due to a recovery of the drug research market, as well as the
efforts of the Company's integrated global selling efforts. Higher levels of
demand were recognized from both major pharmaceutical manufacturers and
biotechnology companies, and
35
the Company's growing presence in the Pacific Rim countries contributed to the
revenue increase.
Operating profit of the CRO Services segment was $2.5 million in 2001 compared
with $1.7 million in 2000. As a percentage of the segment's revenue, operating
profit was 1.7% in 2001 compared with 1.3% in 2000. The improvement in operating
performance was attributable to the favorable impact of the aforementioned
increase in revenues, the overall stabilization of the drug research market
following several large pharmaceutical company mergers in 2000, as well as the
realization of benefits from the Company's initiatives to integrate and
streamline the organization. Offsetting the improvement in operating
performance was the $4.2 million impact of restructuring charges associated
with the Phase I productivity and consolidation program, which totaled $9.8
million pretax in the 2001 year compared with $5.6 million pretax in 2000.
Consolidated
The Company's consolidated gross profit as a percentage of total net sales of
26.5% in the year ended December 31, 2001 improved from the rate of 26.4%
experienced during 2000, and represented a year-over-year increase in gross
profit of approximately $54.0 million to $579.4 million. Positively impacting
overall gross profit were the Company's purchasing leverage associated with the
procurement of pharmaceuticals and benefits realized from the Company's
formulary compliance program, as well as the leveraging of fixed and variable
overhead costs at the Company's pharmacies and the full period impact of the
reduced cost structure brought about by the Phase I Program completed in 2000.
These favorable factors were offset in part by the previously mentioned shift in
mix towards newer, branded drugs which typically produce higher gross profit,
but lower gross profit margins.
Omnicare's operating expenses for the year ended December 31, 2001 of $349.5
million were higher than the 2000 amount of $334.8 million, by $14.7 million,
due to the overall growth of the business. Operating expenses as a percentage of
total net sales, however, totaled 16.0% in 2001, representing a decline from the
16.8% experienced in 2000. This decline is primarily due to the full period
favorable impact of the Phase I Program, which was successfully completed in
late 2000, the leveraging of fixed and variable overhead costs over a larger
sales base in 2001 than that which existed in 2000, and the integration and
streamlining of the CRO business.
Investment income for the year ended December 31, 2001 was $2.6 million, an
improvement of $0.7 million over the same period of 2000. Larger average
invested cash balances during 2001 as compared to 2000 was the primary driver of
the increase in investment income.
Interest expense during 2001 was $56.3 million, an increase of $1.2 million
versus the comparable prior year period. This increase was largely due to the
impact of an increase in amortization of debt issuance costs classified as
interest expense, relating to the first quarter 2001 debt transactions,
partially offset by the reduction in outstanding debt, as discussed at the
"Financial Condition, Liquidity and Capital Resources" section below. Also
unfavorably impacting 2001 interest expense was a marginal increase in the
weighted average interest rates paid on outstanding debt brought about by the
aforementioned debt transactions. These transactions converted a substantial
portion of the Company's outstanding debt under revolving
36
credit facilities, which are subject to variable rates of interest, to senior
subordinated notes, which are subject to a higher, fixed rate of interest, but
which also have a longer term.
The increase in the effective income tax rate to 38% in 2001 from 37% in the
prior year is primarily attributable to the full utilization in 2000 of certain
benefits derived from the Company's state tax planning program. While other
state tax planning benefits will continue, they will be realized at a different
magnitude than was the case in 2000. The effective tax rates in 2001 and 2000
are higher than the federal statutory rate largely as a result of the combined
impact of various nondeductible expenses (primarily intangible asset
amortization and acquisition costs), state and local income taxes and
tax-accrual adjustments.
Restructuring and Other Related Charges
- --------------------------------------------------------------------------------
Phase I Program
In 2000, the Company completed its previously disclosed productivity and
consolidation program (the "Phase I Program"). The Phase I Program was
implemented to allow the Company to gain maximum benefit from its acquisition
program and to respond to changes in the healthcare industry. As part of the
Phase I Program, the roster of pharmacies and other operating locations was
reconfigured through the consolidation, relocation, closure and opening of
sites, resulting in a net reduction of 59 locations. The Phase I Program also
resulted in the reduction of the Company's work force by 16%, or approximately
1,800 full- and part-time employees.
Details of the restructuring and other related charges relating to the Phase I
productivity and consolidation program follow (in thousands):
Utilized Balance at Utilized Balance at Utilized Balance at
2000 during December 31, during December 31, during December 31,
Provision 2000 2000 2001 2001 2002 2002
--------- -------- ------------ -------- ----------- -------- -----------
Restructuring charges:
Employee severance $ 3,296 $ (8,367) $3,390 $ (2,997) $ 393 $(393) $ --
Employment agreement buy-outs 1,048 (3,735) 676 (676) -- -- --
Lease terminations 1,881 (3,811) 2,593 (1,775) 818 (246) 572
Other assets and facility exit costs 10,627 (9,737) 2,538 (2,299) 239 (239) --
------- -------- ------ -------- ------ ----- ----
Total restructuring charges 16,852 $(25,650) $9,197 $(7,747) $1,450 $(878) $572
======== ====== ======== ====== ===== ====
Other related charges 10,347
-------
Total restructuring and other
related charges $27,199
=======
In connection with this program, over the 1999 and 2000 periods, Omnicare
recorded a total of $62.6 million pretax ($39.8 million after taxes) for
restructuring and other related charges, of which $27.2 million pretax ($17.1
million after taxes, or $0.19 per diluted share) related to the 2000 year. The
restructuring charges included severance pay, the buy-out of employment
agreements, the buy-out of lease obligations, the write-off of other assets
(representing a project-to-date cumulative amount of $11.0 million of pretax
non-cash items, through December 31, 2000) and facility exit costs. The other
related charges were primarily comprised of consulting fees and duplicate costs
associated with the program, as well as the write-off of certain non-core
healthcare investments.
37
As of December 31, 2002, the Company had paid approximately $23.3 million of
severance and other employee-related costs relating to the reduction of
approximately 1,800 employees. The remaining liabilities at December 31, 2002
represent amounts not yet paid relating to actions taken (comprised of remaining
lease payments), and will be adjusted as these matters are settled.
Phase II Program
In 2001, the Company announced the implementation of a second phase of the
productivity and consolidation initiative (the "Phase II Program"). The Phase II
Program, completed on September 30, 2002, further streamlined operations,
increased efficiencies and helped enhance the Company's position as a high
quality, cost-effective provider of pharmaceutical services. Building on the
previous efforts, the Phase II Program included the merging or closing of seven
pharmacy locations and the reconfiguration in size and function of an additional
ten locations. The Phase II Program also included a reduction in occupied
building space in certain locations and the rationalization or reduction of
staffing levels in the CRO business in order to better garner the efficiencies
of the integration and functional reorganization of that business. The Phase II
Program encompassed a net reduction of approximately 460 employees, or about 5%
of the Company's total workforce, across both the Pharmacy Services and CRO
Services segments.
In connection with the Phase II Program, the Company expensed a total of $18.3
million pretax ($11.4 million aftertax, or $0.12 per diluted share) for
restructuring charges during the year ended December 31, 2001. Further,
approximately $23.2 million pretax ($14.4 million aftertax, or $0.15 per diluted
share) was recorded during the year ended December 31, 2002, when the amounts
were required to be recognized in accordance with U.S. GAAP. The restructuring
charges included severance pay, the buy-out of employment agreements, the
buy-out of lease obligations, the write-off of leasehold improvements and other
assets, and related fees and facility exit costs.
38
Details of the pretax restructuring charges relating to the Phase II Program
follow (in thousands):
2001 Utilized Balance at 2002 Utilized Balance at
Provision/ during December 31, Provision/ during December 31,
Accrual 2001 2001 Accrual 2002 2002
---------- -------- ------------ ---------- -------- ------------
Restructuring charges:
Employee severance $ 4,256 $ (2,614) $1,642 $ 2,177 $ (2,655) $1,164
Employment agreement buy-outs 2,086 (1,578) 508 -- (214) 294
Lease terminations 2,711 (2,105) 606 5,862 (1,846) 4,622
Other assets, fees and facility
exit costs 9,291 (6,264) 3,027 15,156 (14,690) 3,493
------- -------- ------ ------- -------- ------
Total restructuring charges $18,344 $(12,561) $5,783 $23,195 $(19,405) $9,573
======= ======== ====== ======= ======== ======
As of December 31, 2002, the Company had paid approximately $7.1 million of
severance and other employee-related costs relating to the reduction of
approximately 460 employees. The remaining liabilities recorded at December 31,
2002 represent amounts not yet paid or settled relating to actions taken, and
will be adjusted in future periods as these matters are finalized.
Impact of Inflation
- --------------------------------------------------------------------------------
Inflation has not materially affected Omnicare's profitability inasmuch as price
increases have generally been obtained to cover inflationary drug cost
increases.
Financial Condition, Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Cash and cash equivalents at December 31, 2002 were $141.1 million compared with
$171.3 million at December 31, 2001 (including restricted cash amounts of $3.1
million and $2.9 million, respectively). The Company generated positive cash
flows from operating activities of $159.1 million during the year ended December
31, 2002 compared with net cash flows from operating activities of $153.1
million and $132.7 million during the years ended December 31, 2001 and 2000,
respectively. These operating cash flows were used primarily for
acquisition-related payments (further discussed below), capital expenditures,
debt repayment and dividends. The increase in cash generated from operations
during 2002 was driven primarily by earnings growth, as previously discussed in
the "Results of Operations" section.
Net cash used in investing activities was $152.4 million, $46.8 million and
$76.1 million in 2002, 2001 and 2000, respectively. Acquisitions of businesses
required cash payments of $127.8 million (including amounts payable pursuant to
acquisition agreements relating to pre-2002 acquisitions) in 2002, which were
funded by borrowings under the Revolving Credit Facility and operating cash
flows. Acquisitions of businesses during 2001 and 2000 required $20.3 million
and $41.7 million, respectively, of cash payments (including amounts payable
pursuant to acquisition agreements relating to pre-2001 and pre-2000
acquisitions, respectively) which were primarily funded by operating cash flows.
The Company's capital requirements are primarily comprised of capital
expenditures, largely relating to investments in the Company's information
technology systems, and ongoing payments originating from its acquisition
program. There were no material commitments and contingencies outstanding at
December 31, 2002, other than the
39
Company's cash tender offer for all of the outstanding shares of NCS and related
redemption or repayment of existing NCS debt, discussed further below.
Additionally, certain acquisition-related payments potentially due in the
future, including deferred payments, indemnification payments and payments
originating from earnout provisions (including up to an additional $18.0 million
relating to APS, contingent upon performance, payable in annual increments of up
to $6.0 million each as evaluated in the first quarter of each of the next three
years) may become payable.
Net cash used for financing activities was $38.0 million, $49.6 million and
$41.8 million in 2002, 2001 and 2000, respectively. During 2002, the Company
used $120.0 million in cash generated from its operations to fully pay down the
outstanding obligations under its revolving credit facility, including the $90.0
million drawn down in early 2002 in connection with the aforementioned APS
acquisition.
On February 6, 2003, the Company's Board of Directors declared a quarterly cash
dividend of 2.25 cents per share for an indicated annual rate of 9 cents per
common share for 2003, which is consistent with annual dividends paid per common
share for the 2002, 2001 and 2000 years. Aggregate dividends of $8.5 million
paid during the year ended December 31, 2002 were comparable with the $8.5
million and $8.3 million paid for the years ended December 31, 2001 and 2000,
respectively.
The Company's current ratio was 3.4 to 1.0 at December 31, 2002 and December 31,
2001.
Disclosures About Off-Balance Sheet Arrangements and Aggregate Contractual
- --------------------------------------------------------------------------
Obligations
- -----------
At December 31, 2002, the Company did not have any unconsolidated entities or
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.
The following summarizes the Company's contractual obligations at December 31,
2002, and the effect such obligations are expected to have on the Company's
liquidity and cash flow in future periods.
40
Contractual Obligations (in thousands):
Less than After
Total(1) 1 year 1-3 years(1) 4-5 years 5 years
-------- --------- ------------ --------- --------
Long-term debt obligations $720,000 $ -- $ -- $345,000 $375,000
Capital lease obligations 297 110 187 -- --
Operating lease obligations 114,922 20,544 34,182 37,172 23,024
-------- ------- ------- -------- --------
Total contractual cash obligations $835,219 $20,654 $34,369 $382,172 $398,024
======== ======= ======= ======== ========
(1) In January 2003, the Company borrowed $499.0 million under the Revolving
Credit Facility to finance its acquisition of NCS (see Note 19 of the notes to
consolidated financial statements).
As of December 31, 2002, the Company had approximately $7.5 million outstanding
relating to standby letters of credit, substantially all of which are subject to
automatic annual renewals.
In March 2001, the Company completed the issuance, at par value, of $375.0
million of 8.125% senior subordinated notes (the "Senior Notes"), due 2011. The
Senior Notes were subsequently exchanged for replacement notes with identical
terms, which were registered with the Securities and Exchange Commission.
Concurrent with the issuance of the Senior Notes, the Company entered into a new
three-year syndicated $495.0 million revolving line of credit facility (the
"Revolving Credit Facility"). Subsequent to the closing of the Revolving Credit
Facility, the Company received commitments from additional financial
institutions that allowed the Company to increase the size of the Revolving
Credit Facility to $500.0 million. Net proceeds from the Senior Notes of
approximately $365.0 million and borrowings under the new Revolving Credit
Facility of approximately $70.0 million were used to repay outstanding
indebtedness under the Company's former revolving credit facilities, which
totaled $435.0 million at December 31, 2000, and such former facilities were
terminated. Borrowings under the Revolving Credit Facility bear interest, at the
Company's option, at a rate equal to either: (i) London Inter-bank Offerer Rate
("LIBOR") plus a margin that varies depending on certain ratings on the
Company's long-term debt; or (ii) the higher of (a) the prime rate or (b) the
sum of the federal funds rate plus 0.50%. The margin was 1.375% at December 31,
2002. Additionally, the Company is charged a commitment fee on the unused
portion of the Revolving Credit Facility, which also varies depending on such
ratings. At December 31, 2002, the commitment fee was 0.375%. The Revolving
Credit Facility had no outstanding loans, and $499.0 million of available funds,
at December 31, 2002.
In December 1997, the Company issued $345.0 million of 5.0% convertible
subordinated debentures (the "Debentures"), due 2007. The Debentures are
convertible into common stock at any time after March 4, 1998 at the option of
the holder at a price of $39.60 per share.
The Revolving Credit Facility, the Debentures and the Senior Notes contain
representations and warranties, covenants and events of default customary for
such facilities. Interest rates charged on borrowings outstanding under the
Revolving Credit Facility are based on prevailing market rates as discussed in
the following section.
41
On January 15, 2003, Omnicare closed its $5.50 per share cash tender offer for
all of the issued and outstanding shares of Class A common stock and Class B
common stock of NCS. Omnicare accepted all validly-tendered shares for payment
on January 15, 2003. Omnicare subsequently acquired the remaining shares of
Class A common stock of NCS.
The acquisition of NCS, to be accounted for as a purchase business combination,
included cash consideration and transaction costs of approximately $493
million. The cash consideration included the payoff of certain NCS debt totaling
approximately $325.5 million, which was retired by Omnicare immediately
following the acquisition. The Company financed the acquisition with available
cash, working capital and borrowings under its three-year, $500.0 million
revolving credit facility.
The Company believes that net cash flows from operating activities, credit
facilities and other short- and long-term debt financings, if any, will be
sufficient to satisfy its future working capital, acquisition contingency
commitments, capital expenditures, debt servicing and other financing
requirements for the foreseeable future. The Company is evaluating its
capital requirements and considering financing alternatives to restructure
currently outstanding borrowings over a longer term. The Company may, in the
future, refinance its indebtedness, issue additional indebtedness, or issue
additional equity as deemed appropriate. The Company believes that, if needed,
these additional external sources of financing are readily available.
Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
Omnicare's primary market risk exposure relates to interest rate risk exposure
through its borrowings. The Company's debt obligations at December 31, 2002
include $345.0 million outstanding under 5.0% fixed rate Debentures, due 2007,
and $375.0 million outstanding under its 8.125% fixed rate Senior Notes, due
2011. At December 31, 2002, the approximate fair value of Omnicare's Debentures
and Senior Notes was $329.0 million and $401.3 million, respectively. As
previously mentioned, there were no outstanding loans under the Company's
three-year, $500.0 million variable-rate Revolving Credit Facility at December
31, 2002.
The Company has operations and revenue that occur outside of the U.S. and
transactions that are settled in currencies other than the U.S. dollar, exposing
it to market risk related to changes in foreign currency exchange rates.
However, the substantial portion of the Company's operations and revenues and
the substantial portion of the Company's cash settlements are exchanged in U.S.
dollars. Therefore, changes in foreign currency exchange rates do not represent
a substantial market risk exposure to the Company.
The Company does not have any financial instruments held for trading purposes,
and does not hedge any of its market risks with derivative instruments.
42
Critical Accounting Policies
- --------------------------------------------------------------------------------
The preparation of the Company's financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingencies. On
an on-going basis, the Company evaluates the estimates used, including those
related to bad debts, contractual allowances, inventory valuation, impairment of
goodwill, restructuring accruals, income taxes, pension obligations and other
operating allowances and accruals. Management bases its estimates on historical
experience, current conditions and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The Company
believes the following critical accounting policies involve more significant
judgments and estimates used in the preparation of the consolidated financial
statements.
Revenue Recognition
Pharmacy Services
Revenue is recognized when products or services are delivered or provided to the
customer. A significant portion of the Company's revenues from sales of
pharmaceutical and medical products is reimbursable from state Medicaid and, to
a lesser extent, the federal Medicare programs. The Company monitors its
revenues and receivables from these reimbursement sources, as well as other
third-party insurance payors, and records an estimated contractual allowance for
certain sales and receivable balances. Accordingly, the total net sales and
receivables reported in the Company's financial statements are recorded at the
amount ultimately expected to be received from these payors. Contractual
allowances are adjusted to actual as cash is received and claims are settled.
The Company evaluates several criteria in developing the estimated contractual
allowances on a monthly basis, including historical trends based on actual
claims paid, current contract and reimbursement terms and changes in customer
base and payor/product mix.
Contract Research Services
A portion of the Company's revenues are earned by performing services under
contracts with various pharmaceutical, biotechnology, medical device and
diagnostics companies, based on contract terms. Most of the contracts provide
for services to be performed on a units of service basis. These contracts
specifically identify the units of service and unit pricing. Under these
contracts, revenue is generally recognized upon completion of the units of
service, unless the units of service are performed over an extended period of
time. For extended units of service, revenue is recognized based on labor hours
expended as a percentage of total labor hours expected to be expended. For
time-and-materials contracts, revenue is recognized at contractual hourly rates,
and for fixed-price contracts revenue is recognized using a method similar to
that used for extended units of service. The Company's contracts provide for
price renegotiations upon scope of work changes. The Company recognizes revenue
related to these scope changes when underlying services are performed and
realization is assured. In a number of cases, clients are required to make
termination payments in addition to payments for services already rendered. Any
anticipated losses resulting from contract performance are charged to earnings
in the period identified. Billings and payments are specified in each contract.
Revenue recognized in excess of
43
billings is classified as unbilled receivables, while billings in excess of
revenue are classified as deferred revenue on the accompanying balance sheets.
In accordance with EITF No. 01-14, the Company has recorded reimbursements
received for "out-of-pocket" expenses on a grossed-up basis in the income
statement as revenues and expenses, and has adjusted the prior year income
statements to reflect the impact of EITF No. 01-14.
Allowance for Doubtful Accounts
The Company establishes the allowance for doubtful accounts based on historical
credit losses and specifically identified credit risks. Management reviews this
allowance on an ongoing basis for appropriateness. Factors considered in
determining the adequacy of the allowance include current and expected economic
conditions and each customer's payment history and creditworthiness. Judgment is
used to assess the collectibility of account balances, and the creditworthiness
of a customer. Given the Company's experience, management believes that the
reserves for potential losses are adequate, but if one or more of the Company's
larger customers were to default on its obligations, the Company could be
exposed to losses in excess of the provisions established. If economic
conditions worsen, impacting the Company's customers' ability to pay, management
may adjust the allowance for doubtful accounts.
Inventories
The Company maintains inventory at lower of cost or market, with cost
determined on the basis of the first-in, first-out method. There are no
significant obsolescence reserves recorded since the Company has not
historically experienced (nor does it expect to experience) significant levels
of inventory write-offs.
Omnicare uses a periodic inventory system. Physical inventories are typically
performed on a monthly basis at all pharmacy sites, and in all cases at least
once a quarter. Cost of goods sold is recorded based on the actual results of
the physical inventory counts, and is estimated during those circumstances when
a physical inventory is not performed in a particular month. The Company
evaluates various criteria in developing estimated cost of goods sold during
non-inventory months, including the historical cost of goods sold trends based
on prior physical inventory results; a review of cost of goods sold information
reflecting current customer contract terms; and consideration and analysis of
changes in customer base, product mix, payor mix, state Medicaid and third-party
insurance reimbursement levels or other issues that may impact cost of goods
sold. Actual cost of goods sold have not varied significantly from estimated
amounts in non-inventory months.
Goodwill
SFAS 142 requires that goodwill and other indefinite lived intangible assets be
reviewed for impairment using a fair value based approach upon adoption and at
least annually thereafter. SFAS 142 requires the Company to assess whether there
is an indication that goodwill is impaired, and requires goodwill to be tested
between annual tests if events occur or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. The Company's assessments to date have indicated that goodwill has not
been impaired. Events may occur in the future which could result in an
impairment of the Company's goodwill, and any resulting impairment charge could
be material to the Company's financial position, results of operations or cash
flows.
44
The assessment of goodwill impairment requires estimates of future cash flows.
To the extent the carrying value of the assets exceed their fair value, an
impairment loss would be recorded. Changes in these estimates of future cash
flows due to unforeseen events could affect the outcome of the Company's
impairment analysis.
Restructuring Programs
The Company has recorded accruals in connection with its restructuring programs,
primarily for facility exit costs and involuntary termination benefits. The
accruals were established based on management's best estimate of the costs to be
incurred, timing of payments and employee retention rates. Changes in these
estimates or actual results could require the Company to make adjustments to the
recorded accruals. Management reviews these accruals on an on-going basis for
appropriateness.
Employee Benefit Plans
For certain of its employee benefit plans, the Company estimates the expected
return on plan assets, discount rate, rate of compensation increase and future
healthcare costs, among other items, and relies on actuarial estimates, to
assess the future potential liability and funding requirements. These estimates,
if assessed differently, could have an impact on the Company's consolidated
financial position, results of operations or cash flows. However, a 1% change in
the discount rate used to calculate the Company's pension obligations would not
have a material impact to the Company's operating results.
Income Taxes
The Company estimates its tax liabilities based on current tax laws in the
statutory jurisdictions in which it operates. These estimates include judgments
about deferred tax assets and liabilities resulting from temporary differences
between assets and liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes, as well as about the realization of
deferred tax assets. If the provisions for current or deferred taxes are not
adequate, if the Company is unable to realize certain deferred tax assets or if
the tax laws change unfavorably, the Company could experience potential losses.
Likewise, if provisions for current and deferred taxes are in excess of those
eventually needed, if the Company is able to realize additional deferred tax
assets or if tax laws change favorably, the Company could experience potential
gains.
Recently Issued Accounting Standards
- --------------------------------------------------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement updates, clarifies and simplifies existing accounting
pronouncements. This Statement is effective for the Company beginning January 1,
2003. The adoption of the standard did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
45
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an on-going benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and
requires liabilities associated with exit and disposal activities to be expensed
as incurred rather than at the date of the commitment to an exit or disposal
plan. SFAS 146 is effective for exit or disposal activities of the Company that
are initiated after December 31, 2002.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions," which is not applicable to the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS 123" ("SFAS
148"). While limited in scope, SFAS 148 provides additional transition guidance
for those entities that elect to voluntarily adopt the accounting provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The
standard is intended to encourage the adoption of the provisions of SFAS 123 by
providing three transitional implementation methodologies. Even for those
companies choosing not to adopt the provisions of SFAS 123, SFAS 148 includes
new disclosure requirements related to a company's issuance of stock
compensation. The transition and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002. The new interim
disclosure provisions are effective for the first interim period beginning after
December 15, 2002. The disclosure provisions of SFAS 148 have been incorporated
into the notes to consolidated financial statements and Omnicare currently
intends to continue accounting for stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations, as permitted by U.S. GAAP.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), which expands previously issued accounting
guidance and disclosure requirements for certain guarantees. FIN 45 requires
Omnicare to recognize an initial liability for the fair value of an obligation
assumed by issuing a guarantee. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure provisions
of FIN 45 have been incorporated into the notes to consolidated financial
statements, and its implementation has not had a material impact on the
Company's financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which is not applicable to the Company.
46
Outlook
- --------------------------------------------------------------------------------
The Company derives approximately one-half of its revenues directly from
government sources, principally state Medicaid and to a lesser extent federal
Medicare programs, and one-half from the private sector (including individual
residents, third-party insurers and SNFs).
In recent years, Congress has passed a number of federal laws that have effected
major changes in the healthcare system. The Balanced Budget Act of 1997 (the
"BBA") sought to achieve a balanced federal budget by, among other things,
changing the reimbursement policies applicable to various healthcare providers.
In a significant change for the SNF industry, the BBA provided for the
introduction in 1998 of the prospective payment system ("PPS") for
Medicare-eligible residents of SNFs. Prior to PPS, SNFs under Medicare received
cost-based reimbursement. Under PPS, Medicare pays SNFs a fixed fee per patient
per day based upon the acuity level of the resident, covering substantially all
items and services furnished during a Medicare-covered stay, including pharmacy
services. PPS resulted in a significant reduction of reimbursement to SNFs.
Admissions of Medicare residents, particularly those requiring complex care,
declined in many SNFs due to concerns relating to the adequacy of reimbursement
under PPS. This caused a weakness in Medicare census leading to a significant
reduction of overall occupancy in the SNFs the Company serves. This decline in
occupancy and acuity levels adversely impacted Omnicare's results beginning in
1999, as the Company experienced lower utilization of Omnicare services, coupled
with PPS-related pricing pressure from Omnicare's SNF customers. In 1999 and
2000, Congress sought to restore some of the reductions in reimbursement
resulting from PPS. A BBRA provision (subsequently modified by BIPA) gave SNFs a
temporary rate increase for certain specific high-acuity patients beginning
April 1, 2000, and ending when the Centers for Medicare & Medicaid Services
("CMS") implements a refined patient classification system under PPS. CMS did
not implement such refinements in fiscal year 2003, and the Bush Administration
has indicated that the refinements also will not be implemented in fiscal year
2004, thus continuing the additional rate increases currently in place for
certain high-acuity patients. BBRA also included an overall 4% across the board
increase in payments otherwise determined under the BBA for all patients for
federal fiscal years 2001 and 2002. In 2000, BIPA further increased
reimbursement by means of a temporary 16.66% across the board increase in the
nursing component of the federal rate for all patients for services furnished
before October 1, 2002, and for fiscal year 2001, a 3.16% rate increase for all
patients. These provisions of the BBRA and BIPA helped to improve the financial
condition of SNFs, motivated them to increase admissions, particularly of higher
acuity residents, and stabilized the unfavorable operating trends attributable
to PPS. However, as noted, certain of the increases in Medicare reimbursement
for SNFs provided for under the BBRA and the BIPA expired on October 1, 2002
with no further action taken by Congress. Congress may consider these funding
issues in 2003. If no legislation is enacted, the loss of revenues associated
with this occurrence could have an adverse effect on the financial condition of
the Company's SNF customers which, in turn, could adversely affect the timing
or level of their payments to Omnicare. While it is hoped that Congress will
restore some or all of these reimbursement amounts, no assurances can be given
as to whether Congress will take such action in 2003.
Looking beyond the stabilization of Medicare funding for skilled nursing
facilities, other key healthcare funding issues remain, including the pressures
on federal and state Medicaid budgets
47
arising from the economic downturn which has led to decreasing reimbursement
rates in certain states. While the Company has managed to adjust to these
pricing pressures to date, such pressures are likely to continue or escalate
if economic recovery does not emerge and there can be no assurance that such
occurrence will not have an adverse impact on the Company's business. Longer
term, funding for federal and state healthcare programs must consider the
aging of the population and the growth in enrollees as eligibility is expanded;
the escalation in drug costs owing to higher drug utilization among seniors and
the introduction of new, more efficacious but also more expensive medications;
the implementation of a Medicare drug benefit for seniors; and the long-term
financing of the entire Medicare program. Given competing national priorities,
it remains difficult to predict the outcome and impact on the Company of any
changes in healthcare policy relating to the future funding of the Medicare and
Medicaid programs.
Demographic trends indicate that demand for long-term care will increase well
into the middle of this century as the elderly population grows significantly.
Moreover, those over 65 consume a disproportionately high level of healthcare
services when compared with the under 65 population. There is widespread
consensus that appropriate pharmaceutical care is generally considered the most
cost-effective form of treatment for the chronic ailments afflicting the elderly
and also one which is able to improve the quality of life. Further, the pace and
quality of new drug development is yielding many promising new drugs targeted at
the diseases of the elderly. These new drugs may be more expensive than older,
less effective drug therapies due to rising research costs. However, they are
significantly more effective in curing or ameliorating illness and in lowering
overall healthcare costs by reducing among other things, hospitalizations,
physician visits, nursing time and lab tests. These trends not only support
long-term growth for the geriatric pharmaceutical industry but also containment
of healthcare costs and the well being of the nation's growing elderly
population.
In order to fund this growing demand, the Company anticipates that the
government and the private sector will continue to review, assess and possibly
alter healthcare delivery systems and payment methodologies. While it is not
possible to predict the effect of any further initiatives on Omnicare's
business, management believes that the Company's expertise in geriatric
pharmaceutical care and pharmaceutical cost management position Omnicare to
help meet the challenges of today's healthcare environment. Further, while
volatility can occur from time to time in the contract research business owing
to factors such as the success or failure of its clients' compounds, the timing
or budgeting constraints of its clients, or consolidation in the pharmaceutical
industry, new drug discovery remains an important priority of pharmaceutical
manufacturers that will be enhanced by the advances in science such as the
mapping of the human genome. Pharmaceutical manufacturers, in order to optimize
their research and development efforts, will continue to turn to contract
research organizations to assist them in accelerating drug research development
and commercialization.
48
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Regarding Forward-Looking Information
- --------------------------------------------------------------------------------
In addition to historical information, this report contains certain statements
that constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include all statements regarding the intent, belief or current expectations
regarding the matters discussed or incorporated by reference in this document
(including statements as to "beliefs," "expectations," "anticipations,"
"intentions" or similar words) and all statements which are not statements of
historical fact.
These forward-looking statements involve known and unknown risks, uncertainties,
contingencies and other factors that could cause results, performance or
achievements to differ materially from those stated. These forward-looking
statements and trends include those relating to expectations concerning
Omnicare's financial performance; internal growth trends; growth in beds served;
new contract development; expansion of clinical and other service programs;
increased market penetration of newer drugs; trends concerning government
reimbursement; trends concerning drug price inflation; the impact of Omnicare's
productivity, consolidation and integration programs; expected benefits from
acquisitions, including NCS and APS; the operating environment in the skilled
nursing facility and drug research markets; the impact of legislation, including
legislation related to reimbursement rates; expectations concerning Medicare
reimbursement trends and Congressional action with respect thereto; the impact
of healthcare funding issues including pricing pressures; the impact of the
CRO's global selling efforts; the impact of higher demand for CRO services from
pharmaceutical manufacturers and biotechnology companies; the impact of
worldwide CRO expansion; trends concerning the commencement, continuation or
cancellation of CRO projects and backlog; purchasing leverage; the impact of
Omnicare's formulary compliance program; the impact of leveraging of costs and
trends concerning the continuation thereof; the ability to obtain price
increases; the ability to allocate resources in order to enhance gross profit
margins; the impact of pharmaceutical purchasing programs; the adequacy and
availability of Omnicare's sources of liquidity and capital; expectations
concerning future financing or refinancing of debt or equity; the adequacy of
Omnicare's allowance for doubtful accounts; the impact of PPS on SNFs and
Omnicare; trends concerning the acuity of patients served; trends concerning SNF
occupancy levels; the impact of demographic trends; the impact of new drug
development; opportunities to contain healthcare costs while ensuring the
well-being of the elderly population; and developments concerning future
healthcare delivery systems and payment methodologies. Such risks,
uncertainties, contingencies, assumptions and other factors, many of which are
beyond Omnicare's control, include without limitation: overall economic,
financial and business conditions; trends for the continued growth of Omnicare's
business; the ability to implement productivity, consolidation, integration and
cost reduction efforts and to realize related anticipated benefits; the impact
and pace of pharmaceutical price increases; delays and further reductions in
reimbursement by the government and other payors to Omnicare and its customers
as a result of pressure on federal and state budgets due to the continuing
economic downturn and other factors; the overall financial condition of
Omnicare's customers; the ability to assess and react to the financial condition
of customers; the ability of vendors and business partners to continue to
provide products and services to Omnicare; the continued successful
integration of the CRO business and acquired companies, including APS
and NCS, and the ability to realize
49
anticipated revenues, economies of scale, cost synergies and profitability; the
continued availability of suitable acquisition candidates; pricing and other
competitive factors in Omnicare's industry; increases or decreases in
reimbursement; the effect of new government regulations, executive orders and/or
legislative initiatives, including those relating to reimbursement and drug
pricing policies, and changes in the interpretation and application of these
policies; government budgetary pressures and shifting priorities; efforts by
payors to control costs; the outcome of litigation; Omnicare's failure to obtain
or maintain required regulatory approvals or licenses; the failure of the
long-term care facilities Omnicare serves to maintain required regulatory
approvals; loss or delay of CRO contracts for regulatory or other reasons; the
ability of CRO projects to produce revenues in future periods; the ability to
attract and retain needed management; the impact and pace of technological
advances; the ability to obtain or maintain rights to data, technology and other
intellectual property; the impact of consolidation in the pharmaceutical and
long-term care industries; volatility in the market for Omnicare's stock and in
the financial markets generally; changes in international economic and political
conditions and currency fluctuations between the U.S. dollar and other
currencies; access to capital and financing; the demand for Omnicare's products
and services; variations in costs or expenses; the ability to continue to
leverage costs through growth; changes in tax law and regulation; and changes
in accounting rules and standards.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, Omnicare's actual results, performance
or achievements could differ materially from those expressed in, or implied by,
such forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
thereof. Except as otherwise required by law, Omnicare does not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is set forth in the "Quantitative and
Qualitative Disclosures about Market Risk" caption at Part II, Item 7, of this
Filing.
50
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Page
----
Financial Statements:
Report of Independent Accountants 52
Consolidated Statements of Income 53
Consolidated Balance Sheets 54
Consolidated Statements of Cash Flows 55
Consolidated Statements of Stockholders' Equity 56
Notes to Consolidated Financial Statements 57
Financial Statement Schedule:
II - Valuation and Qualifying Accounts S-1
All other financial statement schedules are omitted because they are not
applicable or because the required information is shown in the Consolidated
Financial Statements or Notes thereto.
51
Report of Independent Accountants
To the Stockholders and
Board of Directors of Omnicare, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Omnicare, Inc. and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Chicago, Illinois
January 31, 2003
52
CONSOLIDATED STATEMENTS OF INCOME
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands, except per share data)
For the years ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Sales $2,606,450 $2,159,131 $1,971,348
Reimbursable out-of-pockets 26,304 23,905 16,491
---------- ---------- ----------
Total net sales 2,632,754 2,183,036 1,987,839
---------- ---------- ----------
Cost of sales 1,915,397 1,579,732 1,445,955
Reimbursed out-of-pocket expenses 26,304 23,905 16,491
---------- ---------- ----------
Total direct costs 1,941,701 1,603,637 1,462,446
---------- ---------- ----------
Gross profit 691,053 579,399 525,393
Selling, general and administrative expenses 411,272 349,545 334,837
Goodwill amortization (Note 5) -- 33,199 32,670
Restructuring and other related charges (Note 13) 23,195 18,344 27,199
Other expense (Note 14) -- 4,817 --
---------- ---------- ----------
Operating income 256,586 173,494 130,687
Investment income 3,276 2,615 1,910
Interest expense (56,811) (56,324) (55,074)
---------- ---------- ----------
Income before income taxes 203,051 119,785 77,523
Income taxes 77,145 45,514 28,706
---------- ---------- ----------
Net income $ 125,906 $ 74,271 $ 48,817
========== ========== ==========
Earnings per share:
Basic $ 1.34 $ 0.80 $ 0.53
========== ========== ==========
Diluted $ 1.33 $ 0.79 $ 0.53
========== ========== ==========
Weighted average number of common shares outstanding:
Basic 94,168 93,124 92,012
========== ========== ==========
Diluted 94,905 93,758 92,012
========== ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
53
CONSOLIDATED BALANCE SHEETS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands, except share data)
December 31,
-----------------------
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 137,936 $ 168,396
Restricted cash 3,147 2,922
Accounts receivable, less allowances
of $68,593 (2001-$45,573) 522,857 478,077
Unbilled receivables 25,062 23,621
Inventories 190,464 149,134
Deferred income tax benefits 18,621 28,147
Other current assets 103,471 77,297
---------- ----------
Total current assets 1,001,558 927,594
Properties and equipment, at cost less accumulated
depreciation of $177,870 (2001-$160,164) 139,908 155,073
Goodwill 1,188,907 1,123,800
Other noncurrent assets 97,212 83,809
---------- ----------
Total assets $2,427,585 $2,290,276
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 175,648 $ 140,327
Current debt 110 393
Accrued employee compensation 22,627 25,015
Deferred revenue 25,254 39,338
Income taxes payable 6,837 9,256
Other current liabilities 66,174 54,944
---------- ----------
Total current liabilities 296,650 269,273
Long-term debt 187 30,669
5.0% convertible subordinated debentures, due 2007 345,000 345,000
8.125% senior subordinated notes, due 2011 375,000 375,000
Deferred income tax liabilities 84,071 81,495
Other noncurrent liabilities 51,615 39,056
---------- ----------
Total liabilities 1,152,523 1,140,493
---------- ----------
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $1 par value, 200,000,000 shares authorized,
95,441,400 shares issued (2001-94,671,800 shares issued) 95,441 94,672
Paid-in capital 737,421 722,701
Retained earnings 498,856 381,441
---------- ----------
1,331,718 1,198,814
Treasury stock, at cost-1,139,900 shares
(2001-986,600 shares) (23,471) (19,824)
Deferred compensation (29,018) (24,273)
Accumulated other comprehensive income (4,167) (4,934)
---------- ----------
Total stockholders' equity 1,275,062 1,149,783
---------- ----------
Total liabilities and stockholders' equity $2,427,585 $2,290,276
========== ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
54
CONSOLIDATED STATEMENTS OF CASH FLOWS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands)
For the years ended December 31,
--------------------------------
2002 2001 2000
--------- --------- --------
Cash flows from operating activities:
Net income $ 125,906 $ 74,271 $ 48,817
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 33,129 32,164 32,211
Amortization 12,134 41,906 41,762
Provision for doubtful accounts 31,163 25,490 26,729
Deferred tax provision 15,428 17,305 19,767
Non-cash portion of restructuring charges 9,060 2,811 6,804
Changes in assets and liabilities, net of effects
from acquisition of businesses:
Accounts receivable and unbilled receivables (41,788) (50,774) (44,314)
Inventories (28,261) (12,949) (8,988)
Current and noncurrent assets (37,046) 6,292 (10,710)
Accounts payable 34,829 15,130 11,115
Accrued employee compensation 517 (1,993) (14,436)
Deferred revenue (14,084) 11,005 4,012
Current and noncurrent liabilities 18,122 (7,571) 19,932
--------- --------- --------
Net cash flows from operating activities 159,109 153,087 132,701
--------- --------- --------
Cash flows from investing activities:
Acquisition of businesses (127,783) (20,263) (41,664)
Capital expenditures (24,648) (26,222) (32,423)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust (225) (622) (2,300)
Other 273 305 271
--------- --------- --------
Net cash flows from investing activities (152,383) (46,802) (76,116)
--------- --------- --------
Cash flows from financing activities:
Borrowings on line of credit facilities 90,000 70,000 --
Proceeds from long-term borrowings -- 375,000 --
Payments on line of credit facilities (120,000) (475,000) (30,000)
Principal payments on long-term obligations (214) (2,898) (1,838)
Fees paid for financing arrangements -- (16,254) (635)
Proceeds from (payments for) stock awards and exercise of
stock options, net of stock tendered in payment 667 8,065 (1,011)
Dividends paid (8,491) (8,468) (8,293)
Other 72 -- --
--------- --------- --------
Net cash flows from financing activities (37,966) (49,555) (41,777)
--------- --------- --------
Effect of exchange rate changes on cash 780 59 (468)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents (30,460) 56,789 14,340
Cash and cash equivalents at beginning of year - unrestricted 168,396 111,607 97,267
--------- --------- --------
Cash and cash equivalents at end of year - unrestricted $ 137,936 $ 168,396 $111,607
========= ========= ========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
55
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands, except per share data)
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
------- -------- -------- --------
Balance at January 1, 2000 $91,612 $684,419 $275,114 $ (6,950)
Dividends paid ($0.09 per share) -- -- (8,293) --
Stock acquired for benefit plans -- -- -- (88)
Exercise of stock options 173 1,559 -- (1,882)
Stock awards, net of amortization 946 7,161 -- (1,840)
Other -- (444) -- (48)
------- -------- -------- --------
Subtotal 92,731 692,695 266,821 (10,808)
------- -------- -------- --------
Net income -- -- 48,817 --
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- -- -- --
Unrealized appreciation in fair value of
investments -- -- -- --
------- -------- -------- --------
Comprehensive income (loss) -- -- 48,817 --
------- -------- -------- --------
Balance at December 31, 2000 92,731 692,695 315,638 (10,808)
Dividends paid ($0.09 per share) -- -- (8,468) --
Stock acquired for benefit plans -- -- -- (83)
Exercise of stock options 1,430 20,691 -- (6,614)
Stock awards, net of amortization 511 9,747 -- (2,319)
Other -- (432) -- --
------- -------- -------- --------
Subtotal 94,672 722,701 307,170 (19,824)
------- -------- -------- --------
Net income -- -- 74,271 --
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- -- -- --
Unrealized appreciation in fair value of
investments -- -- -- --
Equity adjustment for minimum
pension liability -- -- -- --
------- -------- -------- --------
Comprehensive income (loss) -- -- 74,271 --
------- -------- -------- --------
Balance at December 31, 2001 94,672 722,701 381,441 (19,824)
Dividends paid ($0.09 per share) -- -- (8,491) --
Stock acquired for benefit plans -- -- -- (112)
Exercise of stock options 229 4,055 -- (313)
Stock awards, net of amortization 540 10,807 -- (3,222)
Other -- (142) -- --
------- -------- -------- --------
Subtotal 95,441 737,421 372,950 (23,471)
------- -------- -------- --------
Net income -- -- 125,906 --
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- -- -- --
Unrealized appreciation in fair value of
investments -- -- -- --
Equity adjustment for minimum
pension liability -- -- -- --
------- -------- -------- --------
Comprehensive income -- -- 125,906 --
------- -------- -------- --------
Balance at December 31, 2002 $95,441 $737,421 $498,856 $(23,471)
======= ======== ======== ========
Accumulated
Other Total
Deferred Comprehensive Stockholders'
Compensation Income Equity
------------ ------------- -------------
Balance at January 1, 2000 $(14,098) $(1,717) $1,028,380
Dividends paid ($0.09 per share) -- -- (8,293)
Stock acquired for benefit plans -- -- (88)
Exercise of stock options -- -- (150)
Stock awards, net of amortization (4,817) -- 1,450
Other -- -- (492)
-------- ------- ----------
Subtotal (18,915) (1,717) 1,020,807
-------- ------- ----------
Net income -- -- 48,817
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- (1,694) (1,694)
Unrealized appreciation in fair value of
investments -- 493 493
-------- ------- ----------
Comprehensive income (loss) -- (1,201) 47,616
-------- ------- ----------
Balance at December 31, 2000 (18,915) (2,918) 1,068,423
Dividends paid ($0.09 per share) -- -- (8,468)
Stock acquired for benefit plans -- -- (83)
Exercise of stock options -- -- 15,507
Stock awards, net of amortization (5,358) -- 2,581
Other -- -- (432)
-------- ------- ----------
Subtotal (24,273) (2,918) 1,077,528
-------- ------- ----------
Net income -- -- 74,271
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- 59 59
Unrealized appreciation in fair value of
investments -- 208 208
Equity adjustment for minimum
pension liability -- (2,283) (2,283)
-------- ------- ----------
Comprehensive income (loss) -- (2,016) 72,255
-------- ------- ----------
Balance at December 31, 2001 (24,273) (4,934) 1,149,783
Dividends paid ($0.09 per share) -- -- (8,491)
Stock acquired for benefit plans -- -- (112)
Exercise of stock options -- -- 3,971
Stock awards, net of amortization (4,745) -- 3,380
Other -- -- (142)
-------- ------- ----------
Subtotal (29,018) (4,934) 1,148,389
-------- ------- ----------
Net income -- -- 125,906
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- 781 781
Unrealized appreciation in fair value of
investments -- 1,274 1,274
Equity adjustment for minimum
pension liability -- (1,288) (1,288)
-------- ------- ----------
Comprehensive income -- 767 126,673
-------- ------- ----------
Balance at December 31, 2002 $(29,018) $(4,167) $1,275,062
======== ======= ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
56
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
Description of Business
Omnicare, Inc. and its subsidiaries ("Omnicare" or the "Company") provide
geriatric pharmaceutical care and clinical research services. At December 31,
2002, Omnicare served long-term care facilities comprising approximately 754,000
beds in 45 states, making Omnicare the nation's largest provider of professional
pharmacy, related consulting and data management services for skilled nursing,
assisted living and other institutional healthcare providers. The Company also
provided clinical research services to the pharmaceutical and biotechnology
industries in 28 countries worldwide at December 31, 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Translation of Foreign Financial Statements
Assets and liabilities of the Company's foreign operations are translated at the
year-end rate of exchange, and the income statements are translated at the
average rate of exchange for the year. Gains or losses from translating foreign
currency financial statements are accumulated in a separate component of
stockholders' equity.
Cash Equivalents
Cash equivalents include all investments in highly liquid instruments with
original maturities of three months or less.
Restricted Cash
Restricted cash represents cash transferred to separate irrevocable trusts for
settlement of employee health and severance costs.
Inventories
Inventories consist primarily of purchased pharmaceuticals and medical supplies
held for sale to customers and are stated at the lower of cost or market. Cost
is determined using the first-in, first-out ("FIFO") method.
Omnicare uses a periodic inventory system. Physical inventories are typically
performed on a monthly basis at all pharmacy sites, and in all cases at least
once a quarter. Cost of goods sold is recorded based on the actual results of
the physical inventory counts, and is estimated during
57
those circumstances when a physical inventory is not performed in a particular
month. The Company evaluates various criteria in developing estimated cost of
goods sold during non-inventory months, including the historical cost of goods
sold trends based on prior physical inventory results; a review of cost of goods
sold information reflecting current customer contract terms; and consideration
and analysis of changes in customer base, product mix, payor mix, state Medicaid
and third-party insurance reimbursement levels or other issues that may impact
cost of goods sold. Actual costs of goods sold have not varied significantly
from estimated amounts in non-inventory months.
Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance, repairs, renewals and betterments that do not
materially prolong the useful lives of the assets are charged to expense as
incurred. Depreciation of properties and equipment is computed using the
straight-line method over the estimated useful lives of the assets, which range
from five to ten years for computer equipment and software, machinery and
equipment, and furniture and fixtures. Buildings and building improvements are
depreciated over forty years, and leasehold improvements are amortized over the
lesser of the lease terms, or their useful lives. The Company capitalizes
certain costs that are directly associated with the development of internally
developed software, representing the historical cost of these assets. Once the
software is completed and placed into service, such costs are amortized over the
estimated useful lives, ranging from five to ten years.
Business Combinations
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
("SFAS 141"). SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests methods is no longer permitted. SFAS 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001. The Company has adopted SFAS 141 for business combinations. The
net assets and operating results of acquired businesses have been included in
the Company's financial statements from the date of acquisition.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist principally of interest-bearing cash and cash equivalents and accounts
receivable.
The Company is exposed to credit risk in the event of default by the financial
institutions or issuers of cash and cash equivalents to the extent recorded on
the balance sheet. At any given point in time, the Company has cash on deposit
with financial institutions, and cash invested in high quality short-term money
market funds and U.S. government-backed repurchase agreements, generally having
original maturities of three months or less, in order to minimize its credit
risk.
58
The Company establishes allowances for doubtful accounts based on historical
credit losses and specifically identified credit risks. Management reviews this
allowance on an ongoing basis for appropriateness, and such losses have been
within management's expectations. For the years ended December 31, 2002, 2001
and 2000, no single customer accounted for 10% or more of revenues. The Company
generally does not require collateral.
Approximately one-half of Omnicare's pharmacy services billings are directly
reimbursed by government sponsored programs. These programs include state
Medicaid and, to a lesser extent, the federal Medicare programs. The remainder
of Omnicare's billings are paid or reimbursed by individual residents, long-term
care facilities and other third party payors, including private insurers. A
portion of these revenues also are indirectly dependent on government programs.
The table below represents the Company's approximated payor mix for the last
three years:
2002 2001 2000
---- ---- ----
State Medicaid programs 46% 44% 43%
Private pay and long-term care facilities(a) 44% 44% 46%
Federal Medicare programs(b) 2% 3% 3%
Other private sources(c) 8% 9% 8%
--- --- ---
Totals 100% 100% 100%
=== === ===
(a) Includes payments from skilled nursing facilities on behalf of their
federal Medicare program-eligible residents.
(b) Includes direct billing for medical supplies.
(c) Includes the Company's contract research organization revenues.
Leases
Leases that substantially transfer all of the benefits and risks of ownership of
property to Omnicare or otherwise meet the criteria for capitalization under
U.S. Generally Accepted Accounting Principles ("GAAP") are accounted for as
capital leases. An asset is recorded at the time a capital lease is entered into
together with its related long-term obligation to reflect its purchase and
financing. Property and equipment recorded under capital leases are depreciated
on the same basis as previously described. Rental payments under operating
leases are expensed as incurred.
Goodwill, Intangibles and Other Assets
Intangible assets are comprised primarily of goodwill, noncompete agreements and
customer relationship assets, all originating from business combinations
accounted for as purchase transactions. Effective January 1, 2002, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In
accordance with SFAS 142, goodwill is no longer amortized but instead reviewed
for impairment at least annually and upon the occurrence of an event that
indicates impairment may have occurred. Intangible assets that will continue
to be amortized under SFAS 142 are amortized using the straight-line method
over their useful lives of 4.7 to 10.0 years.
59
Debt issuance costs are included in other assets and are amortized using the
effective interest method over the life of the related debt.
Valuation of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," long-lived assets such as property and equipment, software
(acquired and internally-developed) and investments are reviewed for impairment
when events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. An impairment loss would be recognized when
estimated future undiscounted cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying amount. No
impairment losses have been recognized in the periods presented.
Fair Value of Financial Instruments
For cash and cash equivalents, restricted cash, accounts receivable and unbilled
receivables, the carrying value of these items approximates their fair value.
The fair value of restricted funds held in trust for settlement of the Company's
pension obligations is based on quoted market prices of the investments held by
the trustee. For accounts payable, the carrying value approximates fair value.
The fair value of the Company's line of credit facilities approximates their
carrying value, as the effective interest rate fluctuates with changes in market
rates. The fair value of the convertible subordinated debentures and the senior
subordinated notes, respectively, was $329.0 million and $401.3 million at
December 31, 2002, as determined by quoted market rates on that date.
Revenue Recognition
Pharmacy Services
Revenue is recognized when products or services are delivered or provided to the
customer. A significant portion of the Company's revenues from sales of
pharmaceutical and medical products is reimbursable from state Medicaid and, to
a lesser extent, the federal Medicare programs. The Company monitors its
revenues and receivables from these reimbursement sources, as well as other
third-party insurance payors, and records an estimated contractual allowance for
certain sales and receivable balances. Accordingly, the total net sales and
receivables reported in the Company's financial statements are recorded at the
amount ultimately expected to be received from these payors. Contractual
allowances are adjusted to actual as cash is received and claims are settled.
The Company evaluates several criteria in developing the estimated contractual
allowances on a monthly basis, including historical trends based on actual
claims paid, current contract and reimbursement terms and changes in customer
base and payor/product mix.
Contract Research Services
A portion of the Company's revenues are earned by performing services under
contracts with various pharmaceutical, biotechnology, medical device and
diagnostics companies, based on contract terms. Most of the contracts provide
for services to be performed on a units of service basis. These contracts
specifically identify the units of service and unit pricing. Under these
contracts, revenue is generally recognized upon completion of the units of
service, unless the
60
units of service are performed over an extended period of time. For extended
units of service, revenue is recognized based on labor hours expended as a
percentage of total labor hours expected to be expended. For time-and-materials
contracts, revenue is recognized at contractual hourly rates, and for
fixed-price contracts revenue is recognized using a method similar to that used
for extended units of service. The Company's contracts provide for price
renegotiations upon scope of work changes. The Company recognizes revenue
related to these scope changes when underlying services are performed and
realization is assured. In a number of cases, clients are required to make
termination payments in addition to payments for services already rendered. Any
anticipated losses resulting from contract performance are charged to earnings
in the period identified. Billings and payments are specified in each contract.
Revenue recognized in excess of billings is classified as unbilled receivables,
while billings in excess of revenue are classified as deferred revenue on the
accompanying consolidated balance sheets. In accordance with Emerging Issues
Task Force ("EITF") Issue No. 01-14, "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred" ("EITF No.
01-14"), the Company has recorded reimbursements received for "out-of-pocket"
expenses on a grossed-up basis in the income statement as revenues and expenses,
and has adjusted the prior year income statements to reflect the impact of EITF
No. 01-14.
Income Taxes
The Company accounts for income taxes using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates to differences between the
tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements.
Stock-Based Employee Compensation
At December 31, 2002, the Company has three stock-based employee compensation
plans, which are described more fully in Note 8. As permitted per U.S. GAAP, the
Company accounts for these plans under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related Interpretations. No
stock-based employee compensation cost for stock options is reflected in net
income as all options granted under the plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
61
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), for stock options
(in thousands, except per share data):
For the years ended December 31,
--------------------------------
2002 2001 2000
-------- ------- -------
Net income, as reported $125,906 $74,271 $48,817
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all options, net of
related tax effects (7,835) (3,528) (5,635)
-------- ------- -------
Pro forma net income $118,071 $70,743 $43,182
======== ======= =======
Earnings per share:
Basic - as reported $ 1.34 $ 0.80 $ 0.53
======== ======= =======
Basic - pro forma $ 1.25 $ 0.76 $ 0.47
======== ======= =======
Diluted - as reported $ 1.33 $ 0.79 $ 0.53
======== ======= =======
Diluted - pro forma $ 1.24 $ 0.75 $ 0.47
======== ======= =======
The fair value of each option at the grant date is estimated using the
Black-Scholes option-pricing model, with the following weighted average
assumptions used for grants in 2002, 2001 and 2000:
2002 2001 2000
------ ------ -----
Volatility 63% 64% 61%
Risk-free interest rate 3.1% 3.75% 5.0%
Dividend yield 0.4% 0.4% 0.4%
Expected term of options (in years) 5.5 4.9 4.0
Weighted average fair value per option $14.80 $10.97 $8.36
The above pro forma information is based on the circumstances and assumptions in
effect for each of the respective periods and, therefore, is not necessarily
representative of the actual effect of SFAS 123 on net income or earnings per
share in future years.
62
Comprehensive Income
The accumulated aftertax other comprehensive income (loss) adjustments at
December 31, 2002 and 2001, net of aggregate tax benefits of $1.0 million and
$1.0 million, respectively, by component and in the aggregate, follows (in
thousands):
December 31,
------------------
2002 2001
------- --------
Cumulative foreign currency translation adjustments $(2,571) $(3,352)
Unrealized appreciation in fair value of investments 1,975 701
Equity adjustment for minimum pension liability (3,571) (2,283)
------- -------
Total accumulated other comprehensive loss adjustments, net $(4,167) $(4,934)
======= =======
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, the reported
amounts of revenues and expenses during the reporting periods, and amounts
reported in the accompanying notes. Significant estimates underlying the
accompanying consolidated financial statements include the allowance for
doubtful accounts; the net carrying value of inventories; the goodwill
impairment assessment; accruals pursuant to the Company's restructuring
initiatives; employee benefit plan assumptions and reserves; current and
deferred income tax assets, liabilities and provisions; and various other
operating allowances and accruals (including health and property/casualty
insurance accruals). Actual results could differ from those estimates depending
upon certain risks and uncertainties.
Potential risks and uncertainties, many of which are beyond the control of
Omnicare include, but are not necessarily limited to, such factors as overall
economic, financial and business conditions; delays in reimbursement by the
government and other payors to customers and Omnicare; the overall financial
condition of Omnicare's customers; the effect of new government regulations,
executive orders and/or legislative initiatives, including those relating to
reimbursement and drug pricing policies and in the interpretation and
application of such policies; efforts by payors to control costs; the outcome of
litigation; other contingent liabilities; loss or delay of contracts pertaining
to the Company's Contract Research Organization ("CRO" or "CRO Services")
segment for regulatory or other reasons; currency fluctuations between the U.S.
dollar and other currencies; changes in tax law and regulation; access to
capital and financing; the demand for Omnicare's products and services; pricing
and other competitive factors in the industry; variations in costs or expenses;
and changes in accounting rules and standards.
Recently Issued Accounting Standards
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement updates, clarifies and simplifies existing accounting
pronouncements. This Statement is effective for the Company beginning January 1,
2003. The adoption of the standard did not have
63
a material impact on the Company's consolidated financial position, results of
operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and
requires liabilities associated with exit and disposal activities to be expensed
as incurred rather than at the date of the commitment to an exit or disposal
plan. SFAS 146 is effective for exit or disposal activities of the Company that
are initiated after December 31, 2002.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions," which is not applicable to the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS 123" ("SFAS
148"). While limited in scope, SFAS 148 provides additional transition guidance
for those entities that elect to voluntarily adopt the accounting provisions of
SFAS 123. The standard is intended to encourage the adoption of the provisions
of SFAS 123 by providing three transitional implementation methodologies. Even
for those companies choosing not to adopt the provisions of SFAS 123, SFAS 148
includes new disclosure requirements related to a company's issuance of stock
compensation. The transition and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002. The new interim
disclosure provisions are effective for the first interim period beginning after
December 15, 2002. The disclosure provisions of SFAS 148 have been incorporated
into the notes to consolidated financial statements and Omnicare currently
intends to continue accounting for stock-based compensation plans in accordance
with APB 25 and related Interpretations, as permitted by U.S. GAAP.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), which expands previously issued accounting
guidance and disclosure requirements for certain guarantees. FIN 45 requires
Omnicare to recognize an initial liability for the fair value of an obligation
assumed by issuing a guarantee. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure provisions
of FIN 45 have been incorporated into the notes to consolidated financial
statements, and its implementation has not had a material impact on the
Company's financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which is not applicable to the Company.
64
Reclassifications
Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.
Note 2 - Acquisitions
Since 1989, the Company has been involved in a program to acquire providers of
pharmaceutical products and related pharmacy management services and medical
supplies to long-term care facilities and their residents. The Company's
strategy has included the acquisition of freestanding institutional pharmacy
businesses as well as other assets, generally insignificant in size, which have
been combined with existing pharmacy operations to augment their internal
growth. From time to time, the Company may acquire other businesses such as
long-term care software companies, contract research organizations, pharmacy
consulting companies and medical supply companies, which complement the
Company's core business. During the year ended December 31, 2002, the Company
completed one acquisition, which was an institutional pharmacy business that was
accounted for using the purchase method. No acquisitions of businesses were
completed during the years ended December 31, 2001 and 2000.
In accordance with accounting rules, all business combinations entered into
after July 1, 2001 are accounted for using the purchase method. For acquisitions
accounted for as purchases, including insignificant acquisitions, the purchase
price paid for each has been allocated to the fair value of the assets acquired
and liabilities assumed. Purchase price allocations are subject to final
determination within one year after the acquisition date.
In January 2002, Omnicare completed the acquisition of the assets comprising the
pharmaceutical business of American Pharmaceutical Services, Inc. and other
related entities (collectively, "APS"). The acquisition, accounted for as a
purchase business combination, included cash consideration and transaction costs
which aggregated approximately $114 million (including an adjustment based on
the closing balance sheet review). Up to an additional $18.0 million in total
deferred payments may become payable in annual increments of up to $6.0 million
each, contingent upon future performance, as evaluated in the first quarter of
each of the next three years. The Company has completed its purchase price
allocation, including the identification of goodwill and other intangible assets
based on an appraisal performed by an independent valuation firm.
At the time of the acquisition, APS provided professional pharmacy and related
consulting services to approximately 60,000 residents of skilled nursing and
assisted living facilities through its network of 32 pharmacies in 15 states, as
well as respiratory and Medicare Part B services for residents of long-term care
facilities. With the acquisition, Omnicare has achieved certain economies of
scale and cost synergies, as well as expanded its geographic reach. The net
assets and operating results of APS have been included in the Company's
financial statements beginning in the first quarter of 2002.
65
The following table summarizes the estimated fair values of the net assets
acquired at the date of the acquisition (in thousands):
Current assets $ 40,934
Property and equipment 8,358
Intangible assets 4,400
Goodwill 60,072
--------
Total net assets acquired $113,764
========
In connection with the purchase of APS, the Company acquired amortizable
intangible assets comprised of non-compete agreements and customer relationship
assets totaling $1.3 million and $3.1 million, respectively. Amortization
periods for the non-compete agreements and customer relationship assets are 10.0
years and 4.7 years, respectively, and 6.3 years on a weighted-average basis.
The Company has also recorded goodwill totaling approximately $60 million (all
of which is tax deductible) in connection with the acquisition, although this
amount is subject to adjustment based primarily on the potential payment of any
deferred consideration discussed above. Further discussion of goodwill and other
intangible assets is included in Note 5.
Unaudited pro forma combined results of operations of the Company and APS for
the year ended December 31, 2001 are presented below. Such pro forma
presentation has been prepared assuming that the APS acquisition had been made
as of January 1, 2001. Pro forma information is not presented for the year ended
December 31, 2002 as the results of APS are included in those of the Company
from the closing date of January 7, 2002, and the difference from the beginning
of the period is not significant.
The unaudited pro forma combined financial information follows (in thousands,
except per share data):
For the year ended
December 31, 2001
------------------
Net sales $2,451,214
Net income $ 73,461
Earnings per share:
Basic $ 0.79
Diluted $ 0.78
Warrants outstanding as of December 31, 2002, issued in prior years in
connection with acquisitions, represent the right to purchase 1.8 million shares
of Omnicare common stock. These warrants can be exercised at any time through
2006 at prices ranging from $29.70 to $48.00 per share. There were no warrants
to purchase shares of common stock exercised in 2002.
The purchase agreements for acquisitions generally include clauses whereby the
seller will or may be paid additional consideration at a future date depending
on the passage of time and/or
66
whether certain future events occur. The agreements also include provisions
containing a number of representations and covenants by the seller and provide
that if those representations or covenants are violated or found not to have
been true, Omnicare may offset any payments required to be made at a future date
against any claims it may have under indemnity provisions in the agreement.
There are no significant anticipated future offsets against acquisition-related
payables and/or contingencies under indemnity provisions as of December 31, 2002
and 2001. Amounts contingently payable through 2005, primarily payments
originating from earnout provisions (including up to an additional $18.0 million
relating to APS), total approximately $27.2 million as of December 31, 2002 and,
if paid, will be recorded as additional purchase price, serving to increase
goodwill in the period in which the contingencies are resolved and payment is
made. The amount of cash paid for acquisitions of businesses in the Consolidated
Statements of Cash Flows represents acquisition related payments made in each of
the years of acquisition, as well as acquisition related payments made during
each of the years pursuant to acquisition transactions entered into in prior
years.
Note 3 - Cash and Cash Equivalents
A summary of cash and cash equivalents follows (in thousands):
December 31,
-------------------
2002 2001
-------- --------
Cash (including restricted cash) $ 58,751 $ 48,226
Money market funds 20,334 9,206
U.S. government-backed repurchase agreements 61,998 113,886
-------- --------
$141,083 $171,318
======== ========
Repurchase agreements represent investments in U.S. government-backed securities
(government agency issues and treasury issues at December 31, 2002 and 2001,
respectively), under agreements to resell the securities to the counterparty.
The term of the agreement usually spans overnight, but in no case is longer than
30 days. The Company has a collateralized interest in the underlying securities
of repurchase agreements, which are segregated in the accounts of the bank
counterparty.
67
Note 4 - Properties and Equipment
A summary of properties and equipment follows (in thousands):
December 31,
---------------------
2002 2001
--------- ---------
Land $ 1,553 $ 1,553
Buildings and building improvements 5,256 5,044
Computer equipment and software 172,605 154,532
Machinery and equipment 79,804 89,855
Furniture, fixtures and leasehold improvements 58,560 64,253
--------- --------
317,778 315,237
Accumulated depreciation (177,870) (160,164)
--------- ---------
$ 139,908 $ 155,073
========= =========
Note 5 - Goodwill and Other Intangible Assets
In accordance with SFAS 142, the Company discontinued the amortization of
goodwill effective January 1, 2002. A reconciliation of the previously reported
net income and earnings per share to the amounts adjusted for the exclusion of
goodwill amortization, net of tax, follows (in thousands, except per share
data):
For the years ended December 31,
---------------------------------
2002 2001 2000
-------- ------- -------
Net income, as reported $125,906 $74,271 $48,817
Goodwill amortization, net of tax -- 20,583 20,582
-------- ------- -------
Adjusted net income $125,906 $94,854 $69,399
======== ======= =======
Basic earnings per share:
Net income, as reported $ 1.34 $ 0.80 $ 0.53
Goodwill amortization, net of tax -- 0.22 0.22
-------- ------- -------
Adjusted net income $ 1.34 $ 1.02 $ 0.75
======== ======= =======
Diluted earnings per share:
Net income, as reported $ 1.33 $ 0.79 $ 0.53
Goodwill amortization, net of tax -- 0.22 0.22
-------- ------- -------
Adjusted net income $ 1.33 $ 1.01 $ 0.75
======== ======= =======
The Company determined that there was no indication that goodwill was impaired
at the date of adoption of SFAS 142. During the third quarter of 2002, the
Company completed its annual
68
goodwill impairment assessment based on an evaluation of estimated future cash
flows and determined that goodwill was not impaired.
Changes in the carrying amount of goodwill for the year ended December 31, 2002,
by business segment, are as follows (in thousands):
Pharmacy CRO
Services Services Total
---------- -------- ----------
Balance as of January 1, 2002 $1,085,938 $37,862 $1,123,800
Goodwill acquired in the year
ended December 31, 2002 61,272 -- 61,272
Other 2,729 1,106 3,835
---------- -------- ----------
Balance as of December 31, 2002 $1,149,939 $38,968 $1,188,907
========== ======== ==========
The "Other" caption above includes the settlement of acquisition matters
relating to pre-2002 acquisitions (including payments pursuant to acquisition
agreements such as deferred payments, indemnification payments and payments
originating from earnout provisions), as well as the effect of adjustments due
to foreign currency translations.
The table below presents the Company's other intangible assets at December 31,
2002 and 2001, all of which are subject to amortization (in thousands):
December 31, 2002
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Non-compete agreements $10,106 $(6,500) $3,606
Customer relationship assets 3,100 (660) 2,440
Other 373 (230) 143
------- ------- ------
Total $13,579 $(7,390) $6,189
======= ======= ======
December 31, 2001
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Non-compete agreements $8,963 $(5,754) $3,209
Other 190 (149) 41
------ ------- ------
Total $9,153 $(5,903) $3,250
====== ======= ======
Pretax amortization expense related to intangible assets was $1.5 million, $1.2
million and $0.7 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
69
Estimated annual amortization expense for intangible assets subject to
amortization at December 31, 2002 for the next five fiscal years is as follows
(in thousands):
Year Ended Amortization
December 31, Expense
------------ ------------
2003 $1,329
2004 1,160
2005 1,095
2006 750
2007 309
Note 6 - Leasing Arrangements
The Company has operating leases that cover various operating and administrative
facilities, and certain operating equipment. In most cases, the Company expects
that these leases will be renewed or replaced by other leases in the normal
course of business. There are no significant contingent rentals in the Company's
operating leases.
The following is a schedule of future minimum rental payments required under
operating leases that have initial or remaining noncancellable terms in excess
of one year as of December 31, 2002 (in thousands):
2003 $ 20,544
2004 18,267
2005 15,915
2006 14,366
2007 22,806
Later years 23,024
--------
Total minimum payments required $114,922
========
Total rent expense under operating leases for the years ended December 31, 2002,
2001 and 2000 were $31.8 million, $27.1 million and $27.9 million, respectively.
70
Note 7 - Long-Term Debt
A summary of long-term debt follows (in thousands):
December 31,
-------------------
2002 2001
-------- --------
Revolving line of credit facilities $ -- $ 30,000
Convertible subordinated debentures 345,000 345,000
Senior subordinated notes 375,000 375,000
Capitalized lease obligations 297 1,062
-------- --------
720,297 751,062
Less current portion (110) (393)
-------- --------
$720,187 $750,669
======== ========
The following is a schedule of required long-term debt payments due during each
of the next five years and thereafter, as of December 31, 2002 (in thousands):
2003 $ 110
2004(a) 180
2005 7
2006 --
2007 345,000
Later years 375,000
--------
$720,297
========
(a) In January 2003, the Company borrowed $499.0 million under the Revolving
Credit Facility to finance its acquisition of NCS HealthCare, Inc. ("NCS")
(see Note 19).
Total interest payments made for the years ended December 31, 2002, 2001 and
2000 were $51.8 million, $44.1 million and $54.0 million, respectively. As of
December 31, 2002, the Company had approximately $7.5 million outstanding
relating to standby letters of credit, substantially all of which are subject to
automatic annual renewals.
Revolving Credit Facilities
In March 2001, the Company entered into a new three-year syndicated $495.0
million revolving line of credit facility (the "Revolving Credit Facility"),
including a $25.0 million letter of credit subfacility, with various lenders.
Subsequent to the closing of the Revolving Credit Facility, the Company received
commitments from additional financial institutions that allowed the Company to
increase the size of the Revolving Credit Facility to $500.0 million.
Borrowings under the Revolving Credit Facility bear interest, at the Company's
option, at a rate equal to either: (i) London Inter-bank Offerer Rate ("LIBOR")
plus a margin that varies depending on certain ratings on the Company's
long-term debt; or (ii) the higher of (a) the prime rate or (b) the sum of the
federal funds rate plus 0.50%. The margin was 1.375% at December
71
31, 2002. Additionally, the Company is charged a commitment fee on the unused
portion of the Revolving Credit Facility, which also varies depending on such
ratings. At December 31, 2002, the commitment fee was 0.375%. The Revolving
Credit Facility agreement contains financial covenants, which include a fixed
charge coverage ratio and minimum consolidated net worth levels as well as
certain representations and warranties, affirmative and negative covenants, and
events of default customary for such a facility. The Company was in compliance
with these covenants as of December 31, 2002. The three-year Revolving Credit
Facility had no outstanding loans as of December 31, 2002, compared with $30.0
million outstanding at December 31, 2001. In January 2003, the Company borrowed
$499.0 million under the Revolving Credit Facility to finance its acquisition of
NCS (see Note 19).
Upon the issuance of the Revolving Credit Facility, the Company had deferred
debt issuance costs of $6.3 million. During 2002, 2001 and 2000, respectively,
the Company amortized approximately $2.0 million, $1.9 million and $1.2 million
of deferred debt issuance costs related to its revolving credit facilities.
Convertible Subordinated Debentures
In December 1997, the Company issued $345.0 million of 5.0% convertible
subordinated debentures ("Debentures"), due 2007. The Debentures are convertible
into common stock at any time after March 4, 1998 at the option of the holder at
a price of $39.60 per share. At any time on or after December 6, 2000, the
Debentures are redeemable at the Company's option on at least 30 days' notice as
a whole or, from time to time, in part at prices (expressed as a percentage of
the principal amount) ranging from 102.5% at December 1, 2002, scaling downward
ratably at 0.5% intervals to 100.0% at December 1, 2007 together with accrued
interest to, but excluding, the date fixed for redemption. In connection with
the issuance of the Debentures, the Company deferred $8.5 million in debt
issuance costs, of which approximately $0.9 million was amortized in each of the
three years ended December 31, 2002. The Debentures contain certain covenants
and events of default customary for such instruments.
Senior Subordinated Notes
Concurrent with the issuance of the Revolving Credit Facility, the Company
completed the issuance, at par value, of $375.0 million of 8.125% senior
subordinated notes (the "Senior Notes"), due 2011. In connection with the
issuance of the Senior Notes, the Company deferred $11.1 million in debt
issuance costs, of which approximately $1.1 million and $0.8 million, were
amortized during 2002 and 2001, respectively. The Senior Notes contain certain
affirmative and negative covenants and events of default customary for such
instruments. The Senior Notes were subsequently exchanged for replacement notes
with identical terms, which were registered with the Securities and Exchange
Commission.
Note 8 - Stock Incentive Plans
At December 31, 2002, the Company has three stock incentive plans under which it
may grant stock-based incentives to key employees. Under these plans, stock
options generally become exercisable beginning one year following the date of
grant and vest in four equal annual installments of 25%, or become exercisable
beginning four years following the date of grant and vest in one installment of
100%.
72
Under the 1992 Long-Term Stock Incentive Plan, the Company may grant stock
awards, stock appreciation rights and stock options at not less than the fair
market value of the Company's common stock on the date of grant. As of December
31, 2002, approximately 0.2 million shares were available for grant under this
plan.
During 1995, the Company's Board of Directors and stockholders approved the 1995
Premium-Priced Stock Option Plan, providing options to purchase 2.5 million
shares of Company common stock available for grant at an exercise price of 125%
of the stock's fair market value at the date of grant. As of December 31, 2002,
an insignificant amount of shares were available for grant under this plan.
During 1998, the Company's Board of Directors approved the 1998 Long-Term
Employee Incentive Plan (the "1998 Plan"), under which the Company was
authorized to grant stock-based incentives to a broad base of employees
(excluding executive officers and directors of the Company) in an amount
initially aggregating up to 1.0 million shares of Company common stock for
non-qualified options, stock awards and stock appreciation rights. In March 2000
and November 2002, the Company's Board of Directors amended the 1998 Plan to
increase the shares available for granting to 3.5 million and 6.3 million,
respectively. As of December 31, 2002, approximately 3.3 million shares were
available for grant under this plan.
The Company also has a Director Stock Plan, which allows for stock options and
stock awards to be granted to certain non-employee directors. As of December 31,
2002, approximately 0.1 million shares were available for grant under this plan.
Summary information for stock options is presented below (in thousands, except
exercise price data):
2002 2001 2000
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Options outstanding, beginning of year 7,913 $19.31 7,796 $18.06 6,692 $18.42
Options granted 2,074 26.38 1,760 19.98 1,675 16.34
Options exercised (230) 15.30 (1,429) 11.79 (172) 6.30
Options forfeited (249) 25.47 (214) 22.35 (399) 21.41
------ ------ ------ ------ ----- -------
Options outstanding, end of year 9,508 $20.78 7,913 $19.31 7,796 $18.06
------ ------ ------ ------ ----- -------
Options exercisable, end of year 4,518 $20.45 3,082 $21.80 3,035 $19.48
------ ------ ------ ------ ----- -------
73
The following summarizes information about stock options outstanding and
exercisable as of December 31, 2002 (in thousands, except exercise price and
remaining life data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------ ----------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Outstanding Contractual Average Exercisable Average
Range of at December Life Exercise at December Exercise
Exercise Prices 31, 2002 (in years) Price 31, 2002 Price
- --------------- ----------- ----------- -------- ----------- ---------
$4.11 - $12.34 1,087 4.9 $11.62 793 $11.53
12.35 - 15.42 2,050 6.5 15.42 1,432 15.42
15.43 - 18.32 1,254 7.4 16.57 533 16.57
18.33 - 24.86 1,972 8.8 20.16 437 20.07
24.87 - 55.08 3,145 7.4 29.52 1,323 32.94
- --------------- ----- --- ------ ----- ------
$4.11 - $55.08 9,508 7.2 $20.78 4,518 $20.45
- --------------- ----- --- ------ ----- ------
Nonvested stock awards that are granted to key employees at the discretion of
the Compensation and Incentive Committee of the Board of Directors are
restricted as to the transfer of ownership and generally vest over a seven-year
period, with a greater proportion vesting in the latter years. Unrestricted
stock awards are granted annually to all members of the Board of Directors, and
non-employee directors also receive nonvested stock awards that generally vest
on the third anniversary of the date of grant. The fair value of a stock award
is equal to the fair market value of a share of Company stock at the grant date.
Summary information relating to stock award grants is presented below:
For the years ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Nonvested shares 538,529 512,364 947,438
Unrestricted shares 4,800 4,800 5,200
Weighted average grant date fair value $ 21.32 $ 20.35 $ 9.85
When granted, the cost of nonvested stock awards is deferred and amortized over
the vesting period. Unrestricted stock awards are expensed during the year
granted. During 2002, 2001 and 2000, the amount of compensation expense related
to stock awards was $5.9 million, $3.8 million and $3.9 million, respectively.
Note 9 - Related Party Transactions
The Company subleased offices from Chemed Corporation ("Chemed"), a stockholder,
in part of 2002 and all of 2001 and 2000. The Company was charged for consulting
services pertaining to information systems development in part of 2001 and all
of 2000. In 2002, 2001 and 2000, the Company was also charged for the occasional
use of Chemed's corporate aviation department, rent and other incidental
expenses based on Chemed's cost. The Company believes that the method by which
such charges were determined was reasonable and that the charges are
74
essentially equal to that which would have been incurred if the Company had
operated as an unaffiliated entity. Charges to the Company for these services
for the years ended December 31, 2002, 2001 and 2000 were $0.3 million,
$1.0 million and $1.4 million, respectively. Net amounts owed by the Company
to Chemed were not significant at either December 31, 2002 or 2001.
Note 10 - Employee Benefit Plans
The Company has various defined contribution savings plans under which eligible
employees can participate by contributing a portion of their salary for
investment, at the direction of each employee, in one or more investment funds.
Several of the plans were adopted in connection with certain of the Company's
acquisitions. The plans are tax-deferred arrangements pursuant to Internal
Revenue Code ("IRC") Section 401(k) and are subject to the provisions of the
Employee Retirement Income Security Act ("ERISA"). The Company matches employee
contributions in varying degrees (either in shares of the Company's common stock
or cash, in accordance with the applicable plan provisions) based on the
contribution levels of the employees, as specified in the respective plan
documents. Expense relating to the Company's defined contribution plans for the
years ended December 31, 2002, 2001 and 2000 was $3.8 million, $3.9 million and
$4.0 million, respectively.
The Company has a non-contributory, defined benefit pension plan covering
certain corporate headquarters employees and the employees of several companies
sold by the Company in 1992, for which benefits ceased accruing upon the sale
(the "Qualified Plan"). Benefits accruing under this plan to corporate
headquarters employees were fully vested and frozen as of January 1, 1994.
Obligations under the plan of $2.4 million were fully funded at December 31,
2002.
The Company also has an excess benefit plan which provides retirement payments
to participants in amounts consistent with what they would have received under
the Qualified Plan if payments to them under the Qualified Plan were not limited
by the IRC and other restrictions. Retirement benefits are based primarily on an
employee's years of service and compensation near retirement and are calculated
on a basis consistent with the Qualified Plan. The Company has established rabbi
trusts, which are invested primarily in a mutual fund holding U.S. Treasury
obligations, to provide for the obligation under the excess benefit plan. The
Company's policy is to fund pension costs in accordance with the funding
provisions of ERISA. Expense relating to the Company's excess benefit plan
totaled $4.8 million for the year ended December 31, 2002, and $4.0 million for
each of the years ended December 31, 2001 and 2000.
Actuarial assumptions used to calculate the benefit obligations and expenses
include a 6.75% interest rate as of December 31, 2002 (7.25% at December 31,
2001 and 7.75% at December 31, 2000, respectively), an expected long-term rate
of return on assets of 8% and a 6% rate of increase in compensation levels.
The aggregate assets invested for settlement of the Company's pension
obligations, including rabbi trust assets, ("plan assets") as of December 31,
2002 and 2001 are greater than the aggregate Accumulated Benefit Obligation
("ABO") by $3.2 million and $3.1 million, respectively. Since rabbi trust assets
do not serve to offset the Company's pension obligation in
75
accordance with U.S. GAAP, an additional minimum pension liability has been
recorded, as a component of other comprehensive income, for the difference
between the ABO and the recorded liability for the excess benefit plan. The
plan assets as of December 31, 2002 and 2001 are (less)/greater than the
aggregate Projected Benefit Obligation ("PBO") by $(2.3) million and $0.2
million, respectively (collectively referred to as "net PBO"). The decrease
in the net PBO from the prior year of $2.5 million primarily relates to an
increase in plan assets of $4.9 million, more than offset by an actuarial loss
of $4.0 million, interest expense (including the change in the discount rate)
of $2.8 million and service costs of $0.6 million. Plan assets amounted to
$25.1 million and $20.2 million at December 31, 2002 and 2001, respectively.
In addition, the Company also has supplemental pension plans ("SPPs") in which
certain of its officers participate. Retirement benefits under the SPPs are
calculated on the basis of a specified percentage of the officers' covered
compensation, years of credited service and a vesting schedule, as specified in
the plan documents. One of the SPPs terminated in 2000, resulting in benefit
payments of $2.4 million.
In November 1999, the Company's Board of Directors adopted the Omnicare
StockPlus Program, a non-compensatory employee stock purchase plan (the "ESPP").
Under the ESPP, employees and non-employee directors of the Company who elect to
participate may contribute up to 6% of eligible compensation (or an amount not
to exceed $20,000 for non-employee directors) to purchase shares of the
Company's common stock. For each share of stock purchased, the participant also
receives two options to purchase additional shares of the Company's stock. The
options are subject to a four-year vesting period and are generally subject to
forfeiture in the event the related shares are not held by the participant for a
minimum of two years. The options have a ten-year life from the date of
issuance. Amounts contributed to the ESPP are used by the plan administrator to
purchase the Company's stock on the open market. Options awarded under the ESPP
are issued out of the 1992 Long-Term Stock Incentive Plan and the 1998 Long-Term
Employee Incentive Plan, and are included in the option activity presented in
Note 8 to the Consolidated Financial Statements.
Note 11 - Income Taxes
The provision for income taxes is comprised of the following (in thousands):
For the years ended December 31,
--------------------------------
2002 2001 2000
------- ------- -------
Current provision:
Federal $55,898 $26,440 $ 8,304
State and local 5,145 1,709 575
Foreign 674 60 60
------- ------- -------
61,717 28,209 8,939
------- ------- -------
Deferred provision:
Federal 12,881 16,314 17,967
State 2,547 991 1,800
------- ------- -------
15,428 17,305 19,767
------- ------- -------
Total income tax provision $77,145 $45,514 $28,706
======= ======= =======
76
Tax benefits related to the exercise of stock options and stock awards have
been credited to paid-in capital in amounts of $0.6 million and $5.3 million
for 2002 and 2001, respectively. These amounts were not significant during
2000.
The difference between the Company's reported income tax expense and the federal
income tax expense computed at the statutory rate of 35% is explained in the
following table (in thousands):
For the years ended December 31,
2002 2001 2000
-------------- -------------- --------------
Federal income tax at the statutory rate $71,068 35.0% $41,925 35.0% $27,133 35.0%
State and local income taxes, net
of federal income tax benefit 4,999 2.5 1,712 1.4 1,123 1.5
Amortization of nondeductible
intangible assets -- -- 3,177 2.7 3,037 3.9
Nondeductible pooling-of-interests/merger and
acquisition costs -- -- (401) (0.3) (622) (0.8)
Impact of net operating loss -- -- -- -- (373) (0.5)
Other, net (including tax accrual adjustments) 1,078 0.5 (899) (0.8) (1,592) (2.1)
------- ---- ------- ---- ------- ----
Total income tax provision $77,145 38.0% $45,514 38.0% $28,706 37.0%
======= ==== ======= ==== ======= ====
Income tax payments (refunds), net, amounted to $64.2 million, $16.0 million and
$(6.8) million in 2002, 2001 and 2000, respectively.
A summary of deferred tax assets and liabilities follows (in thousands):
December 31,
2002 2001
-------- --------
Accounts receivable reserves $ 16,691 $ 12,517
Accrued liabilities 34,821 33,738
Other 11,879 7,012
-------- --------
Gross deferred tax assets $ 63,391 $ 53,267
======== ========
Fixed assets and depreciation methods $ 7,963 $ 10,121
Amortization of intangibles 111,384 87,829
Current and noncurrent assets 7,041 6,892
Other 2,453 1,773
-------- --------
Gross deferred tax liabilities $128,841 $106,615
======== ========
77
Note 12 - Earnings Per Share Data
Basic earnings per share are computed based on the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
include the dilutive effect of stock options and warrants.
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share ("EPS") computations (in thousands, except per
share data):
For the year ended December 31, 2002
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Basic EPS
Net income $125,906 94,168 $1.34
=====
Effect of Dilutive Securities
Stock options and stock warrants -- 737
-------- ------
Diluted EPS
Net income plus assumed conversions $125,906 94,905 $1.33
======== ====== =====
For the year ended December 31, 2001
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Basic EPS
Net income $74,271 93,124 $0.80
=====
Effect of Dilutive Securities
Stock options and stock warrants -- 634
------- ------
Diluted EPS
Net income plus assumed conversions $74,271 93,758 $0.79
======= ====== =====
For the year ended December 31, 2000
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
---------------------------------------
Basic EPS
Net income $48,817 92,012 $0.53
=====
Effect of Dilutive Securities
Stock options and stock warrants -- --
------- ------
Diluted EPS
Net income plus assumed conversions $48,817 92,012 $0.53
======= ====== =====
During the years ended December 31, 2002, 2001 and 2000, the anti-dilutive
effect associated with selected options and warrants was excluded from the
computation of diluted earnings per share, since the exercise price of these
options and warrants was greater than the average market price of the Company's
common stock during these periods. The aggregate anti-dilutive stock options and
warrants excluded for those years totaled 4.5 million, 3.8 million, and 7.6
million, respectively.
The $345.0 million of Convertible Debentures which are convertible into
approximately 8.7 million shares at $39.60 per share were outstanding during
2002, 2001 and 2000, but were not
78
included in the computation of diluted EPS for the years ended December 31,
2002, 2001 and 2000 because the impact during these periods was anti-dilutive.
Note 13 - Restructuring and Other Related Charges
Phase I Program
In 2000, the Company completed its previously disclosed productivity and
consolidation program (the "Phase I Program"). The Phase I Program was
implemented to allow the Company to gain maximum benefit from its acquisition
program and to respond to changes in the healthcare industry. As part of the
Phase I Program, the roster of pharmacies and other operating locations was
reconfigured through the consolidation, relocation, closure and opening of
sites, resulting in a net reduction of 59 locations. The Phase I Program also
resulted in the reduction of the Company's work force by 16%, or approximately
1,800 full- and part-time employees.
Details of the restructuring and other related charges relating to the Phase I
productivity and consolidation program follow (in thousands):
Utilized Balance at Utilized Balance at Utilized Balance at
2000 during December 31, during December 31, during December 31,
Provision 2000 2000 2001 2001 2002 2002
--------- --------- ------------ -------- ------------ -------- ------------
Restructuring charges:
Employee severance $ 3,296 $ (8,367) $3,390 $(2,997) $ 393 $(393) $ --
Employment agreement buy-outs 1,048 (3,735) 676 (676) -- -- --
Lease terminations 1,881 (3,811) 2,593 (1,775) 818 (246) 572
Other assets and facility exit
costs 10,627 (9,737) 2,538 (2,299) 239 (239) --
------- -------- ------ ------- ------ ----- ----
Total restructuring charges 16,852 $(25,650) $9,197 $(7,747) $1,450 $(878) $572
======== ====== ======= ====== ===== ====
Other related charges 10,347
-------
Total restructuring and other
related charges $27,199
=======
In connection with this program, over the 1999 and 2000 periods, Omnicare
recorded a total of $62.6 million pretax ($39.8 million after taxes) for
restructuring and other related charges, of which $27.2 million pretax ($17.1
million after taxes, or $0.19 per diluted share) related to the 2000 year. The
restructuring charges included severance pay, the buy-out of employment
agreements, the buy-out of lease obligations, the write-off of other assets
(representing a project-to-date cumulative amount of $11.0 million of pretax
non-cash items, through December 31, 2000) and facility exit costs. The other
related charges were primarily comprised of consulting fees and duplicate costs
associated with the program, as well as the write-off of certain non-core
healthcare investments.
As of December 31, 2002, the Company had paid approximately $23.3 million of
severance and other employee-related costs relating to the reduction of
approximately 1,800 employees. The remaining liabilities at December 31, 2002
represent amounts not yet paid relating to actions taken (comprised of remaining
lease payments), and will be adjusted as these matters are settled.
79
Phase II Program
In 2001, the Company announced the implementation of a second phase of the
productivity and consolidation initiative (the "Phase II Program"). The Phase II
Program, completed on September 30, 2002, further streamlined operations,
increased efficiencies and helped enhance the Company's position as a high
quality, cost-effective provider of pharmaceutical services. Building on the
previous efforts, the Phase II Program included the merging or closing of seven
pharmacy locations and the reconfiguration in size and function of an additional
ten locations. The Phase II Program also included a reduction in occupied
building space in certain locations and the rationalization or reduction of
staffing levels in the CRO business in order to better garner the efficiencies
of the integration and functional reorganization of that business. The Phase II
Program encompassed a net reduction of approximately 460 employees, or about 5%
of the Company's total workforce, across both the Pharmacy Services and CRO
Services segments.
In connection with the Phase II Program, the Company expensed a total of $18.3
million pretax ($11.4 million aftertax, or $0.12 per diluted share) for
restructuring charges during the year ended December 31, 2001. Further,
approximately $23.2 million pretax ($14.4 million aftertax, or $0.15 per diluted
share) was recorded during the year ended December 31, 2002, when the amounts
were required to be recognized in accordance with U.S. GAAP. The restructuring
charges included severance pay, the buy-out of employment agreements, the
buy-out of lease obligations, the write-off of leasehold improvements and other
assets, and related fees and facility exit costs.
Details of the pretax restructuring charges relating to the Phase II Program
follow (in thousands):
2001 Utilized Balance at 2002 Utilized Balance at
Provision/ during December 31, Provision/ during December 31,
Accrual 2001 2001 Accrual 2002 2002
---------- -------- ------------ ---------- -------- -----------------
Restructuring charges:
Employee severance $ 4,256 $ (2,614) $ 1,642 $ 2,177 $ (2,655) $1,164
Employment agreement buy-outs 2,086 (1,578) 508 -- (214) 294
Lease terminations 2,711 (2,105) 606 5,862 (1,846) 4,622
Other assets, fees and facility
exit costs 9,291 (6,264) 3,027 15,156 (14,690) 3,493
------- -------- ------- ------- -------- ------
Total restructuring charges $18,344 $(12,561) $ 5,783 $23,195 $(19,405) $9,573
======= ======== ======= ======= ======== ======
As of December 31, 2002, the Company had paid approximately $7.1 million of
severance and other employee-related costs relating to the reduction of
approximately 460 employees. The remaining liabilities recorded at December 31,
2002 represent amounts not yet paid or settled relating to actions taken, and
will be adjusted in future periods as these matters are finalized.
80
Note 14 - Other Expense
Included in the 2001 results are other expense items totaling $1.8 million
pretax ($1.1 million aftertax, or $0.01 per diluted share) and $3.0 million
pretax ($1.9 million aftertax, or $0.02 per diluted share). The $1.8 million
special charge recorded in the first quarter of 2001 represents a repayment to
the Medicare program of overpayments made to one of the Company's pharmacy units
during the period from January 1997 through April 1998. As part of its corporate
compliance program, the Company learned of the overpayments, which related to
Medicare Part B claims that contained documentation errors, and notified the
Health Care Financing Administration (now known as the Centers for Medicare &
Medicaid Services) for review and determination of the amount of overpayment.
The $3.0 million special charge recorded in the second quarter of 2001
represents a settlement during June 2001 of certain contractual issues with a
customer, which issues and amount relate to prior year periods.
Note 15 - Shareholders' Rights Plan
In May 1999, the Company's Board of Directors declared a dividend, payable on
June 2, 1999, of one preferred share purchase right (a "Right") for each
outstanding share of the Company's $1.00 per share par value common stock, that,
when exercisable, entitles the registered holder to purchase from the Company
one ten-thousandth of a share of Series A Junior Participating Preferred Stock
of the Company, without par value (the "Preferred Shares"), at a price of $135
per one ten-thousandth of a share, subject to adjustment. Upon certain events
relating to the acquisition of, commencement or announcement of, or announcement
of an intention to make a tender offer or exchange offer that would result in
the beneficial ownership of 15% or more of the Company's outstanding common
stock by an individual or group of individuals (the "Distribution Date"), the
Rights not owned by the 15% stockholder will entitle its holder to purchase, at
the Right's then current exercise price, common shares having a market value of
twice such exercise price. Additionally, if after any person has become a 15%
stockholder, the Company is involved in a merger or other business combination
with any other person, each Right will entitle its holder (other than the 15%
stockholder) to purchase, at the Right's then current exercise price, common
shares of the acquiring company having a value of twice the Right's then current
exercise price. The Rights will expire on May 17, 2009, unless redeemed earlier
by the Company at $0.01 per Right until the Distribution Date.
Note 16 - Segment Inforfmation
Based on the "management approach" as defined by SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," Omnicare has two
operating business segments. The Company's largest segment is Pharmacy Services.
Pharmacy Services provides distribution of pharmaceuticals, related pharmacy
consulting, data management services and medical supplies to long-term care
facilities in 45 states in the United States of America ("USA") at December 31,
2002. The Company's other reportable segment is CRO Services, which provides
comprehensive product development services to client companies in
pharmaceutical, biotechnology, medical devices and diagnostics industries in 28
countries around the world at December 31, 2002, including the USA.
81
The table below presents information about the reportable segments as of and for
the years ended December 31, 2002, 2001 and 2000 and should be read in
connection with the paragraphs that follow (in thousands):
Corporate
Pharmacy CRO and Consolidated
2002: Services Services Consolidating Totals
- ----------------------------------------------------------------------------------------------
Net sales $2,467,237 $165,517 $ -- $2,632,754
Depreciation and amortization 40,389 2,237 2,637 45,263
Restructuring charges (6,769) (16,426) -- (23,195)
Operating income (expense) 288,196 4,610 (36,220) 256,586
Total assets 2,126,718 120,155 180,712 2,427,585
Capital expenditures 22,900 776 972 24,648
==============================================================================================
2001:
- ----------------------------------------------------------------------------------------------
Net sales $2,033,752 $149,284 $ -- $2,183,036
Depreciation and amortization 68,390 3,881 1,799 74,070
Restructuring charges (8,504) (9,840) -- (18,344)
Other (expense) (4,817) -- -- (4,817)
Operating income (expense) 200,780 2,540 (29,826) 173,494
Total assets 1,953,243 133,371 203,662 2,290,276
Capital expenditures 23,571 1,504 1,147 26,222
==============================================================================================
2000:
- ----------------------------------------------------------------------------------------------
Net sales $1,858,697 $129,142 $ -- $1,987,839
Depreciation and amortization 69,346 3,458 1,169 73,973
Restructuring and other related charges (21,615) (5,584) -- (27,199)
Operating income (expense) 156,589 1,664 (27,566) 130,687
Total assets 1,960,870 117,212 132,136 2,210,218
Capital expenditures 26,866 3,119 2,438 32,423
==============================================================================================
In accordance with EITF No. 01-14, the Company included in its reported CRO
segment net sales amounts, reimbursable out-of-pockets totaling $26.3 million,
$23.9 million and $16.5 million pretax for the years ended December 31, 2002,
2001 and 2000, respectively.
Additionally, in accordance with Omnicare's adoption of SFAS No. 142, the
Company discontinued amortization of goodwill as of January 1, 2002.
Accordingly, no goodwill amortization was recorded during the year ended
December 31, 2002. Pretax goodwill amortization for years ended December 31,
2001 and 2000 totaled $32.1 million and $31.6 million, respectively, for the
Pharmacy Services segment, and $1.1 million and $1.1 million, respectively, for
the CRO Services segment.
82
The following summarizes sales and long-lived assets by geographic area as of
and for the years ended December 31, 2002, 2001 and 2000 (in thousands):
Net Sales Long-Lived Assets
------------------------------------ ------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- -------- -------- --------
United States $2,596,605 $2,147,537 $1,951,660 $138,516 $153,562 $156,610
Foreign 36,149 35,499 36,179 1,392 1,511 1,925
---------- ---------- ---------- -------- -------- --------
Total $2,632,754 $2,183,036 $1,987,839 $139,908 $155,073 $158,535
========== ========== ========== ======== ======== ========
The determination of foreign sales is based on the country in which the sales
originate. No individual foreign country's sales were material to the
consolidated sales of Omnicare. In accordance with EITF No. 01-14, Omnicare
included in its net sales, during the years ended December 31, 2002, 2001 and
2000, reimbursable out-of-pockets totaling $18.6 million, $17.2 million and
$10.4 million, respectively, for the United States geographic area, $7.7
million, $6.7 million and $6.1 million, respectively, for the foreign geographic
area and $26.3 million, $23.9 million and $16.5 million, respectively, for the
total net sales.
83
Note 17 - Summary of Quarterly Results (Unaudited)
The following table presents the Company's quarterly financial information for
2002 and 2001 (in thousands, except per share data):
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- ----------
2002
Total net sales(a) $638,314 $654,155 $664,718 $675,567 $2,632,754
Total direct costs(a) 474,110 483,225 489,151 495,215 1,941,701
-------- -------- -------- -------- ----------
Gross profit 164,204 170,930 175,567 180,352 691,053
Selling, general and
administrative expenses 99,618 102,501 103,888 105,265 411,272
Restructuring charges (Note 13) 4,797 7,302 11,096 -- 23,195
-------- -------- -------- -------- ----------
Operating income 59,789 61,127 60,583 75,087 256,586
Investment income 798 667 651 1,160 3,276
Interest expense (14,176) (14,475) (14,339) (13,821) (56,811)
-------- -------- -------- -------- ----------
Income before income taxes 46,411 47,319 46,895 62,426 203,051
Income taxes 17,635 17,961 17,829 23,720 77,145
-------- -------- -------- -------- ----------
Net income $ 28,776 $ 29,358 $ 29,066 $ 38,706 $ 125,906
======== ======== ======== ======== ==========
Earnings per share:
Basic $ 0.31 $ 0.31 $ 0.31 $ 0.41 $ 1.34
======== ======== ======== ======== ==========
Diluted(b) $ 0.30 $ 0.31 $ 0.31 $ 0.41 $ 1.33
======== ======== ======== ======== ==========
Weighted average number of
common shares outstanding:
Basic 93,963 94,175 94,245 94,286 94,168
======== ======== ======== ======== ==========
Diluted(b) 94,598 95,292 94,710 97,684 94,905
======== ======== ======== ======== ==========
84
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- ----------
2001
Total net sales(a) $529,408 $536,492 $547,843 $569,293 $2,183,036
Total direct costs(a) 389,144 394,429 402,312 417,752 1,603,637
-------- -------- -------- -------- ----------
Gross profit 140,264 142,063 145,531 151,541 579,399
Selling, general and
administrative expenses 87,754 85,755 86,359 89,677 349,545
Goodwill amortization (Note 5) 8,162 8,335 8,393 8,309 33,199
Restructuring charges (Note 13) -- -- 15,409 2,935 18,344
Other expense (Note 14) 1,817 3,000 -- -- 4,817
-------- -------- -------- -------- ----------
Operating income 42,531 44,973 35,370 50,620 173,494
Investment income 474 748 701 692 2,615
Interest expense (13,909) (14,415) (14,201) (13,799) (56,324)
-------- -------- -------- -------- ----------
Income before income taxes 29,096 31,306 21,870 37,513 119,785
Income taxes 11,052 11,910 8,310 14,242 45,514
-------- -------- -------- -------- ----------
Net income $ 18,044 $ 19,396 $ 13,560 $ 23,271 $ 74,271
======== ======== ======== ======== ==========
Earnings per share:(c)
Basic $ 0.20 $ 0.21 $ 0.15 $ 0.25 $ 0.80
======== ======== ======== ======== ==========
Diluted $ 0.19 $ 0.21 $ 0.14 $ 0.25 $ 0.79
======== ======== ======== ======== ==========
Weighted average number of
common shares outstanding:
Basic 92,422 93,198 93,345 93,515 93,124
======== ======== ======== ======== ==========
Diluted 93,170 94,042 94,117 94,049 93,758
======== ======== ======== ======== ==========
85
Notes to Summary of Quarterly Results:
(a) In accordance with the adoption of EITF No. 01-14, Omnicare has recorded
reimbursements received for "out-of-pocket" expenses on a grossed-up basis
in total net sales and total direct costs for both the 2002 and 2001
periods. EITF No. 01-14 relates solely to the Company's CRO Services
business.
(b) The fourth quarter of 2002 includes the dilutive effect of the $345.0
million Convertible Debentures, which assumes conversion using the "if
converted" method. 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.
(c) Earnings per share is calculated independently for each separately reported
quarterly and full year period. Accordingly, the sum of the separately
reported quarters may not necessarily be equal to the per share amount for
the corresponding full year period, as independently calculated.
Note 18 - Guarantor Subsidiaries
The Company's Senior Notes are fully and unconditionally guaranteed on an
unsecured, joint and several basis by certain wholly owned subsidiaries of the
Company (the "Guarantor Subsidiaries"). The following condensed consolidating
financial data illustrates the composition of Omnicare, Inc. ("Parent"), the
Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of December 31,
2002 and 2001 for the balance sheets, as well as the statements of income and
cash flows for each of the three years ended December 31, 2002, 2001 and 2000.
Separate complete financial statements of the respective Guarantor Subsidiaries
would not provide additional information which would be useful in assessing the
financial condition of the Guarantor Subsidiaries and thus are not presented. No
eliminations column is presented for the condensed consolidating statements of
cash flows since there were no significant eliminating amounts during the
periods presented.
86
Note 18 -- Guarantor Subsidiaries-Continued
Summary Consolidating Statements of Income
(in thousands) Year ended December 31,
---------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc. and
2002: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries
- ---- -------- ------------ ------------- ------------ ------------------
Total net sales $ -- $2,521,682 $ 111,072 $ -- $2,632,754
Cost of sales -- 1,850,455 91,246 -- 1,941,701
-------- ---------- --------- --------- ----------
Gross profit -- 671,227 19,826 -- 691,053
Selling, general and administrative expenses 29,585 360,245 21,442 -- 411,272
Restructuring charges -- 22,397 798 -- 23,195
-------- ---------- --------- --------- ----------
Operating income (loss) (29,585) 288,585 (2,414) -- 256,586
Investment income 1,755 1,288 233 -- 3,276
Interest expense (56,082) (547) (182) -- (56,811)
-------- ---------- --------- --------- ----------
Income (loss) before income taxes (83,912) 289,326 (2,363) -- 203,051
Income tax (benefit) expense (31,887) 109,930 (898) -- 77,145
Equity in net income of subsidiaries 177,931 -- -- (177,931) --
-------- ---------- --------- --------- ----------
Net income (loss) $125,906 $ 179,396 $ (1,465) $(177,931) $ 125,906
======== ========== ========= ========= ==========
2001:
- ----
Total net sales $ -- $2,084,844 $ 148,489 $ (50,297) $2,183,036
Cost of sales -- 1,524,989 128,945 (50,297) 1,603,637
-------- ---------- --------- --------- ----------
Gross profit -- 559,855 19,544 -- 579,399
Selling, general and administrative expenses 17,026 343,389 22,329 -- 382,744
Restructuring charges -- 18,344 -- -- 18,344
Other expense -- 4,817 -- -- 4,817
-------- ---------- --------- --------- ----------
Operating income (loss) (17,026) 193,305 (2,785) -- 173,494
Investment income 1,767 613 235 -- 2,615
Interest expense (53,956) (798) (1,570) -- (56,324)
-------- ---------- --------- --------- ----------
Income (loss) before income taxes (69,215) 193,120 (4,120) -- 119,785
Income tax (benefit) expense (26,302) 73,509 (1,693) -- 45,514
Equity in net income of subsidiaries 117,184 -- -- (117,184) --
-------- ---------- --------- --------- ----------
Net income (loss) $ 74,271 $ 119,611 $ (2,427) $(117,184) $ 74,271
======== ========== ========= ========= ==========
2000:
- ----
Total net sales $ -- $1,886,231 $ 161,662 $ (60,054) $1,987,839
Cost of sales -- 1,383,737 138,763 (60,054) 1,462,446
-------- ---------- --------- --------- ----------
Gross profit -- 502,494 22,899 -- 525,393
Selling, general and administrative expenses 13,383 326,415 27,709 -- 367,507
Restructuring and other related charges -- 25,052 2,147 -- 27,199
-------- ---------- --------- --------- ----------
Operating income (loss) (13,383) 151,027 (6,957) -- 130,687
Investment income 1,774 (274) 410 -- 1,910
Interest expense (54,126) (767) (181) -- (55,074)
-------- ---------- --------- --------- ----------
Income (loss) before income taxes (65,735) 149,986 (6,728) -- 77,523
Income tax (benefit) expense (24,322) 53,990 (962) -- 28,706
Equity in net income of subsidiaries 90,230 -- -- (90,230) --
-------- ---------- --------- --------- ----------
Net income (loss) $ 48,817 $ 95,996 $ (5,766) $ (90,230) $ 48,817
======== ========== ========= ========= ==========
87
Note 18 - Guarantor Subsidiaries - Continued
Condensed Consolidating Balance Sheets
(in thousands) December 31,
----------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc. and
2002: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries
- ---- ---------- ------------ ------------- ------------ -----------------
ASSETS
Cash and cash equivalents $ 95,693 $ 36,191 $ 6,052 $ -- $ 137,936
Restricted cash -- 3,147 -- -- 3,147
Accounts receivable, net (including intercompany) -- 524,290 13,610 (15,043) 522,857
Inventories -- 185,521 4,943 -- 190,464
Other current assets 1,399 144,399 1,356 -- 147,154
---------- ---------- -------- ----------- ----------
Total current assets 97,092 893,548 25,961 (15,043) 1,001,558
---------- ---------- -------- ----------- ----------
Properties and equipment, net 2,931 126,452 10,525 -- 139,908
Goodwill -- 1,121,728 67,179 -- 1,188,907
Other noncurrent assets 31,234 65,029 949 -- 97,212
Investment in subsidiaries 1,903,357 -- -- (1,903,357) --
---------- ---------- -------- ----------- ----------
Total assets $2,034,614 $2,206,757 $104,614 $(1,918,400) $2,427,585
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $ 37,363 $ 255,691 $ 18,639 $ (15,043) $ 296,650
Long-term debt -- 187 -- -- 187
5.0% convertible subordinated debentures, due 2007 345,000 -- -- -- 345,000
8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000
Other noncurrent liabilities 2,189 132,577 920 -- 135,686
Stockholders' equity 1,275,062 1,818,302 85,055 (1,903,357) 1,275,062
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders' equity $2,034,614 $2,206,757 $104,614 $(1,918,400) $2,427,585
========== ========== ======== =========== ==========
2001:
- ----
ASSETS
Cash and cash equivalents $ 127,110 $ 37,304 $ 3,982 $ -- $ 168,396
Restricted cash -- 2,922 -- -- 2,922
Accounts receivable, net (including intercompany) -- 462,882 24,648 (9,453) 478,077
Inventories -- 144,833 4,301 -- 149,134
Other current assets 944 126,049 2,072 -- 129,065
---------- ---------- -------- ----------- ----------
Total current assets 128,054 773,990 35,003 (9,453) 927,594
---------- ---------- -------- ----------- ----------
Properties and equipment, net 3,192 139,130 12,751 -- 155,073
Goodwill -- 1,060,523 63,277 -- 1,123,800
Other noncurrent assets 30,023 53,317 469 -- 83,809
Investment in subsidiaries 1,754,149 -- -- (1,754,149) --
---------- ---------- -------- ----------- ----------
Total assets $1,915,418 $2,026,960 $111,500 $(1,763,602) $2,290,276
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $ 14,797 $ 246,338 $ 17,591 $ (9,453) $ 269,273
Long-term debt 30,000 609 60 -- 30,669
5.0% convertible subordinated debentures, due 2007 345,000 -- -- -- 345,000
8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000
Other noncurrent liabilities 838 119,227 486 -- 120,551
Stockholders' equity 1,149,783 1,660,786 93,363 (1,754,149) 1,149,783
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders' equity $1,915,418 $2,026,960 $111,500 $(1,763,602) $2,290,276
========== ========== ======== =========== ==========
88
Note 18 -- Guarantor Subsidiaries - Continued
Condensed Consolidating Statements of Cash Flows
(in thousands) Year ended December 31,
----------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2002: Parent Subsidiaries Subsidiaries and Subsidiaries
- ----- -------- ------------ ------------- ----------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 30,269 $ 894 $ 31,163
Other (29,513) 155,544 1,915 127,946
-------- --------- -------- ---------
Net cash flows from operating activities (29,513) 185,813 2,809 159,109
-------- --------- -------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (126,533) (1,250) (127,783)
Capital expenditures -- (24,378) (270) (24,648)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust -- (225) -- (225)
Other -- 272 1 273
-------- --------- -------- ---------
Net cash flows from investing activities -- (150,864) (1,519) (152,383)
-------- --------- -------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 90,000 -- -- 90,000
Payments on line of credit facilities (120,000) -- -- (120,000)
Proceeds from long-term borrowings -- (214) -- (214)
Proceeds from stock awards and exercise of stock options,
net of stock tendered in payment -- 667 -- 667
Dividends -- (8,491) -- (8,491)
Other 28,096 (28,024) -- 72
-------- --------- -------- ---------
Net cash flows from financing activities (1,904) (36,062) -- (37,966)
-------- --------- -------- ---------
Effect of exchange rate changes on cash -- -- 780 780
-------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents (31,417) (1,113) 2,070 (30,460)
Cash and cash equivalents at beginning of year -
unrestricted 127,110 37,304 3,982 168,396
-------- --------- -------- ---------
Cash and cash equivalents at end of year - unrestricted $ 95,693 $ 36,191 $ 6,052 $ 137,936
======== ========= ======== =========
2001:
- -----
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 24,201 $ 1,289 $ 25,490
Other (65,203) 190,247 2,553 127,597
-------- --------- -------- ---------
Net cash flows from operating activities (65,203) 214,448 3,842 153,087
-------- --------- -------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (20,263) -- (20,263)
Capital expenditures (703) (21,546) (3,973) (26,222)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust -- (622) -- (622)
Other -- 135 170 305
-------- --------- -------- ---------
Net cash flows from investing activities (703) (42,296) (3,803) (46,802)
-------- --------- -------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 70,000 -- -- 70,000
Proceeds from long-term borrowings 375,000 -- -- 375,000
Payments on line of credit facilities (475,000) -- -- (475,000)
Fees paid for financing arrangements (16,254) -- -- (16,254)
Other 190,607 (194,122) 214 (3,301)
-------- --------- -------- ---------
Net cash flows from financing activities 144,353 (194,122) 214 (49,555)
-------- --------- -------- ---------
Effect of exchange rate changes on cash -- -- 59 59
-------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents 78,447 (21,970) 312 56,789
Cash and cash equivalents at beginning of year -
unrestricted 48,663 59,274 3,670 111,607
-------- --------- -------- ---------
Cash and cash equivalents at end of year - unrestricted $127,110 $ 37,304 $ 3,982 $ 168,396
======== ========= ======== =========
89
Note 18 - Guarantor Subsidiaries - Continued
Condensed Consolidating Statements of Cash Flows - Continued
(in thousands) Year ended December 31,
-----------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2000: Parent Subsidiaries Subsidiaries and Subsidiaries
- ----- --------- ------------ ------------- ----------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 22,604 $ 4,125 $ 26,729
Other (57,558) 158,883 4,647 105,972
--------- --------- -------- ---------
Net cash flows from operating activities (57,558) 181,487 8,772 132,701
--------- --------- -------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (36,018) (5,646) (41,664)
Capital expenditures (1,859) (26,423) (4,141) (32,423)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust -- (2,300) -- (2,300)
Other -- 1,044 (773) 271
--------- --------- -------- ---------
Net cash flows from investing activities (1,859) (63,697) (10,560) (76,116)
--------- --------- -------- ---------
Cash flows from financing activities:
Payments on line of credit facilities (30,000) -- -- (30,000)
Other 86,071 (97,790) (58) (11,777)
--------- --------- -------- ---------
Net cash flows from financing activities 56,071 (97,790) (58) (41,777)
--------- --------- -------- ---------
Effect of exchange rate changes on cash -- -- (468) (468)
--------- --------- -------- ---------
Net (decrease) increase in cash and cash equivalents (3,346) 20,000 (2,314) 14,340
Cash and cash equivalents at beginning of year -
unrestricted 52,009 39,274 5,984 97,267
--------- --------- -------- ---------
Cash and cash equivalents at end of year - unrestricted $ 48,663 $ 59,274 $ 3,670 $ 111,607
========= ========= ======== =========
90
Note 19 - Subsequent Event
On January 15, 2003, Omnicare closed its $5.50 per share cash tender offer for
all of the issued and outstanding shares of Class A common stock and Class B
common stock of NCS. Omnicare accepted, on January 15, 2003, all validly
tendered shares for payment (totaling 17,510,126 shares of Class A common
stock, representing approximately 94% of the then-outstanding Class A common
stock, and 5,038,996 shares of Class B common stock, representing 100% of the
then-outstanding Class B common stock). Omnicare subsequently acquired the
remaining shares of Class A common stock of NCS.
The acquisition of NCS, to be accounted for as a purchase business combination,
included cash consideration and transaction costs of approximately $493
million. The cash consideration included the payoff of certain NCS debt totaling
pproximately $325.5 million, which was retired by Omnicare immediately
following the acquisition. The Company financed the acquisition with available
cash, working capital and borrowings under its three-year, $500.0 million
revolving credit facility. The Company has engaged an independent valuation firm
to assist with the determination of the initial purchase price allocation,
including the identification of goodwill and other identifiable intangible
assets.
At the time of the acquisition, NCS provided professional pharmacy and related
services to long-term care facilities, including skilled nursing centers and
assisted living facilities comprising approximately 199,000 beds in 33 states
and managed hospital pharmacies in 10 states. Omnicare expects to achieve
certain economies of scale and operational efficiencies from the acquisition,
while broadening Omnicare's geographical reach. The net assets and operating
results of NCS will be included from the date of acquisition in the Company's
financial statements beginning in the first quarter of 2003.
91
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding our executive officers included in Part I of
this Form 10-K, the information required under this Item is set forth in our
2003 Proxy Statement which is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information required under this Item is set forth in our 2003 Proxy Statement
which is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2002 (in thousands, except exercise price
data):
Number of Securities
to be Issued Upon Weighted Average Number of Securities
Exercise of Exercise Price of Remaining Available for
Outstanding Options Outstanding Options Future Issuance Under
Plan Category and Warrants and Warrants Equity Compensation Plans(c)
- ---------------------------------- -------------------- ------------------- ----------------------------
Equity compensation plans
approved by stockholders (a) 7,065 $20.66 260
Equity compensation plans
not approved by stockholders (b) 2,543 21.26 3,369
-------------------- ----------------------------
9,608 20.82 3,629
==================== ============================
(a) Includes the 1992 Long-Term Stock Incentive Plan and the 1995
Premium-Priced Stock Option Plan.
(b) Includes the 1998 Long-Term Employee Incentive Plan and Director Stock
Plan, as further discussed in Note 8 of the Notes to Consolidated Financial
Statements included at Item 8 of this Filing. Additionally, the outstanding
amount includes 220 of compensation-related warrants issued in 1997 at an
exercise price of $29.275 per share.
(c) Excludes securities listed in the first column of the table. Under the 1992
Long-Term Stock Incentive Plan securities available for issuance are
determined under a formula. The number of shares available for issuance
under such plan as of any given date (a "Determination Date") may not
exceed that number of shares equal to (i) 5% of the Company's issued and
outstanding common stock as of the preceding December 31 reduced by (ii)
the total number of stock incentives granted under the 1992 Plan at any
time during the then current calendar year and during the immediately
preceding two calendar years (the "Granting Period") increased by (iii) the
total number of shares covered by previously granted stock incentives
forfeited during the Granting Period.
92
The remaining information required under this Item is set forth in our 2003
Proxy Statement which is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is set forth in our 2003 Proxy Statement
which is incorporated herein by reference.
ITEM 14 - CONTROLS AND PROCEDURES
(a) Based on a recent evaluation, which was completed within 90 days of the
filing of this Annual Report on Form 10-K, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in periodic reports filed
under the Securities Exchange Act of 1934.
(b) There were no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
our last evaluation.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Our 2002 Consolidated Financial Statements are included in Part II,
Item 8, of this Filing.
(a)(2) Financial Statement Schedule
See Index to Financial Statements and Financial Statement Schedule
at Part II, Item 8, of this Filing.
(a)(3) Exhibits
See Index of Exhibits.
(b) Reports on Form 8-K
Omnicare did not file any Reports on Form 8-K during the quarter
ended December 31, 2002.
93
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, on this 27th day of March 2003.
OMNICARE, INC.
/s/ David W. Froesel, Jr.
-------------------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of l934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Edward L. Hutton Chairman and Director
- ---------------------------
Edward L. Hutton
/s/ Joel F. Gemunder President, Chief Executive Officer and Director
- --------------------------- (Principal Executive Officer)
Joel F. Gemunder
/s/ David W. Froesel, Jr. Senior Vice President and
- --------------------------- Chief Financial Officer and Director
David W. Froesel, Jr. (Principal Financial and
Accounting Officer)
Timothy E. Bien, Director*
Charles H. Erhart, Jr., Director* March 27, 2003
Patrick E. Keefe, Director*
Sandra E. Laney, Director*
Andrea R. Lindell, DNSc, RN, Director*
Sheldon Margen, M.D., Director*
Kevin J. McNamara, Director*
John H. Timoney, Director*
* Cheryl D. Hodges, by signing her name hereto, signs this document on behalf of
herself as a director and on behalf of each person indicated above pursuant to a
power of attorney duly executed by such person and filed with the Securities and
Exchange Commission.
/s/ Cheryl D. Hodges
-------------------------------------
Cheryl D. Hodges
(Attorney-in-Fact)
94
SECTION 302 CEO CERTIFICATION
I, Joel F. Gemunder, President and Chief Executive Officer of Omnicare, Inc.
(the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ Joel F. Gemunder
-------------------------------------
Joel F. Gemunder
President and Chief Executive Officer
95
SECTION 302 CFO CERTIFICATION
I, David W. Froesel, Jr., Senior Vice President and Chief Financial Officer of
Omnicare, Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ David W. Froesel, Jr.
------------------------------------
David W. Froesel, Jr.
Senior Vice President and Chief
Financial Officer
96
Schedule II
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
(in thousands)
Additions
Balance at charged Write-offs, Balance
Year ended beginning of to cost net of at end
December 31, period and expenses Acquisitions recoveries of period
- ------------ ------------ ------------ ------------ ----------- ---------
Allowance for uncollectible accounts receivable:
2002 $45,573 $31,163 $20,182 $(28,325) $68,593
2001 40,497 25,490 -- (20,414) 45,573
2000 36,883 26,729 -- (23,115) 40,497
S-1
INDEX OF EXHIBITS
Document Incorporated by Reference from a
Number and Description of Exhibit Previous Filing or Filed Herewith, as
(Numbers Coincide with Item 601 of Regulation S-K) Indicated Below
- ------------------------------------------------------------ -----------------------------------------
(3.1) Restated Certificate of Incorporation of Omnicare, Filed Herewith
Inc. (as amended)
(3.2) Certificate of Designations of Series A Junior Filed Herewith
Participating Preferred Stock of Omnicare, Inc.
dated as of May 18, 1999
(3.3) By-Laws of Omnicare, Inc., as amended Form S-3
September 28, 1998
(4.1) Indenture dated as of December 10, 1997 between Form S-3
the Company and The First National Bank of February 6, 1998
Chicago, as Trustee
(4.2) Indenture dated as of March 20, 2001, by and among Form 8-K
Omnicare, Inc., the Guarantors named therein and March 23, 2001
SunTrust Bank, as trustee, relating to the
Company's $375.0 million 8.125% Senior
Subordinated Notes due 2011
(4.3) Three-year, $495.0 million Credit Agreement dated Form 8-K
as of March 20, 2001, among Omnicare, Inc., as the March 23, 2001
Borrower, the Guarantors named therein and the
lenders named therein, as the Lenders, Lehman
Commercial Paper Inc., as a Syndication Agent,
SunTrust Bank, as a Documentation Agent, Deutsche
Banc Alex. Brown, as a Documentation Agent, and
Bank One, NA, with its main office in Chicago,
Illinois, as the Administrative Agent
E-1
INDEX OF EXHIBITS
Number and Description of Exhibit Document Incorporated by Reference from a Previous
(Numbers Coincide with Item 601 of Regulation S-K) Filing or Filed Herewith, as Indicated Below
- -------------------------------------------------- --------------------------------------------------
(4.4) Rights Agreement, and related Exhibits, dated as Form 8-K
of May 17, 1999 between Omnicare, Inc. and First May 18, 1999
Chicago Trust Company of New York, as Rights Agent
(10.1) Executive Salary Protection Plan, as amended, Form 10-K
May 22, 1981 March 25, 1996
(10.2) Annual Incentive Plan for Senior Executive Proxy Statement for 2001 Annual Meeting of
Officers Shareholders dated April 10, 2001
(10.3) 1992 Long-Term Stock Incentive Plan Proxy Statement for 2002 Annual Meeting of
Stockholders dated April 10, 2002
(10.4) 1995 Premium-Priced Stock Option Plan Proxy Statement for 1995 Annual Meeting of
Stockholders dated April 10, 1995
(10.5) 1998 Long-Term Employee Incentive Plan Form 10-K
March 30, 1999
(10.6) Amendment to 1998 Long-Term Employee Incentive Filed Herewith
Plan effective November 26, 2002
(10.7) Form of Indemnification Agreement with Directors Form 10-K
and Officers March 30, 1999
(10.8) Employment Agreements with J.F. Gemunder Filed Herewith
and C.D. Hodges dated August 4, 1988
(10.9) Employment Agreement with P.E. Keefe dated Form 10-K
March 4, 1993 March 25, 1994
E-2
INDEX OF EXHIBITS
Number and Description of Exhibit Document Incorporated by Reference from a Previous
(Numbers Coincide with Item 601 of Regulation S-K) Filing or Filed Herewith, as Indicated Below
- -------------------------------------------------- --------------------------------------------------
(10.10) Split Dollar Agreement with E.L. Hutton dated June Form 10-K
1, 1995 (Agreement in the same form exists with March 25, 1996
J.F. Gemunder)
(10.11) Split Dollar Agreement dated June 1, 1995 Form 10-K
(Agreements in the same form exist with the March 25, 1996
following Executive Officers: T.E. Bien, C.D.
Hodges and P.E. Keefe)
(10.12) Retirement Plan for E.L. Hutton Form 10-K
March 30, 2001
(10.13) Employment Agreement with T.E. Bien dated Form 10-K
January 1, 1994 March 31, 1997
(10.14) Employment Agreement with D.W. Froesel, Jr. Form 10-K
dated February 17, 1996 March 31, 1997
(10.15) Employment Agreement with P. Laterza dated Form 10-K
August 5, 1998 March 30, 2000
(10.16) Form of Amendment to Employment Agreements with Form 10-K
J.F. Gemunder, P.E. Keefe and C.D. Hodges dated as March 30, 2000
of February 25, 2000
(10.17) Amendment to Employment Agreement with J.F. Filed Herewith
Gemunder dated as of September 25, 2002
(10.18) Amendment to Employment Agreement with J.F. Filed Herewith
Gemunder dated as of March 6, 2003
(Amendments in the same form exist with the
following Executive Officers: P.E. Keefe and
C.D. Hodges)
E-3
INDEX OF EXHIBITS
Number and Description of Exhibit Document Incorporated by Reference from a Previous
(Numbers Coincide with Item 601 of Regulation S-K) Filing or Filed Herewith, as Indicated Below
- -------------------------------------------------- --------------------------------------------------
(10.19) Form of Amendment to Employment Agreements with Form 10-K
T.E. Bien, D.W. Froesel, Jr. and P. Laterza March 30, 2000
dated as of February 25, 2000
(10.20) Amendment to Employment Agreement with P. Laterza Form 10-K
dated as of August 2, 2000 March 30, 2001
(12) Statement of Computation of Ratio of Earnings to Filed Herewith
Fixed Charges
(21) Subsidiaries of Omnicare, Inc. Filed Herewith
(23.1) Consent of PricewaterhouseCoopers LLP Filed Herewith
(24) Powers of Attorney Filed Herewith
(99.1) Certification of Chief Executive Officer of Filed Herewith
Omnicare, Inc. in accordance with Section 906 of
the Sarbanes-Oxley Act of 2002*
(99.2) Certification of Chief Financial Officer of Filed Herewith
Omnicare, Inc. in accordance with Section 906 of
the Sarbanes-Oxley Act of 2002*
* 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-4
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as........................'r'