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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8269
OMNICARE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1001351
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 East RiverCenter Boulevard, Covington, Kentucky 41011
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (859) 392-3300
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant:
1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and
2) has been subject to such filing requirement for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
COMMON STOCK OUTSTANDING
- ------------------------
Number of
Shares Date
---------- --------------
Common Stock, $1 par value 94,688,442 March 31, 2003
OMNICARE, INC. AND
SUBSIDIARY COMPANIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income - Three months ended -
March 31, 2003 and 2002 3
Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 4
Consolidated Statements of Cash Flows - Three months ended -
March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II. OTHER INFORMATION:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(In thousands, except per share data)
Three Months Ended
March 31,
-------------------
2003 2002
-------- --------
Sales $797,753 $632,015
Reimbursable out-of-pockets 8,108 6,299
-------- --------
Total net sales 805,861 638,314
-------- --------
Cost of sales 589,792 467,811
Reimbursed out-of-pocket expenses 8,108 6,299
-------- --------
Total direct costs 597,900 474,110
-------- --------
Gross profit 207,961 164,204
Selling, general and administrative expenses 126,928 99,618
Restructuring charges (Note 5) -- 4,797
-------- --------
Operating income 81,033 59,789
Investment income 588 798
Interest expense (16,456) (14,176)
-------- --------
Income before income taxes 65,165 46,411
Income taxes 24,742 17,635
-------- --------
Net income $ 40,423 $ 28,776
======== ========
Earnings per share:
Basic $ 0.43 $ 0.31
======== ========
Diluted $ 0.42 $ 0.30
======== ========
Weighted average number of common shares outstanding:
Basic 94,386 93,963
======== ========
Diluted 104,029 94,598
======== ========
Comprehensive income $ 41,420 $ 29,003
======== ========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
CONSOLIDATED BALANCE SHEETS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(In thousands, except share data)
March 31, December 31,
2003 2002
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 128,990 $ 137,936
Restricted cash 5,801 3,147
Accounts receivable, less allowances
of $85,159 (2002 - $68,593) 634,236 522,857
Unbilled receivables 25,790 25,062
Inventories 232,338 190,464
Deferred income tax benefits 25,833 18,621
Other current assets 107,984 103,471
---------- ----------
Total current assets 1,160,972 1,001,558
Properties and equipment, at cost less accumulated
depreciation of $185,881 (2002 - $177,870) 157,482 139,908
Goodwill 1,605,168 1,188,907
Other noncurrent assets 104,932 97,212
---------- ----------
Total assets $3,028,554 $2,427,585
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 214,208 $ 175,648
Current debt 474,407 110
Accrued employee compensation 26,480 22,627
Deferred revenue 33,042 25,254
Income taxes payable 22,268 6,837
Other current liabilities 82,850 66,174
---------- ----------
Total current liabilities 853,255 296,650
Long-term debt 411 187
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 91,678 84,071
Other noncurrent liabilities 50,920 51,615
---------- ----------
Total liabilities 1,716,264 1,152,523
---------- ----------
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,
96,019,700 shares issued (2002 - 95,441,400 shares issued) 96,020 95,441
Paid-in capital 752,015 737,421
Retained earnings 537,066 498,856
---------- ----------
1,385,101 1,331,718
Treasury stock, at cost - 1,331,300 shares (2002 - 1,139,900 shares) (28,338) (23,471)
Deferred compensation (41,303) (29,018)
Accumulated other comprehensive income (3,170) (4,167)
---------- ----------
Total stockholders' equity 1,312,290 1,275,062
---------- ----------
Total liabilities and stockholders' equity $3,028,554 $2,427,585
========== ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(In thousands)
Three Months Ended
March 31,
---------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 40,423 $ 28,776
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation 9,568 8,211
Amortization 3,193 3,480
Provision for doubtful accounts 11,045 6,558
Deferred tax provision 13,469 2,042
Non-cash portion of restructuring charges -- 2,420
Changes in assets and liabilities, net of effects from
acquisition of businesses:
Accounts receivable and unbilled receivables (43,631) (22,930)
Inventories (8,076) (10,930)
Current and noncurrent assets 456 (14,861)
Accounts payable (10,768) 27,364
Accrued employee compensation (2,509) (5,974)
Deferred revenue 7,788 (7,044)
Current and noncurrent liabilities (15,607) 5,786
--------- ---------
Net cash flows from operating activities 5,351 22,898
--------- ---------
Cash flows from investing activities:
Acquisition of businesses (476,999) (105,029)
Capital expenditures (3,990) (4,975)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust (2,654) (3,420)
Other 45 45
--------- ---------
Net cash flows from investing activities (483,598) (113,379)
--------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 499,000 90,000
Payments on line of credit facilities (25,000) (20,000)
Principal payments on long-term obligations (146) --
Payments for stock awards and exercise of stock options,
net of stock tendered in payment (3,117) (2,101)
Dividends paid (2,125) (2,118)
Other -- (115)
--------- ---------
Net cash flows from financing activities 468,612 65,666
--------- ---------
Effect of exchange rate changes on cash 689 538
--------- ---------
Net decrease in cash and cash equivalents (8,946) (24,277)
Cash and cash equivalents at beginning of period - unrestricted 137,936 168,396
--------- ---------
Cash and cash equivalents at end of period - unrestricted $ 128,990 $ 144,119
========= =========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
1. Interim Financial Data
The interim financial data is unaudited; however, in the opinion of the
management of Omnicare, Inc., the interim data includes all adjustments (which
include only normal adjustments, except as described in Note 5) considered
necessary for a fair presentation of the consolidated financial position,
results of operations and cash flows of Omnicare, Inc. and its consolidated
subsidiaries ("Omnicare" or the "Company"). These financial statements should be
read in conjunction with the Consolidated Financial Statements and related notes
included in Omnicare's Annual Report on Form 10-K for the year ended December
31, 2002. Certain reclassifications of prior year amounts have been made to
conform with the current year presentation.
2. Stock-Based Employee Compensation
At March 31, 2003, the Company has three stock-based employee compensation
plans. As permitted per U.S. Generally Accepted Accounting Principles ("U.S.
GAAP"), the Company accounts for these plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations. No stock-based employee compensation cost for stock options is
reflected in net income as all options granted under the plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting
for Stock-Based Compensation--Transition and Disclosure--an amendment of
SFAS 123" ("SFAS 148"), for stock options (in thousands, except per share data):
Three Months Ended March 31,
2003 2002
------- -------
Net income, as reported $40,423 $28,776
Deduct: Total stock-based employee compensation
expense determined under fair value-based
method for all options, net of related tax effects (2,419) (1,235)
------- -------
Pro forma net income $38,004 $27,541
======= =======
Earnings per share:
Basic - as reported $ 0.43 $ 0.31
======= =======
Basic - pro forma $ 0.40 $ 0.29
======= =======
Diluted - as reported $ 0.42 $ 0.30
======= =======
Diluted - pro forma $ 0.39 $ 0.29
======= =======
6
The fair value of each option at the grant date is estimated using the
Black-Scholes option-pricing model, with the following weighted average
assumptions used for grants:
Three Months Ended March 31,
2003 2002
------ ------
Volatility 62% 63%
Risk-free interest rate 3.0% 4.3%
Dividend yield 0.3% 0.3%
Expected term of options (in years) 5.5 5.0
Weighted average fair value per option $14.02 $11.84
The above pro forma information is based on the circumstances and
assumptions in effect for each of the respective periods and, therefore, is not
necessarily representative of the actual effect of SFAS 123 on net income or
earnings per share in future years.
3. Recently Issued Accounting Pronouncements
Effective January 1, 2003, the Company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"), SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), and Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). All
accounting and disclosure relevant to this authoritative guidance has been
incorporated into this Quarterly Report on Form 10-Q. The adoption of SFAS 145,
SFAS 146 and FIN 45 did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
In October 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 147, "Acquisition of Certain Financial Institutions." In January 2003,
the FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities." These pronouncements are not applicable to the Company.
In December 2002, the FASB issued 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 annual
and interim disclosure requirements related to a company's issuance of stock
compensation. The transition and disclosure provisions of SFAS 148 are effective
for fiscal years ending 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.
7
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
Statement will be effective for the Company beginning July 1, 2003. Management
does not expect the standard to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
4. Segment Information
Based on the "management approach," as defined by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," Omnicare
has two business segments. The Company's largest segment is Pharmacy Services.
Pharmacy Services provides distribution of pharmaceuticals, related pharmacy
consulting, data management services and medical supplies to long-term care
facilities in 47 states in the United States of America ("USA") at March 31,
2003. The Company's other reportable segment is Contract Research Organization
("CRO") Services, which provides comprehensive product development services to
client companies in pharmaceutical, biotechnology, medical devices and
diagnostics industries in 29 countries around the world, including the USA, at
March 31, 2003.
The table below presents information about the reportable segments as of
and for the three months ended March 31, 2003 and 2002 and should be read in
conjunction with the paragraph that follows (in thousands):
Three Months Ended March 31,
----------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2003: Services Services Consolidating Totals
- ------------------------------------------------------------------------------------
Net sales $ 763,154 $ 42,707 $ -- $ 805,861
Depreciation and amortization 11,748 418 595 12,761
Operating income (expense) 85,370 4,730 (9,067) 81,033
Total assets 2,731,891 127,116 169,547 3,028,554
Capital expenditures 3,815 65 110 3,990
====================================================================================
2002:
- ------------------------------------------------------------------------------------
Net sales $ 596,265 $ 42,049 $ -- $ 638,314
Depreciation and amortization 10,435 618 638 11,691
Restructuring charges (1,126) (3,671) -- (4,797)
Operating income (expense) 67,079 1,244 (8,534) 59,789
Total assets 2,089,305 141,106 187,345 2,417,756
Capital expenditures 4,452 150 373 4,975
====================================================================================
In accordance with Emerging Issues Task Force ("EITF") Issue No. 01-14,
"Income Statement Characterization of Reimbursements Received for
'Out-of-Pocket' Expenses Incurred," the Company included in its reported CRO
segment net sales amounts of $8.1 million for the three months ended March 31,
2003 ($6.3 million for the period ended March 31, 2002).
8
5. Restructuring Charges
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
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 work force, 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. Of the total amount
recorded during the year ended December 31, 2002, $4.8 million pretax ($3.0
million aftertax, or $0.03 per diluted share) was recorded in the first quarter
of 2002. 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 year-to-date March 31, 2003 and December 31, 2002 activity
relating to the Phase II Program follow (in thousands):
Balance at 2002 Utilized Balance at Utilized Balance at
December 31, Provision/ during December 31, during March 31,
2001 Accrual 2002 2002 2003 2003
------------ ---------- -------- ------------ -------- ----------
Restructuring charges:
Employee severance $1,642 $ 2,177 $ (2,655) $1,164 $(1,123) $ 41
Employment agreement buy-outs 508 -- (214) 294 (21) 273
Lease terminations 606 5,862 (1,846) 4,622 (384) 4,238
Other assets, fees
and facility exit costs 3,027 15,156 (14,690) 3,493 (180) 3,313
------ ------- -------- ------ ------- ------
Total restructuring charges $5,783 $23,195 $(19,405) $9,573 $(1,708) $7,865
====== ======= ======== ====== ======= ======
As of March 31, 2003, the Company had paid approximately $8.2 million of
severance and other employee-related costs relating to the reduction of
approximately 460 employees. The remaining liabilities recorded at March 31,
2003 represent amounts not yet paid or settled relating to actions taken, and
will be adjusted in future periods as these matters are finalized.
In connection with the previously disclosed first phase of its productivity
and consolidation initiative (the "Phase I Program"), Omnicare had liabilities
of $0.6 million at December 31, 2002 and March 31, 2003. The remaining
liabilities at March 31, 2003 represent
9
amounts not yet paid relating to actions taken (consisting of remaining lease
payments), and will be adjusted as these matters are settled.
6. Acquisitions
In January 2002, Omnicare completed the acquisition of the assets
comprising the pharmaceutical business of American Pharmaceutical Services, Inc.
and related entities (collectively, "APS"). The acquisition, accounted for as a
purchase business combination, included cash consideration and transaction costs
which aggregated approximately $120 million (including an adjustment based on
the closing balance sheet review and a $6.0 million deferred payment made in the
first quarter of 2003). Up to an additional $12.0 million in 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
two 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.
In connection with the purchase of APS, the Company acquired amortizable
intangible assets composed 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 $66 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 as discussed above.
On January 15, 2003, Omnicare closed its $5.50 per share cash tender offer
for all of the issued and outstanding shares of Class A common stock and Class B
common stock of NCS HealthCare, Inc. ("NCS"). Omnicare accepted, on January 15,
2003, all validly tendered shares for payment (totaling 17,510,126 shares of
Class A common stock, representing approximately 94% of the then-outstanding
Class A common stock, and 5,038,996 shares of Class B common stock, representing
100% of the then-outstanding Class B common stock). Omnicare subsequently
acquired the remaining shares of Class A common stock of NCS.
The acquisition of NCS, accounted for as a purchase business combination,
included cash consideration and transaction costs of approximately $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 has engaged an independent valuation firm
to assist with the 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 in 33 states and managed hospital pharmacies in
10 states. NCS added approximately 182,000 beds served in the first quarter of
2003. Omnicare expects to achieve certain economies of scale and operational
efficiencies from the acquisition, while broadening Omnicare's geographical
reach.
10
The net assets and operating results of NCS have been included from the date of
acquisition in the Company's financial statements beginning in the first quarter
of 2003.
Unaudited pro forma combined results of operations of the Company and NCS
for the three months ended March 31, 2002 are presented below. Such pro forma
presentation has been prepared assuming that the NCS acquisition had been made
as of January 1, 2002. Pro forma information is not presented for the three
months ended March 31, 2003 as the results of NCS are included in those of the
Company from the closing date of January 15, 2003, and the difference from the
beginning of the period is not significant.
The unaudited pro forma combined financial information follows (in
thousands, except per share data):
Three Months Ended
March 31, 2002
------------------
Net sales $797,702
Net income $ 26,053
Earnings per share:
Basic $ 0.28
Diluted $ 0.28
7. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the three months ended
March 31, 2003, by business segment, are as follows (in thousands):
Pharmacy CRO
Services Services Total
-------- -------- -----
Balance as of December 31, 2002 $1,149,939 $38,968 $1,188,907
Goodwill acquired in the three
months ended March 31, 2003 404,287 - 404,287
Other 11,670 304 11,974
---------- ------- ----------
Balance as of March 31, 2003 $1,565,896 $39,272 $1,605,168
========== ======= ==========
The "Other" caption above includes the settlement of acquisition matters
relating to pre-2003 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 Company's other intangible assets have not changed significantly from
the balances at December 31, 2002. The Company has engaged an independent
valuation firm to assist with the NCS acquisition purchase price allocation,
including the identification of goodwill and other identifiable intangible
assets.
11
8. Guarantor Subsidiaries
The Company's $375.0 million senior subordinated notes due 2011 are fully
and unconditionally guaranteed on an unsecured, joint and several basis by
certain wholly owned subsidiaries of the Company (the "Guarantor Subsidiaries").
The following condensed consolidating financial data illustrates the composition
of Omnicare, Inc. ("Parent"), the Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries as of March 31, 2003 and December 31, 2002 for the balance sheet,
the statement of income for each of the three month periods ended March 31, 2003
and 2002, and the statement of cash flows for the three months ended March 31,
2003 and 2002. Separate complete financial statements of the respective
Guarantor Subsidiaries would not provide additional information that would be
useful in assessing the financial condition of the Guarantor Subsidiaries and
thus are not presented. No eliminations column is presented for the condensed
consolidating statement of cash flows, since there were no significant
eliminating amounts during the periods presented.
Summary Consolidating Statements of Income
(in thousands)
Three Months Ended March 31,
-------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2003 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $778,088 $27,773 $ -- $805,861
Total direct costs -- 575,514 22,386 -- 597,900
-------- -------- ------- -------- --------
Gross profit -- 202,574 5,387 -- 207,961
Selling, general and administrative expenses 1,529 120,129 5,270 -- 126,928
-------- -------- ------- -------- --------
Operating income (loss) (1,529) 82,445 117 -- 81,033
Investment income 345 239 4 -- 588
Interest expense (15,943) (481) (32) -- (16,456)
-------- -------- ------- -------- --------
Income (loss) before income taxes (17,127) 82,203 89 -- 65,165
Income tax (benefit) expense (6,508) 31,216 34 -- 24,742
Equity in net income of subsidiaries 51,042 -- -- (51,042) --
-------- -------- ------- -------- --------
Net income (loss) $ 40,423 $ 50,987 $ 55 $(51,042) $ 40,423
===========================================================================================================================
2002
- ---------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $611,177 $27,137 $ -- $638,314
Total direct costs -- 452,092 22,018 -- 474,110
-------- -------- ------- -------- --------
Gross profit -- 159,085 5,119 -- 164,204
Selling, general and administrative expenses 5,390 88,758 5,470 -- 99,618
Restructuring charges -- 4,797 -- -- 4,797
-------- -------- ------- -------- --------
Operating income (loss) (5,390) 65,530 (351) -- 59,789
Investment income 739 30 29 -- 798
Interest expense (13,962) (35) (179) -- (14,176)
-------- -------- ------- -------- --------
Income (loss) before income taxes (18,613) 65,525 (501) -- 46,411
Income tax (benefit) expense (7,073) 24,953 (245) -- 17,635
Equity in net income of subsidiaries 40,316 -- -- (40,316) --
-------- -------- ------- -------- --------
Net income (loss) $ 28,776 $ 40,572 $ (256) $(40,316) $ 28,776
===========================================================================================================================
12
8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands)
Guarantor Non-Guarantor Omnicare, Inc.
As of March 31, 2003: Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 84,613 $ 36,925 $ 7,452 $ -- $ 128,990
Restricted cash -- 5,801 -- -- 5,801
Accounts receivable, net (including
intercompany) -- 627,451 13,116 (6,331) 634,236
Inventories -- 227,238 5,100 -- 232,338
Other current assets 814 157,730 1,063 -- 159,607
---------- ---------- -------- ----------- ----------
Total current assets 85,427 1,055,145 26,731 (6,331) 1,160,972
---------- ---------- -------- ----------- ----------
Properties and equipment, net -- 148,345 9,137 -- 157,482
Goodwill -- 1,537,685 67,483 -- 1,605,168
Other noncurrent assets 17,801 86,249 882 -- 104,932
Investment in subsidiaries 2,433,696 -- -- (2,433,696) --
---------- ---------- -------- ----------- ----------
Total assets $2,536,924 $2,827,424 $104,233 $(2,440,027) $3,028,554
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $ 504,634 $ 333,487 $ 21,465 $ (6,331) $ 853,255
Long-term debt -- 411 -- -- 411
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 -- 142,598 -- -- 142,598
Stockholders' equity 1,312,290 2,350,928 82,768 (2,433,696) 1,312,290
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders'
equity $2,536,924 $2,827,424 $104,233 $(2,440,027) $3,028,554
=============================================================================================================================
As of December 31, 2002:
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 95,693 $ 36,191 $ 6,052 $ -- $ 137,936
Restricted cash -- 3,147 -- -- 3,147
Accounts receivable, net (including
intercompany) -- 524,290 13,610 (15,043) 522,857
Inventories -- 185,521 4,943 -- 190,464
Other current assets 1,399 144,399 1,356 -- 147,154
---------- ---------- -------- ----------- ----------
Total current assets 97,092 893,548 25,961 (15,043) 1,001,558
---------- ---------- -------- ----------- ----------
Properties and equipment, net 2,931 126,452 10,525 -- 139,908
Goodwill -- 1,121,728 67,179 -- 1,188,907
Other noncurrent assets 31,234 65,029 949 -- 97,212
Investment in subsidiaries 1,903,357 -- -- (1,903,357) --
---------- ---------- -------- ----------- ----------
Total assets $2,034,614 $2,206,757 $104,614 $(1,918,400) $2,427,585
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $ 37,363 $ 255,691 $ 18,639 $ (15,043) $ 296,650
Long-term debt -- 187 -- -- 187
5.0% convertible subordinated debentures,
due 2007 345,000 -- -- -- 345,000
8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000
Other noncurrent liabilities 2,189 132,577 920 -- 135,686
Stockholders' equity 1,275,062 1,818,302 85,055 (1,903,357) 1,275,062
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders'
equity $2,034,614 $2,206,757 $104,614 $(1,918,400) $2,427,585
=============================================================================================================================
13
8. Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows
(in thousands)
Three Months Ended March 31,
-----------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2003: Parent Subsidiaries Subsidiaries and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 10,832 $ 213 $ 11,045
Other (9,086) 1,183 2,209 (5,694)
--------- --------- ------- ---------
Net cash flows from operating activities (9,086) 12,015 2,422 5,351
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (475,373) (1,626) (476,999)
Capital expenditures -- (3,943) (47) (3,990)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust -- (2,654) -- (2,654)
Other -- 45 -- 45
--------- --------- ------- ---------
Net cash flows from investing activities -- (481,925) (1,673) (483,598)
--------- --------- ------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 499,000 -- -- 499,000
Payments on line of credit facilities (25,000) -- -- (25,000)
Other (475,994) 470,644 (38) (5,388)
--------- --------- ------- ---------
Net cash flows from financing activities (1,994) 470,644 (38) 468,612
--------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- 689 689
--------- --------- ------- ---------
Net increase (decrease) in cash and cash equivalents (11,080) 734 1,400 (8,946)
Cash and cash equivalents at beginning of period - unrestricted 95,693 36,191 6,052 137,936
--------- --------- ------- ---------
Cash and cash equivalents at end of period - unrestricted $ 84,613 $ 36,925 $ 7,452 $ 128,990
=============================================================================================================================
2002:
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 5,764 $ 794 $ 6,558
Other (1,020) 12,571 4,789 16,340
--------- --------- ------- ---------
Net cash flows from operating activities (1,020) 18,335 5,583 22,898
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (103,856) (1,173) (105,029)
Capital expenditures -- (4,803) (172) (4,975)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust -- (3,420) -- (3,420)
Other -- 45 -- 45
--------- --------- ------- ---------
Net cash flows from investing activities -- (112,034) (1,345) (113,379)
--------- --------- ------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 90,000 -- -- 90,000
Payments on line of credit facilities (20,000) -- -- (20,000)
Other (97,432) 93,098 -- (4,334)
--------- --------- ------- ---------
Net cash flows from financing activities (27,432) 93,098 -- 65,666
--------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- 538 538
--------- --------- ------- ---------
Net increase (decrease) in cash and cash equivalents (28,452) (601) 4,776 (24,277)
Cash and cash equivalents at beginning of period - unrestricted 127,110 37,304 3,982 168,396
--------- --------- ------- ---------
Cash and cash equivalents at end of period - unrestricted $ 98,658 $ 36,703 $ 8,758 $ 144,119
=============================================================================================================================
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements, related notes and other financial information
appearing elsewhere in this report. In addition, 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 three months ended
March 31, 2003 and 2002 (in thousands, except per share amounts).
Three Months Ended
March 31,
2003 2002
-------- --------
Total net sales $805,861 $638,314
======== ========
Net income $ 40,423 $ 28,776
======== ========
Earnings per share:
Basic $ 0.43 $ 0.31
======== ========
Diluted $ 0.42 $ 0.30
======== ========
Earnings before interest, income taxes, depreciation and amortization ("EBITDA")
calculation:
Net income $ 40,423 $ 28,776
Add:
Interest expense, net of investment income 15,868 13,378
Income taxes 24,742 17,635
Depreciation and amortization 12,761 11,691
-------- --------
EBITDA $ 93,794 $ 71,480
======== ========
EBITDA Reconciliation:
EBITDA $ 93,794 $ 71,480
Subtract:
Interest expense, net of investment income (15,868) (13,378)
Income taxes (24,742) (17,635)
Changes in assets and liabilities, net of effects from acquisition of businesses (72,347) (28,589)
Add:
Provision for doubtful accounts 11,045 6,558
Deferred tax provision 13,469 2,042
Non-cash portion of restructuring charges -- 2,420
-------- --------
Net cash flows from operating activities $ 5,351 $ 22,898
======== ========
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
15
cash flows from operating activities, as defined by United States Generally
Accepted Accounting Principles ("U.S. GAAP"), and should not be considered as a
substitute for net income 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.
Quarter Ended March 31, 2003 vs. 2002
Consolidated
Total net sales for the three months ended March 31, 2003 increased to
$805.9 million from $638.3 million in the comparable prior year period. Diluted
earnings per share for the three months ended March 31, 2003 were $0.42 versus
$0.30 in the same prior year period. Net income for the 2003 first quarter was
$40.4 million versus $28.8 million earned in the comparable 2002 period. EBITDA
for the three months ended March 31, 2003 totaled $93.8 million in comparison
with $71.5 million for the same period of 2002.
Included in the 2002 first quarter was a charge of $4.8 million pretax
($3.0 million aftertax, or $0.03 per diluted share), relating to the Phase II
productivity and consolidation program described hereafter under "Restructuring
Charges."
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $763.2 million for
the first quarter of 2003, exceeding the 2002 amount of $596.3 million by $166.9
million. At March 31, 2003, Omnicare served long-term care facilities comprising
approximately 935,000 beds as compared with approximately 729,500 beds served at
March 31, 2002. The increase in revenues and in beds served was primarily a
result of the acquisition of NCS HealthCare, Inc. ("NCS"), as discussed below.
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
branded drugs targeted at the diseases of the elderly, which often carry higher
prices but are significantly more effective in reducing overall healthcare costs
than those they replace. Lower government reimbursement formulas in some states
and the increasing number and usage of generic drugs partially offset the
increase in pharmacy sales.
Operating income of the Pharmacy Services segment was $85.4 million in the
first quarter of 2003, an $18.3 million improvement as compared with the $67.1
million earned in the comparable period of 2002. The improved operating income
was primarily the result of increased sales, as discussed above, a lower
operating cost structure reflecting principally the impact of the productivity
and consolidation initiative started in the third quarter of 2001 and completed
in the third quarter of 2002 (the "Phase II Program"), the completion of the
integration of American Pharmaceutical Services, Inc. and related entities
(collectively, "APS") discussed below, and the $1.1 million pretax impact of a
restructuring charge in the first quarter of 2002. However, as a percentage of
sales, the Pharmacy Services operating income margin
16
was slightly lower than the prior year period due to the initial impact of
the addition of lower-margin NCS business.
As previously disclosed, certain payment increases provided under 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") 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 the first quarter of 2003.
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 skilled
nursing facility ("SNF") clients which could, in turn, adversely affect the
timing or level of their payments to Omnicare. More recently, the Centers for
Medicare & Medicaid Services ("CMS") announced on May 8, 2003 that it is
proposing a 2.9 percent increase in Medicare payment rates to SNFs for federal
fiscal year 2004 (beginning October 1, 2003). In addition, CMS is not proposing
refinements to the current patient classification system in fiscal year 2004. If
the final rule leaves the current classification system in place, it will result
in continuation of the temporary add-on payment established by the BBRA. CMS
estimates that these temporary payments would equal approximately $1 billion in
fiscal year 2004. 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.
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 $120 million (including an adjustment
based on the closing balance sheet review and a $6.0 million deferred payment
made in the first quarter of 2003). Up to an additional $12.0 million in
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 two years.
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, 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
17
acquisition with available cash, working capital and borrowings under its
three-year, $500.0 million revolving credit facility (the "Revolving Credit
Facility"). The Company has engaged an independent valuation firm to assist
with the purchase price allocation, including the identification of goodwill
and other 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 in 33 states and managed hospital pharmacies in
10 states. NCS added approximately 182,000 beds served in the first quarter of
2003. 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 have been included from the
date of acquisition in the Company's financial statements beginning in the first
quarter of 2003.
CRO Services Segment
Omnicare's Contract Research Organization ("CRO") Services segment recorded
revenues of $42.7 million for the first quarter of 2003 compared with the $42.0
million recorded in the same prior year period. In accordance with Emerging
Issues Task Force ("EITF") Issue No. 01-14, "Income Statement Characterization
of Reimbursements Received for `Out-of-Pocket' Expenses Incurred" ("EITF No.
01-14"), the Company included $8.1 million and $6.3 million of reimbursable
out-of-pockets in its CRO Services segment reported revenue and direct cost
amounts for the three months ended March 31, 2003 and 2002, respectively. Under
EITF No. 01-14, in cases where a company acts as a principal, reimbursements
received for "out-of-pocket" expenses incurred are required to be characterized
as revenue and the associated costs are required to be included as expenses in
the Company's income statement. As a result of this accounting pronouncement,
which affects only the CRO business, CRO revenues and direct costs may fluctuate
significantly based on the timing of when reimbursable expenses are incurred.
Excluding the impact of the reimbursable out-of-pocket expenses, revenues for
the quarter ended March 31, 2003 were marginally lower than the prior-year first
quarter revenues.
Operating income in the CRO Services segment was $4.7 million in the first
quarter of 2003 compared with $1.2 million in the same 2002 period. The
improvement in operating performance was attributable to the year-over-year
realization of benefits from the Company's initiatives to integrate and
streamline the organization and the impact of restructuring charges associated
with the Phase II productivity and consolidation program, which totaled $3.7
million pretax in the 2002 first quarter. Backlog at March 31, 2003 was $180.4
million, representing a decrease of $16.6 million from the March 31, 2002
backlog of $197.0 million and $1.2 million from the December 31, 2002 backlog of
$181.6 million due to projects moving out of backlog, as well as the
cancellation of certain projects in late 2002 and early 2003.
Consolidated
The Company's consolidated gross profit of $208.0 million increased $43.8
million during the first quarter of 2003 from the same prior-year period amount
of $164.2 million. Gross profit as a percentage of total net sales of 25.8% in
the three months ended March 31, 2003, was slightly higher than the 25.7%
experienced during the same period of 2002. Positively impacting
18
overall gross profit was the Company's increased use of generic drugs,
purchasing leverage associated with the procurement of pharmaceuticals due, in
part, to the completion of the integration of the APS business and benefits
realized from the Company's formulary compliance program, as well as the
leveraging of fixed and variable overhead costs at the Company's pharmacies as
a result of the reduced cost structure brought about by the Phase II Program.
These favorable factors were offset primarily by the initial impact of the
lower-margin NCS business and, to a lesser extent, by the previously mentioned
shift in mix toward newer, branded drugs targeted at the diseases of the elderly
that typically produce higher gross profit but lower gross profit margins, and
the effects of lower government reimbursement formulas in some states.
Omnicare's selling, general and administrative ("operating") expenses for
the quarter ended March 31, 2003 of $126.9 million were higher than the
comparable year amount of $99.6 million by $27.3 million, due to the overall
growth of the business, including the acquisition of NCS. Operating expenses as
a percentage of total net sales totaled 15.8% in first quarter 2003,
representing a slight increase from the 15.6% experienced in the comparable
prior year period. This slight increase is due to the initial impact of the NCS
acquisition. Partially offsetting this increase was the year-over-year favorable
impact of the Phase II Program completed in the third quarter of 2002 and the
leveraging of fixed and variable overhead costs over a larger sales base in 2003
than that which existed in 2002.
Investment income for the three months ended March 31, 2003 was $0.6
million, a decline of $0.2 million from the same period of 2002. The impact of
lower interest rates in 2003 versus 2002 was the primary driver of the decrease
in investment income.
Interest expense for the three months ended March 31, 2003 was $16.5
million compared with $14.2 million in the comparable prior-year period. The
increase related to the previously mentioned financing of the NCS acquisition in
January 2003 through borrowings on the Revolving Credit Facility of $499.0
million, partially offset by a $25.0 million repayment in the 2003 first
quarter.
The effective income tax rate was 38% in 2003, consistent with the prior
year. The effective tax rates in 2003 and 2002 are higher than the federal
statutory rate largely as a result of the combined impact of state and local
income taxes, various nondeductible expenses and tax-accrual adjustments.
Restructuring Charges
In 2001, the Company announced the implementation of the Phase II Program,
the second phase of its productivity and consolidation initiative. The Phase II
Program, completed on September 30, 2002, further streamlined operations,
increased efficiencies and helped enhance the Company's position as a
high-quality, cost-effective provider of pharmaceutical services. Building on
previous efforts, the Phase II Program included the merging or closing of seven
pharmacy locations and the reconfiguration in size and function of an additional
ten locations. The Phase II Program also included a reduction in occupied
building space in certain locations and the rationalization or reduction of
staffing levels in the CRO business in order to
19
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 work force,
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. Of the total amount
recorded during the year ended December 31, 2002, $4.8 million pretax ($3.0
million aftertax, or $0.03 per diluted share) was recorded in the first quarter
of 2002. 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 year-to-date March 31, 2003 and December 31, 2002 activity
relating to the Phase II Program follow (in thousands):
Balance at 2002 Utilized Balance at Utilized Balance at
December 31, Provision/ during December 31, during March 31,
2001 Accrual 2002 2002 2003 2003
------------ ---------- -------- ------------ -------- ----------
Restructuring charges:
Employee severance $1,642 $ 2,177 $ (2,655) $1,164 $(1,123) $ 41
Employment agreement buy-outs 508 -- (214) 294 (21) 273
Lease terminations 606 5,862 (1,846) 4,622 (384) 4,238
Other assets, fees and facility
exit costs 3,027 15,156 (14,690) 3,493 (180) 3,313
------ ------- -------- ------ ------- ------
Total restructuring charges $5,783 $23,195 $(19,405) $9,573 $(1,708) $7,865
====== ======= ======== ====== ======= ======
As of March 31, 2003, the Company had paid approximately $8.2 million of
severance and other employee-related costs relating to the reduction of
approximately 460 employees. The remaining liabilities recorded at March 31,
2003 represent amounts not yet paid or settled relating to actions taken, and
will be adjusted in future periods as these matters are finalized.
In connection with the previously disclosed first phase of its productivity
and consolidation initiative (the "Phase I Program"), Omnicare had liabilities
of $0.6 million at December 31, 2002 and March 31, 2003. The remaining
liabilities at March 31, 2003 represent amounts not yet paid relating to actions
taken (consisting of remaining lease payments), and will be adjusted as these
matters are settled.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2003 were $134.8 million compared
with $141.1 million at December 31, 2002 (including restricted cash amounts of
$5.8 million and $3.1 million, respectively). The Company generated positive
cash flows from operating activities of $5.4 million during the three months
ended March 31, 2003 compared with net cash flows from
20
operating activities of $22.9 million during the three months ended
March 31, 2002. These operating cash flows, as well as borrowings on the
Revolving Credit Facility as further discussed below, were used primarily
for acquisition-related payments (discussed further below), capital
expenditures, debt repayment and dividends in both periods. The decrease
in cash flows from operations during the three months ended March 31, 2003
was driven primarily by a well-publicized and broad-based slowdown of payments
to all providers by the Illinois Department of Public Aid (Medicaid Program)
during the first quarter of 2003. Growth in earnings, as previously discussed
in the "Results of Operations" section, partially offset this delay in payments,
which the Company estimates at approximately $56 million, from the State of
Illinois on behalf of Medicaid beneficiaries Omnicare serves. In late April,
the Company began to receive a higher level of payments from Illinois.
Omnicare does not expect this delay in payments from the State of Illinois
to significantly impact the Company's ability to meet its current obligations.
Net cash used in investing activities was $483.6 million and $113.4 million
for the three months ended March 31, 2003 and 2002, respectively. Acquisition
of businesses required cash payments of $477.0 million in the first quarter of
2003, which were primarily funded by borrowings under the Revolving Credit
Facility. Also included in acquisition of businesses were amounts payable
pursuant to acquisition agreements relating to pre-2003 acquisitions,
particularly a $6.0 million deferred payment relating to APS. Acquisition of
businesses during 2002 required $105.0 million of cash payments (including
amounts payable pursuant to acquisition agreements relating to pre-2002
acquisitions), which were funded primarily by borrowings under the Revolving
Credit Facility and 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 its acquisition program. There
were no material commitments and contingencies outstanding at March 31, 2003,
other than 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 $12.0 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 two years),
that may become payable.
Net cash provided by financing activities was $468.6 million and $65.7
million for the three months ended March 31, 2003 and 2002, respectively. In
connection with the aforementioned NCS and APS acquisitions, the Company
borrowed $499.0 million and $90.0 million, respectively, under its Revolving
Credit Facility in the first quarters of 2003 and 2002, respectively. Partially
offsetting these borrowings were payments on the line of credit facility of
$25.0 million and $20.0 million during the quarters ended March 31, 2003 and
2002, respectively.
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. Dividends of $2.1 million paid during the three
months ended March 31, 2003 were consistent with those paid in the comparable
prior year period.
21
The Company's current ratio was 1.4 to 1.0 at March 31, 2003, compared with
the 3.4 to 1.0 in existence at December 31, 2002. The decrease in the current
ratio is primarily related to the early 2003 borrowings on the Revolving Credit
Facility, due in March 2004, drawn to finance the Company's acquisition of NCS,
as well as the impact of integrating the NCS business, at a lower current ratio
level, into Omnicare's balance sheet. The Company has classified borrowings on
the Revolving Credit Facility as current in the 2003 first quarter based on its
March 2004 maturity date. However, the Company is currently evaluating its
capital requirements and considering financing alternatives to restructure
currently outstanding borrowings over a longer term.
In March 2001, the Company entered into a three-year syndicated $495.0
million 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. As of March 31, 2003, the Revolving Credit
Facility bears an interest rate at the London Inter-bank Offerer Rate ("LIBOR")
plus 1.375%, or 2.7%. Additionally, the Company is charged a commitment fee on
the unused portion of the Revolving Credit Facility, which also varies depending
on certain credit ratings. At March 31, 2003, the commitment fee was 0.375%. The
Company has classified the outstanding borrowings associated with this Revolving
Credit Facility as current at March 31, 2003, based on its March 2004 maturity
date.
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 acquisition of NCS, 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.
Disclosures About Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations
At March 31, 2003, 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.
22
In January 2003, the Company borrowed $499.0 million under the Revolving
Credit Facility to finance its acquisition of NCS (see Note 6 of this Form
10-Q). The outstanding balance on the Revolving Credit Facility was $474.0
million at March 31, 2003, and since this contractual obligation is due in less
than one year, it has been reflected as current debt in the March 31, 2003
balance sheet.
Recently Issued Accounting Standards
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"), SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146"), and Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). All accounting and disclosure
relevant to this authoritative guidance has been incorporated into this
Quarterly Report on Form 10-Q. The adoption of SFAS 145, SFAS 146 and FIN 45
did not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
In October 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 147, "Acquisition of Certain Financial Institutions." In January 2003,
the FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities." These pronouncements are 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 annual and interim disclosure requirements related to a company's issuance
of stock compensation. The transition and disclosure provisions of SFAS 148 are
effective for fiscal years ending 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 April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
Statement will be effective for the Company beginning July 1, 2003. Management
does not expect the standard to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
23
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Regarding Forward-Looking Information
In addition to historical information, this report contains forward-looking
statements and performance trends that are subject to certain known and unknown
risks, uncertainties, contingencies and other factors that could cause actual
results, performance or achievements to differ materially from those stated.
Such forward-looking statements and trends include those relating to Omnicare's
business outlook or position or future economic performance; the impact of the
acquisition of NCS; the impact of clinical and other service programs; the
impact of drug price inflation; the impact of penetration of new drugs; the
impact of lower government reimbursement formulas in some states; trends
concerning the number and usage of generic drugs; the impact of the productivity
and consolidation programs; the impact of the integration of the APS and NCS
acquisitions; the impact of reimbursement trends and expectations concerning
legislative action with respect thereto including with regard to the impact of
the expiration of certain payments under BBRA and BIPA, as well as the proposed
increase in Medicare payment rates to SNFs for the 2004 federal fiscal year;
expectations concerning the current patient classification system; the impact of
healthcare funding issues; governmental budgetary and pricing pressures due to
the economic downturn; the impact of streamlining and cost reduction at the CRO
organization; trends concerning CRO backlog; purchasing leverage; the formulary
compliance program; the leveraging of costs; the impact of delayed payment from
Illinois Medicaid; the adequacy and availability of Omnicare's sources of
liquidity and capital; the availability of external sources of financing;
expectations concerning financing alternatives; and the impact of new accounting
rules and standards. Such forward-looking statements involve actual known and
unknown risks, uncertainties, contingencies and other factors that could cause
actual results, performance or achievements to differ materially from those
stated. Such risks, uncertainties, contingencies and other factors, many of
which are beyond the control of Omnicare, include, but are not limited to:
overall economic, financial and business conditions; trends for the continued
growth of the businesses of Omnicare; increases or decreases in reimbursement;
the effect of new government regulations, executive orders and/or legislative
initiatives, including those relating to reimbursement and drug pricing policies
and changes in the interpretation and application of such policies; government
budgetary pressures and shifting priorities; efforts by payors to control costs;
delays and further reductions in reimbursement by the government and other
payors to customers and to Omnicare as a result of pressures on federal and
state budgets due to the continuing economic downturn and other factors; the
overall financial condition of Omnicare's customers; Omnicare's ability to
assess and react to the financial condition of customers; the ability to
implement productivity, consolidation and cost reduction efforts and to realize
anticipated benefits; the continued successful integration of acquired
companies, including NCS, and the ability to realize anticipated economies of
scale, cost synergies and profitability; the continued availability of suitable
acquisition candidates; pricing and other competitive factors in the industry;
the impact of seasonal illness trends on the business of Omnicare; the ability
of vendors and business partners to provide products and services to Omnicare;
the impact and pace of pharmaceutical price increases; the outcome of
litigation; the failure of Omnicare or the long-term care facilities it serves
to obtain or maintain required regulatory approvals or licenses; loss or delay
of CRO contracts for regulatory or other reasons; the ability of CRO projects to
produce revenues in future periods; the ability to attract and retain needed
management; the impact and pace of technological advances; the ability to
24
obtain or maintain rights to data, technology and other intellectual property;
the impact of consolidation in the pharmaceutical and long-term care industries;
changes in tax law and regulation; volatility in Omnicare's stock price and in
the financial markets generally; access to capital and financing; changes in
international economic and political conditions and currency fluctuations
between the U.S. dollar and other currencies; the demand for Omnicare's
products and services; variations in costs or expenses; and changes in
accounting rules and standards.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omnicare's primary market risk exposure relates to interest rate risk
exposure through its borrowings. The Company's debt obligations at March 31,
2003 include $474.0 million outstanding under its March 2001 three-year, $500.0
million variable-rate Revolving Credit Facility at an interest rate of LIBOR
plus 1.375%, or 2.7% at March 31, 2003 (a one-hundred basis point change in the
interest rate would impact pretax interest expense by approximately $4.7 million
per year); $345.0 million outstanding under its 5.0% fixed-rate convertible
debentures, due 2007 (the "Convertible Debentures"); and $375.0 million
outstanding under its 8.125% fixed-rate senior subordinated notes (the "Senior
Notes"), due 2011. At March 31, 2003, the fair value of Omnicare's Revolving
Credit Facility approximates its carrying value, and the fair value of the
Convertible Debentures and Senior Notes is approximately $344.6 million and
approximately $403.1 million, respectively.
The Company has operations and revenue that occur outside of the United
States ("U.S.") and transactions that are settled in currencies other than the
U.S. dollar, exposing it to market risk related to changes in foreign currency
exchange rates. However, the substantial portion of the Company's operations and
revenues and the substantial portion of the Company's cash settlements are
exchanged in U.S. dollars. Therefore, changes in foreign currency exchange rates
do not represent a substantial market risk exposure to the Company.
The Company does not have any financial instruments held for trading
purposes and does not hedge any of its market risks with derivative instruments.
ITEM 4. CONTROLS AND PROCEDURES
(a) Based on a recent evaluation, which was completed within 90 days of the
filing of this Quarterly Report on Form 10-Q, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14)
are effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
periodic reports filed under the Securities Exchange Act of 1934.
(b) There were no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of their last evaluation.
26
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits.
(b) Reports on Form 8-K
(I) During the quarter ended March 31, 2003, the Company filed a
Report on Form 8-K on January 30, 2003 reporting, under Items 2
and 7, the filing of a press release announcing the completion of
its acquisition of NCS HealthCare, Inc., and the related
Agreement and Plan of Merger.
(II) During the quarter ended March 31, 2003, the Company filed a
Report on Form 8-K on February 14, 2003 reporting, under Items 7
and 9, the filing of a press release announcing its financial
results for the fourth quarter and year ended December 31, 2002.
(III) During the quarter ended March 31, 2003, the Company filed a
Report on Form 8-K/A on March 27, 2003 filing, under Item 7, the
financial statements and pro forma financial information required
to be submitted relating to the acquisition of NCS HealthCare,
Inc.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Omnicare, Inc.
Registrant
Date: May 15, 2003 By: /s/ David W. Froesel, Jr.
---------------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
SECTION 302 CEO CERTIFICATION
I, Joel F. Gemunder, President and Chief Executive Officer of Omnicare, Inc.
(the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Joel F. Gemunder
-------------------------------------
Joel F. Gemunder
President and Chief Executive Officer
29
SECTION 302 CFO CERTIFICATION
I, David W. Froesel, Jr., Senior Vice President and Chief Financial Officer of
Omnicare, Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ David W. Froesel, Jr.
------------------------------
David W. Froesel, Jr.
Senior Vice President and Chief Financial Officer
30
INDEX OF EXHIBITS
Document Incorporated by Reference
Number and Description of Exhibits (Numbers Coincide with from a Previous Filing or Filed
Item 601 of Regulation S-K) Herewith, as Indicated Below
--------------------------------------------------------------------- ----------------------------------
(2) Agreement and Plan of Merger, by and among Omnicare, Inc., Exhibit (d)(2) to NCS Acquisition
NCS Acquisition Corp. and NCS Healthcare, Inc., dated as of Corp.'s Schedule TO-T, as amended
December 17, 2002 and filed with the Securities and
Exchange Commission on December 18,
2002
(11) Computation of Earnings Per Common Share Filed Herewith
(12) Computation of Ratio of Earnings to Fixed Charges Filed Herewith
(99.1) Certification of Chief Executive Officer of Omnicare, Inc. Filed Herewith
in accordance with Section 906 of the Sarbanes-Oxley
Act of 2002*
(99.2) Certification of Chief Financial Officer of Omnicare, Inc. Filed Herewith
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-1