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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 June 30, 2004
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)
(859) 392-3300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant:
1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and
2) has been subject to such filing requirement for the past 90 days.
Yes [X] No [_]
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 104,108,382 June 30, 2004
OMNICARE, INC. AND
SUBSIDIARY COMPANIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Income -
Three and six months ended -
June 30, 2004 and 2003 3
Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003 4
Consolidated Statements of Cash Flows -
Six months ended -
June 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 40
ITEM 4. CONTROLS AND PROCEDURES 41
PART II. OTHER INFORMATION:
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES 42
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 43
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---------- -------- ---------- ----------
Sales $1,006,053 $838,183 $1,983,795 $1,635,936
Reimbursable out-of-pockets 4,544 5,850 9,081 13,958
---------- -------- ---------- ----------
Total net sales 1,010,597 844,033 1,992,876 1,649,894
---------- -------- ---------- ----------
Cost of sales 750,433 617,206 1,473,507 1,206,998
Reimbursed out-of-pocket expenses 4,544 5,850 9,081 13,958
---------- -------- ---------- ----------
Total direct costs 754,977 623,056 1,482,588 1,220,956
---------- -------- ---------- ----------
Gross profit 255,620 220,977 510,288 428,938
Selling, general and administrative expenses 143,327 130,090 281,989 257,018
---------- -------- ---------- ----------
Operating income 112,293 90,887 228,299 171,920
Investment income 905 1,166 1,539 1,754
Interest expense (Note 6) (17,243) (21,875) (33,955) (38,331)
---------- -------- ---------- ----------
Income before income taxes 95,955 70,178 195,883 135,343
Income taxes 35,501 26,677 71,938 51,419
---------- -------- ---------- ----------
Net income $ 60,454 $ 43,501 $ 123,945 $ 83,924
========== ======== ========== ==========
Earnings per share:
Basic $ 0.58 $ 0.45 $ 1.19 $ 0.88
========== ======== ========== ==========
Diluted $ 0.58 $ 0.44 $ 1.18 $ 0.86
========== ======== ========== ==========
Weighted average number of common shares outstanding:
Basic 103,996 96,034 103,727 95,215
========== ======== ========== ==========
Diluted 105,002 102,925 104,888 103,372
========== ======== ========== ==========
Dividends per share $ 0.0225 $ 0.0225 $ 0.0450 $ 0.0450
========== ======== ========== ==========
Comprehensive income $ 58,327 $ 44,758 $ 122,500 $ 86,178
========== ======== ========== ==========
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)
June 30, December 31,
2004 2003
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 169,702 $ 187,413
Restricted cash 5,777 714
Deposit with drug wholesaler 44,000 --
Accounts receivable, less allowances
of $122,632 (2003-$108,813) 732,593 678,255
Unbilled receivables 12,551 15,281
Inventories 317,023 326,550
Deferred income tax benefits 82,062 53,224
Other current assets 139,404 121,651
---------- ----------
Total current assets 1,503,112 1,383,088
Properties and equipment, at cost less accumulated
depreciation of $214,293 (2003-$200,498) 146,195 148,307
Goodwill 1,783,183 1,690,558
Other noncurrent assets 193,371 173,068
---------- ----------
Total assets $3,625,861 $3,395,021
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 296,025 $ 296,089
Current debt 24,748 20,709
Accrued employee compensation 26,776 30,611
Deferred revenue 13,673 22,454
Income taxes payable 18,767 16,244
Other current liabilities 79,341 76,653
---------- ----------
Total current liabilities 459,330 462,760
Long-term debt 183,567 135,855
8.125% senior subordinated notes, due 2011 375,000 375,000
6.125% senior subordinated notes, net, due 2013 221,959 226,822
4.0% contingent convertible notes, due 2033 345,000 345,000
Deferred income tax liabilities 103,067 50,913
Other noncurrent liabilities 123,636 122,647
---------- ----------
Total liabilities 1,811,559 1,718,997
---------- ----------
Commitments and contingencies (Note 10)
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,
106,172,700 shares issued (2003-105,050,900 shares issued) 106,173 105,051
Paid-in capital 1,028,304 986,138
Retained earnings 803,613 684,348
Treasury stock, at cost-2,064,300 shares (2003-1,863,000 shares) (54,445) (46,087)
Deferred compensation (64,000) (49,528)
Accumulated other comprehensive income (5,343) (3,898)
---------- ----------
Total stockholders' equity 1,814,302 1,676,024
---------- ----------
Total liabilities and stockholders' equity $3,625,861 $3,395,021
========== ==========
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)
Six Months Ended
June 30,
---------------------
2004 2003
--------- ---------
Cash flows from operating activities:
Net income $ 123,945 $ 83,924
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 18,062 18,827
Amortization 9,608 6,622
Provision for doubtful accounts 21,890 23,180
Deferred tax provision 25,087 18,739
Write-off of debt issuance costs -- 1,164
Changes in assets and liabilities, net of
effects from acquisition of businesses:
Accounts receivable and unbilled receivables (43,791) (50,375)
Inventories 21,258 (23,849)
Current and noncurrent assets (69,625) 16,271
Accounts payable (8,549) 40,363
Accrued employee compensation (4,721) 1,532
Deferred revenue (8,781) (1,992)
Current and noncurrent liabilities 5,408 (14,376)
--------- ---------
Net cash flows from operating activities 89,791 120,030
--------- ---------
Cash flows from investing activities:
Acquisition of businesses (144,643) (492,157)
Capital expenditures (9,837) (7,155)
Transfer of cash to trusts for employee health
and severance costs, net of payments out of the trust (5,063) (2,672)
Other 61 53
--------- ---------
Net cash flows from investing activities (159,482) (501,931)
--------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities and term A loan 190,000 749,000
Payments on line of credit facilities and term A loan (138,206) (549,000)
(Payments on) proceeds from long-term borrowings and obligations (43) 485,221
Fees paid for financing arrangements -- (19,511)
Proceeds from stock offering, net of issuance costs -- 178,774
Proceeds from (payments) for stock awards and exercise of
stock options and warrants, net of stock tendered in payment 6,213 (3,832)
Dividends paid (4,680) (4,250)
Other -- 122
--------- ---------
Net cash flows from financing activities 53,284 836,524
--------- ---------
Effect of exchange rate changes on cash (1,304) 1,973
--------- ---------
Net (decrease) increase in cash and cash equivalents (17,711) 456,596
Cash and cash equivalents at beginning of period - unrestricted 187,413 137,936
--------- ---------
Cash and cash equivalents at end of period - unrestricted $ 169,702 $ 594,532
========= =========
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 6) 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, 2003. Certain reclassifications of prior year amounts have been made to
conform with the current year presentation.
2. Stock-Based Employee Compensation
At June 30, 2004, the Company had four stock-based employee compensation
plans under which incentive awards were outstanding, including the 2004 Stock
and Incentive Plan, approved by the Stockholders at the Company's May 18, 2004
Annual Meeting of Stockholders. From May 18, 2004 forward, stock-based incentive
awards will be made only from the 2004 Stock and Incentive Plan. As permitted
under United States Generally Accepted Accounting Principles ("U.S. GAAP"), the
Company accounts for stock incentive plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations. No stock-based
employee compensation cost for stock options is reflected in net income, as all
options granted under the plans had an exercise price equal to or greater than
the market value of the underlying common stock on the date of grant.
6
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 Six months ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- -------- -------
Net income, as reported $60,454 $43,501 $123,945 $83,924
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 1,907 1,041 3,056 1,817
Deduct: Total stock-based employee
compensation expense (stock options and
awards) determined under fair value
based method, net of related tax effects (6,110) (3,282) (11,626) (6,477)
------- ------- -------- -------
Pro forma net income $56,251 $41,260 $115,375 $79,264
======= ======= ======== =======
Earnings per share:
Basic - as reported $ 0.58 $ 0.45 $ 1.19 $ 0.88
======= ======= ======== =======
Basic - pro forma $ 0.54 $ 0.43 $ 1.11 $ 0.83
======= ======= ======== =======
Diluted - as reported $ 0.58 $ 0.44 $ 1.18 $ 0.86
======= ======= ======== =======
Diluted - pro forma $ 0.54 $ 0.42 $ 1.10 $ 0.81
======= ======= ======== =======
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 Six months ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
------ ------ ------ ------
Volatility 57% 60% 57% 60%
Risk-free interest rate 3.9% 2.6% 3.9% 2.6%
Dividend yield 0.2% 0.3% 0.2% 0.3%
Expected term of options (in years) 5.0 5.4 5.0 5.4
Weighted average fair value per option $20.94 $14.00 $21.24 $14.01
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 Standards
In July 2004, the Emerging Issues Task Force ("EITF") released the draft
abstract for EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt
on Diluted Earnings per Share" ("EITF No. 04-8"). The proposal would require
contingently convertible debt instruments to be included in diluted earnings per
share, if dilutive, regardless of whether the
7
market-price contingency is met. The EITF is currently deliberating on EITF No.
04-8. As drafted, the proposal would be applied by retroactively restating
previously reported diluted earnings per share. It is estimated that the
proposed EITF No. 04-8 would have reduced Omnicare's diluted earnings per share
by approximately $0.05 for the six months ended June 30, 2004, if it had been
effective during this period.
4. Acquisitions
During the first six months of 2004, the Company completed several
acquisitions in its institutional pharmacy business which, individually and in
the aggregate, were not significant. Further, on June 4, 2004, Omnicare
commenced a tender offer for all of the outstanding shares of the common stock
of NeighborCare, Inc. ("NeighborCare") for $30.00 per share in cash. The
transaction has a total value of approximately $1.5 billion, which includes the
assumption of NeighborCare's net debt and any related refinancing thereof. The
acquisition of NeighborCare is expected to be financed with proceeds from a $2.4
billion commitment letter the Company has secured in anticipation of the
transaction or from such other financings that are sufficient, together with
cash on hand, to consummate the tender offer and the proposed merger. The
Company's $2.4 billion commitment letter consists of a $600 million five-year
revolving credit facility, a $700 million five-year senior term A loan facility
and a $1.1 billion 364-day facility. On July 13, 2004, Omnicare announced that
it received a request for additional information from the Federal Trade
Commission ("FTC") relating to its filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 ("HSR Act") in connection with its tender offer for
NeighborCare. The request extends the waiting period under the HSR Act during
which the FTC is permitted to review the proposed transaction until 10 days
after Omnicare has substantially complied with the request. Omnicare is
continuing to work with the FTC with respect to the filing. The Company's tender
offer is scheduled to expire at 5:00 p.m., New York City time, on August 31,
2004, unless extended.
On July 15, 2003, Omnicare acquired the SunScript pharmacy services
business from Sun Healthcare Group, Inc. The acquisition, accounted for as a
purchase business combination, included cash consideration and transaction costs
of approximately $83 million. The Company funded the acquisition of SunScript
from existing cash balances. Up to an additional $15.0 million may become
payable post-closing, subject to adjustment.
At the time of the acquisition, SunScript provided pharmaceutical products
and related consulting services to skilled nursing and assisted living
facilities comprised of approximately 43,000 beds located in 19 states
(excluding beds in Sun Healthcare facilities that Sun Healthcare is divesting in
unrelated transactions). SunScript served these facilities through its network
of 31 long-term care pharmacies. Omnicare has achieved certain economies of
scale and operational efficiencies from the acquisition. The net assets and
operating results of SunScript have been included from the date of acquisition
in the Company's financial statements. The 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.
8
The following table summarizes the fair values of the net assets acquired
at the date of the SunScript acquisition (in thousands):
Current assets, including deferred tax assets $ 33,443
Property and equipment 3,379
Intangible assets 8,272
Goodwill 64,580
Current and noncurrent liabilities (26,981)
--------
Total net assets acquired $ 82,693
========
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"). The acquisition of NCS, accounted
for as a purchase business combination, included cash consideration and
transaction costs of approximately $500 million. The cash consideration included
the payoff of certain NCS debt totaling approximately $325.5 million, which was
retired by Omnicare immediately following the acquisition. The Company initially
financed the acquisition with available cash, working capital and borrowings
under its three-year, $500.0 million revolving credit facility. The Company
later refinanced the borrowings under its three-year, $500.0 million revolving
credit facility, as described further under "Debt and Issuance of Common Stock."
At the time of the acquisition, NCS provided professional pharmacy and
related services to long-term care facilities, including skilled nursing and
assisted living facilities in 33 states and managed hospital pharmacies in 10
states. NCS added approximately 182,000 beds served in the first quarter of
2003. In addition to broadening its geographic reach, Omnicare achieved certain
economies of scale and operational efficiencies from the acquisition. The net
assets and operating results of NCS have been included from the date of
acquisition in the Company's financial statements.
Pro forma information for NCS and SunScript is not presented for the three
and six months ended June 30, 2003, as the results of NCS are included in those
of the Company from the closing date of January 15, 2003, and the difference
from the beginning of the period is not significant, and the impact of SunScript
is not presented due to the lack of significance on the pro forma combined
results.
5. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the six months ended June
30, 2004, by business segment, are as follows (in thousands):
Pharmacy CRO
Services Services Total
---------- -------- ----------
Balance as of December 31, 2003 $1,649,604 $40,954 $1,690,558
Goodwill acquired in the six
months ended June 30, 2004 99,366 -- 99,366
Other (6,431) (310) (6,741)
---------- ------- ----------
Balance as of June 30, 2004 $1,742,539 $40,644 $1,783,183
========== ======= ==========
9
The "Other" caption above includes the settlement of acquisition matters
relating to prior-year acquisitions (including payments pursuant to acquisition
agreements such as deferred payments, indemnification payments and payments
originating from earnout provisions, as well as adjustments for the finalization
of purchase price allocations). "Other" also includes the effect of adjustments
due to foreign currency translations, which relate solely to Contract Research
Organization ("CRO") Services.
The Company's other intangible assets (included in the "Other noncurrent
assets" caption on the Consolidated Balance Sheet) have increased by $8.2
million during the first half of 2004. This increase was primarily due to the
Company's completion of its purchase price allocation for the SunScript
acquisition, including the identification of goodwill and other intangible
assets (primarily related to customer relationship assets and non-compete
agreements) based on an appraisal recently finalized by an independent valuation
firm.
6. Debt and Issuance of Common Stock
During the second quarter of 2003, the Company completed its offering
of $250.0 million aggregate principal amount of 6.125% senior subordinated
notes due 2013 ("6.125% Senior Notes"), issued at par, and 6,468,750 shares
of common stock, $1 par value, at $29.16 per share, for gross proceeds
of approximately $189 million, and the offering, through Omnicare
Capital Trust I, a statutory trust formed by the Company (the "Trust"), of
$345.0 million aggregate principal amount of convertible trust preferred
securities due 2033 ("trust PIERS" or "Preferred Income Equity Redeemable
Securities").
In early 2001, the Company entered into a three-year syndicated $500.0
million revolving line of credit facility (the "Revolving Credit Facility"),
including a $25.0 million letter of credit subfacility, with various lenders. As
previously discussed, in January 2003, the Company borrowed $499.0 million under
the Revolving Credit Facility to finance its acquisition of NCS. The Revolving
Credit Facility was retired in connection with the mid-2003 refinancing
transactions, as further described below.
In connection with the mid-2003 refinancings, the Company entered
into a new, four-year $750.0 million credit facility ("Credit Facility"),
consisting of a $250.0 million term A loan commitment and a $500.0 million
revolving credit commitment, including a $25.0 million letter of credit
subfacility. The new Credit Facility bears interest at the Company's option at a
rate equal to either: (i) the London Interbank Offered Rate ("LIBOR") plus a
margin that varies depending on certain ratings on the Company's senior
long-term debt; or (ii) the higher of (a) the prime rate or (b) the sum of the
federal funds effective rate plus 0.50%. Additionally, the Company is charged a
commitment fee on the unused portion of the revolving credit portion of the
Credit Facility, which also varies depending on such ratings. At June 30, 2004,
the interest rate was LIBOR plus 1.375% and the commitment fee was 0.375%. There
is no utilization fee associated with the Credit Facility.
The Company used the net proceeds from the 6.125% Senior Notes offering and
borrowings of $250.0 million under the term A loan portion of the new Credit
Facility to repay the balance of the Company's existing Revolving Credit
Facility of $474.0 million, with remaining proceeds being used for general
corporate purposes. The Company paid down $4.1 million and $8.2 million on the
term A loan during the three and six months ended June 30, 2004, respectively.
The $147.7 million outstanding at June 30, 2004 under the term A loan is due in
quarterly installments, in varying amounts, through 2007, with approximately
$24.6
10
million due within one year. There was $60.0 million outstanding as of June 30,
2004 under the revolving credit commitment of the Credit Facility.
The Company used a portion of the net proceeds from the common stock
offering and the net proceeds from the trust PIERS offering to redeem the entire
outstanding $345 million aggregate principal amount of the Company's 5%
convertible subordinated debentures ("5% Convertible Debentures"), with
remaining proceeds being used for general corporate purposes. A portion of the
5% Convertible Debentures (approximately $106.5 million) were redeemed in June
2003 and the remaining 5% Convertible Debentures outstanding were redeemed by
July 14, 2003. In connection with the early redemption of the 5% Convertible
Debentures, a charge of $4.1 million pretax ($2.5 million aftertax, or $0.02 per
diluted share) was recognized in interest expense in the second quarter of 2003,
representing the proportionate share of the call premium and the write-off of
unamortized debt issuance costs.
In connection with its offering of $250.0 million of 6.125% Senior Notes
due 2013, during the second quarter of 2003, the Company entered into an
interest rate swap agreement ("Swap Agreement") on all $250.0 million of its
aggregate principal amount of the 6.125% Senior Notes. Under the Swap Agreement,
which hedges against exposure to long-term U.S. dollar interest rates, the
Company will receive a fixed rate of 6.125% and pay a floating rate based on
LIBOR with a maturity of six months plus a spread of 2.27%. The floating rate is
determined semi-annually, in arrears, two London Banking Days prior to the first
of each December and June. The Company records interest expense on the 6.125%
Senior Notes at the floating rate. The estimated LIBOR-based floating rate was
4.17% at June 30, 2004. The Swap Agreement, which matches the terms of the
6.125% Senior Notes, is designated and accounted for as a fair value hedge. The
Company is accounting for the Swap Agreement in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, so
changes in the fair value of the Swap Agreement are offset by changes in the
recorded carrying value of the related 6.125% Senior Notes. The fair value of
the Swap Agreement of $28.0 million at June 30, 2004 is recorded as a noncurrent
liability and a reduction to the carrying value of the related 6.125% Senior
Notes.
In connection with the offering of the trust PIERS in the second quarter of
2003, the Company issued a corresponding amount of contingent convertible notes
due 2033 to the Trust. The Trust is a 100%-owned finance subsidiary of the
Company. The Company has fully and unconditionally guaranteed the securities of
the Trust. The trust PIERS offer fixed cash distributions at a rate of 4.0% per
annum payable quarterly, and a fixed conversion price of $40.82 under a
contingent conversion feature whereby the holders may convert their trust PIERS
if the closing sales price of Omnicare common stock for a predetermined period,
beginning with the quarter ending September 30, 2003, is more than 130% of the
then-applicable conversion price or, during a predetermined period, if the daily
average of the trading prices for the trust PIERS is less than 105% of the
average of the conversion values for the trust PIERS through 2028 (98% for any
period thereafter through maturity). The trust PIERS also will pay contingent
distributions, commencing with the quarterly distribution period beginning June
15, 2009, if the average trading prices of the trust PIERS for a predetermined
period equals 115% or more of the stated liquidation amount of the trust PIERS.
Embedded in the trust PIERS are two derivative instruments, specifically, a
contingent interest provision and a contingent conversion parity provision. The
embedded derivatives are periodically valued by a third-party advisor, and at
June 30, 2004, the values of both derivatives were not material. However, the
values are subject
11
to change, based on market conditions, which could affect the Company's future
financial position, cash flows and results of operations. Omnicare irrevocably
and unconditionally guarantees, on a subordinated basis, certain payments to be
made by the Trust in connection with the trust PIERS.
7. Employee Benefit Plans
The Company has various defined contribution savings plans under which
eligible employees can participate by contributing a portion of their salary for
investment, at the direction of each employee, in one or more investment funds.
Expense relating primarily to the Company's matching contributions for these
defined contribution plans was $1.2 million and $2.4 million for the three and
six months ended June 30, 2004, respectively ($1.0 million and $2.0 million for
the comparable prior year periods ended June 30, 2003, respectively).
The Company also has an excess benefit plan which provides retirement
benefits to certain headquarters employees in amounts generally consistent with
what they would have received under the Company's non-contributory, defined
benefit pension plan (the "Qualified Plan"), frozen in 1993. The retirement
benefits provided by the excess benefit plan are generally comparable to those
that would have been earned in the Qualified Plan, if payments under the
Qualified Plan were not limited by the Internal Revenue Code. The Company has
established rabbi trusts, which are invested primarily in a mutual fund holding
U.S. Treasury obligations, to provide for retirement obligations under the
excess benefit plan. The Company's policy is to fund pension costs in accordance
with the funding provisions of the Employee Retirement Income Security Act
("ERISA").
The following table presents the components of pension cost for each of the
three and six months ended June 30, 2004 and 2003 (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
------ ---- ------ ------
Service cost $ 365 $300 $ 749 $ 694
Interest cost 527 411 1,054 822
Amortization of deferred amounts
(primarily prior actuarial losses) 470 242 940 484
------ ---- ------ ------
Net periodic pension cost $1,362 $953 $2,743 $2,000
====== ==== ====== ======
During the second quarter of 2004, the Company made payments of $6.7
million related to funding plan assets for the settlement of the Company's
pension obligations.
In addition, the Company has supplemental pension plans ("SPPs") in which
certain of its officers participate. Retirement benefits under the SPPs are
calculated on the basis of a specified percentage of the officers' covered
compensation, years of credited service and a vesting schedule, as specified in
the plan documents. Expense relating to the SPPs was $0.2 million and $0.4
million for each of the three and six month periods ended June 30, 2004 and
2003, respectively.
12
8. Earnings Per Share Data
Basic earnings per share are computed based on the weighted average number
of shares of common stock outstanding during the period. Diluted earnings per
share include the dilutive effect of stock options and warrants, as well as
convertible debentures.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share ("EPS") computations (in thousands, except
per share data):
For the three months ended June 30, 2004
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Basic EPS
Net income $60,454 103,996 $0.58
=====
Effect of Dilutive Securities
Stock options and stock warrants -- 1,006
------- -------
Diluted EPS
Net income plus assumed conversions $60,454 105,002 $0.58
======= ======= =====
For the three months ended June 30, 2003
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Basic EPS
Net income $43,501 96,034 $0.45
=====
Effect of Dilutive Securities
5% Convertible Debentures 1,948 5,808
Stock options and stock warrants -- 1,083
------- -------
Diluted EPS
Net income plus assumed conversions $45,449 102,925 $0.44
======= ======= =====
For the six months ended June 30, 2004
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Basic EPS
Net income $123,945 103,727 $1.19
=====
Effect of Dilutive Securities
Stock options and stock warrants -- 1,161
-------- -------
Diluted EPS
Net income plus assumed conversions $123,945 104,888 $1.18
======== ======= =====
For the six months ended June 30, 2003
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Basic EPS
Net income $83,924 95,215 $0.88
=====
Effect of Dilutive Securities
5% Convertible Debentures 4,870 7,260
Stock options and stock warrants -- 897
-------- -------
Diluted EPS
Net income plus assumed conversions $88,794 103,372 $0.86
======== ======= =====
13
During the three and six month periods ended June 30, 2004 and 2003, the
anti-dilutive effect associated with selected options and warrants was excluded
from the computation of diluted EPS, 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 the quarter ended June 30, 2004 and 2003 totaled 2.0
million and 3.0 million, respectively. Further, 2.0 million and 4.8 million
anti-dilutive options and warrants were excluded from the year-to-date June 30,
2004 and 2003 periods, respectively.
The $345.0 million of 4.0% convertible trust preferred securities due 2033,
which are convertible at a fixed conversion price of $40.82 (under a contingent
conversion feature described in Note 6), were outstanding during the three and
six months ended June 30, 2004 and a portion of the three and six months ended
June 30, 2003, but were not included in the computation of diluted EPS because
the conversion trigger of $53.07 had not been met. See further discussion at
Note 3.
The three and six month periods ended June 30, 2003 includes the dilutive
effect of the $345.0 million of 5.0% Convertible Debentures, which assumes
conversion using the "if converted" method. Under that method, the 5.0%
Convertible Debentures are assumed to be converted to common shares (weighted
for the number of days assumed to be outstanding during the period) and interest
expense, net of taxes, related to the 5.0% Convertible Debentures is added back
to net income. Approximately $106.5 million of the $345.0 million 5% Convertible
Debentures were redeemed in June 2003, with the remaining $238.5 million being
redeemed in July 2003. The portion of the 5% Convertible Debentures outstanding
were included in the dilutive EPS calculations for each respective period.
9. Restructuring Program
In connection with the previously disclosed second phase of its
productivity and consolidation initiative (the "Phase II Program"), the Company
had liabilities of $4.1 million at December 31, 2003, of which $0.7 million was
utilized in the six months ended June 30, 2004. The remaining liabilities at
June 30, 2004 of $3.4 million represent amounts not yet paid relating to actions
taken (consisting primarily of lease payments), and will be adjusted as these
matters are settled.
10. Commitments and Contingencies
The Company continuously evaluates contingencies based upon the best
available evidence. Management believes that liabilities have been provided to
the extent necessary and that its assessment of contingencies is reasonable. To
the extent that resolution of contingencies results in amounts that vary from
management's estimates, future earnings will be charged or credited accordingly.
14
As part of its ongoing operations, the Company is subject to various
inspections, audits, inquiries and similar actions by governmental/regulatory
authorities responsible for enforcing the laws and regulations to which the
Company is subject. The Company is also involved in various legal actions
arising in the normal course of business. Although occasional adverse outcomes
(or settlements) may occur and could possibly have an adverse effect on the
results of operations in any one accounting period, the Company believes that
the final disposition of such matters will not have a material adverse effect on
the Company's consolidated financial position.
11. 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 primarily provides distribution of pharmaceuticals, related
pharmacy consulting and other ancillary services, data management services and
medical supplies to skilled nursing, assisted living and other providers of
healthcare services in 47 states in the United States of America ("USA") and the
District of Columbia at June 30, 2004. The Company's other reportable segment is
CRO Services, which provides comprehensive product development services to
client companies in pharmaceutical, biotechnology, medical devices and
diagnostics industries in 29 countries around the world at June 30, 2004,
including the USA.
15
The table below presents information about the reportable segments as of
and for the three and six months ended June 30, 2004 and 2003 and should be read
in conjunction with the paragraph that follows (in thousands):
Three Months Ended June 30,
----------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2004: Services Services Consolidating Totals
- ------------------------------------------------------------------------------------
Net sales $ 976,768 $ 33,829 $ -- $1,010,597
Depreciation and amortization 12,774 354 615 13,743
Operating income (expense) 120,549 3,268 (11,524) 112,293
Total assets 3,197,160 93,549 335,152 3,625,861
Capital expenditures 3,401 295 1,073 4,769
2003:
- ------------------------------------------------------------------------------------
Net sales $ 802,828 $ 41,205 $ -- $ 844,033
Depreciation and amortization 11,626 483 579 12,688
Operating income (expense) 95,825 4,485 (9,423) 90,887
Total assets 2,745,926 122,535 665,977 3,534,438
Capital expenditures 2,270 640 255 3,165
Six Months Ended June 30,
----------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2004: Services Services Consolidating Totals
- ------------------------------------------------------------------------------------
Net sales $1,925,281 $ 67,595 $ -- $1,992,876
Depreciation and amortization 25,742 701 1,227 27,670
Operating income (expense) 243,979 6,476 (22,156) 228,299
Total assets 3,197,160 93,549 335,152 3,625,861
Capital expenditures 8,205 360 1,272 9,837
2003:
- ------------------------------------------------------------------------------------
Net sales $1,565,982 $ 83,912 $ -- $1,649,894
Depreciation and amortization 23,374 901 1,174 25,449
Operating income (expense) 181,195 9,215 (18,490) 171,920
Total assets 2,745,926 122,535 665,977 3,534,438
Capital expenditures 6,085 705 365 7,155
In accordance with EITF Issue No. 01-14, "Income Statement Characterization
of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred," the Company
included in its reported CRO segment net sales amount, reimbursable
out-of-pockets totaling $4.5 million and $9.1 million for the three and six
months ended June 30, 2004, respectively ($5.9 million and $14.0 million for the
comparable prior year periods ended June 30, 2003, respectively).
16
12. Guarantor Subsidiaries
The Company's $375.0 million 8.125% senior subordinated notes due 2011 and
the 6.125% Senior Notes are fully and unconditionally guaranteed on an
unsecured, joint and several basis by certain wholly owned subsidiaries of the
Company (the "Guarantor Subsidiaries"). The following condensed consolidating
financial data illustrates the composition of Omnicare, Inc. ("Parent"), the
Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of June 30, 2004
and December 31, 2003 for the balance sheets, the three and six months ended
June 30, 2004 and 2003 for the statements of income, and the statements of cash
flows for the six months ended June 30, 2004 and 2003. Separate complete
financial statements of the respective Guarantor Subsidiaries would not provide
additional information that would be useful in assessing the financial condition
of the Guarantor Subsidiaries and thus are not presented. No eliminations column
is presented for the condensed consolidating statements of cash flows since
there were no significant eliminating amounts during the periods presented.
Summary Consolidating Statements of Income
(in thousands) Three Months Ended June 30,
-------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2004 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $979,245 $31,352 $ -- $1,010,597
Total direct costs -- 730,161 24,816 -- 754,977
-------- -------- ------- -------- ----------
Gross profit -- 249,084 6,536 -- 255,620
Selling, general and administrative expenses 1,326 137,166 4,835 -- 143,327
-------- -------- ------- -------- ----------
Operating income (loss) (1,326) 111,918 1,701 -- 112,293
Investment income 251 654 -- -- 905
Interest expense (16,050) (1,052) (141) -- (17,243)
-------- -------- ------- -------- ----------
Income (loss) before income taxes (17,125) 111,520 1,560 -- 95,955
Income tax (benefit) expense (6,336) 41,260 577 -- 35,501
Equity in net income of subsidiaries 71,243 -- -- (71,243) --
-------- -------- ------- -------- ----------
Net income (loss) $ 60,454 $ 70,260 $ 983 $(71,243) $ 60,454
======== ======== ======= ======== ==========
2003
- -----------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $806,113 $37,920 $ -- $ 844,033
Total direct costs -- 592,269 30,787 -- 623,056
-------- -------- ------- -------- ----------
Gross profit -- 213,844 7,133 -- 220,977
Selling, general and administrative expenses 1,839 120,862 7,389 -- 130,090
-------- -------- ------- -------- ----------
Operating income (loss) (1,839) 92,982 (256) -- 90,887
Investment income 1,001 117 48 -- 1,166
Interest expense (21,049) (699) (127) -- (21,875)
-------- -------- ------- -------- ----------
Income (loss) before income taxes (21,887) 92,400 (335) -- 70,178
Income tax (benefit) expense (8,317) 35,121 (127) -- 26,677
Equity in net income of subsidiaries 57,071 -- -- (57,071) --
-------- -------- ------- -------- ----------
Net income (loss) $ 43,501 $ 57,279 $ (208) $(57,071) $ 43,501
======== ======== ======= ======== ==========
17
12. Guarantor Subsidiaries (Continued)
Summary Consolidating Statements of Income
(in thousands) Six Months Ended June 30,
-------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2004 Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $1,932,029 $60,847 $ -- $1,992,876
Total direct costs -- 1,434,770 47,818 -- 1,482,588
-------- ---------- ------- --------- ----------
Gross profit -- 497,259 13,029 -- 510,288
Selling, general and administrative expenses 2,707 268,978 10,304 -- 281,989
-------- ---------- ------- --------- ----------
Operating income (loss) (2,707) 228,281 2,725 -- 228,299
Investment income 349 1,177 13 -- 1,539
Interest expense (31,207) (2,429) (319) -- (33,955)
-------- ---------- ------- --------- ----------
Income (loss) before income taxes (33,565) 227,029 2,419 -- 195,883
Income tax (benefit) expense (12,337) 83,384 891 -- 71,938
Equity in net income of subsidiaries 145,173 -- -- (145,173) --
-------- ---------- ------- --------- ----------
Net income (loss) $123,945 $ 143,645 $ 1,528 $(145,173) $ 123,945
======== ========== ======= ========= ==========
2003
- ------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $1,584,201 $65,693 $ -- $1,649,894
Total direct costs -- 1,167,783 53,173 -- 1,220,956
-------- ---------- ------- --------- ----------
Gross profit -- 416,418 12,520 -- 428,938
Selling, general and administrative expenses 3,368 240,991 12,659 -- 257,018
-------- ---------- ------- --------- ----------
Operating income (loss) (3,368) 175,427 (139) -- 171,920
Investment income 1,346 356 52 -- 1,754
Interest expense (36,992) (1,180) (159) -- (38,331)
-------- ---------- ------- --------- ----------
Income (loss) before income taxes (39,014) 174,603 (246) -- 135,343
Income tax (benefit) expense (14,825) 66,337 (93) -- 51,419
Equity in net income of subsidiaries 108,113 -- -- (108,113) --
-------- ---------- ------- --------- ----------
Net income (loss) $ 83,924 $ 108,266 $ (153) $(108,113) $ 83,924
======== ========== ======= ========= ==========
18
12. Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheets
(in thousands)
Guarantor Non-Guarantor Omnicare, Inc.
As of June 30, 2004: Parent Subsidiaries Subsidiaries Eliminations and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 123,748 $ 42,870 $ 3,084 $ -- $ 169,702
Restricted cash -- 5,777 -- -- 5,777
Deposit with drug wholesaler -- 44,000 -- -- 44,000
Accounts receivable, net (including intercompany) -- 723,706 15,127 (6,240) 732,593
Inventories -- 311,656 5,367 -- 317,023
Other current assets 1,877 230,619 1,521 -- 234,017
---------- ---------- -------- ----------- ----------
Total current assets 125,625 1,358,628 25,099 (6,240) 1,503,112
---------- ---------- -------- ----------- ----------
Properties and equipment, net -- 137,560 8,635 -- 146,195
Goodwill -- 1,729,713 53,470 -- 1,783,183
Other noncurrent assets 35,398 146,390 11,583 -- 193,371
Investment in subsidiaries 2,850,843 -- -- (2,850,843) --
---------- ---------- -------- ----------- ----------
Total assets $3,011,866 $3,372,291 $ 98,787 $(2,857,083) $3,625,861
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $ 44,487 $ 405,622 $ 15,461 $ (6,240) $ 459,330
Long-term debt 183,077 490 -- -- 183,567
8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000
6.125% senior subordinated notes, net, due 2013 221,959 -- -- -- 221,959
4.0% contingent convertible notes, due 2033 345,000 -- -- -- 345,000
Other noncurrent liabilities 28,041 197,542 1,120 -- 226,703
Stockholders' equity 1,814,302 2,768,637 82,206 (2,850,843) 1,814,302
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders' equity $3,011,866 $3,372,291 $ 98,787 $(2,857,083) $3,625,861
========== ========== ======== =========== ==========
As of December 31, 2003:
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 134,513 $ 48,940 $ 3,960 $ -- $ 187,413
Restricted cash -- 714 -- -- 714
Accounts receivable, net (including intercompany) -- 672,315 13,708 (7,768) 678,255
Inventories -- 321,465 5,085 -- 326,550
Other current assets 954 187,363 1,839 -- 190,156
---------- ---------- -------- ----------- ----------
Total current assets 135,467 1,230,797 24,592 (7,768) 1,383,088
---------- ---------- -------- ----------- ----------
Properties and equipment, net -- 139,108 9,199 -- 148,307
Goodwill -- 1,621,645 68,913 -- 1,690,558
Other noncurrent assets 33,390 128,147 11,531 -- 173,068
Investment in subsidiaries 2,627,756 -- -- (2,627,756) --
---------- ---------- -------- ----------- ----------
Total assets $2,796,613 $3,119,697 $114,235 $(2,635,524) $3,395,021
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including intercompany) $ 15,205 $ 445,744 $ 9,579 $ (7,768) $ 462,760
Long-term debt 135,384 471 -- -- 135,855
8.125% senior subordinated notes, due 2011 375,000 -- -- -- 375,000
6.125% senior subordinated notes, net, due 2013 226,822 -- -- -- 226,822
4.0% contingent convertible notes, due 2033 345,000 -- -- -- 345,000
Other noncurrent liabilities 23,178 150,068 314 -- 173,560
Stockholders' equity 1,676,024 2,523,414 104,342 (2,627,756) 1,676,024
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders' equity $2,796,613 $3,119,697 $114,235 $(2,635,524) $3,395,021
========== ========== ======== =========== ==========
19
12. Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows
(in thousands) Six Months Ended June 30,
-----------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2004: Parent Subsidiaries Subsidiaries and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 21,405 $ 485 $ 21,890
Other (20,807) 87,413 1,295 67,901
--------- --------- ------- ---------
Net cash flows from operating activities (20,807) 108,818 1,780 89,791
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (143,545) (1,098) (144,643)
Capital expenditures -- (9,583) (254) (9,837)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust -- (5,063) -- (5,063)
Other -- 61 -- 61
--------- --------- ------- ---------
Net cash flows from investing activities -- (158,130) (1,352) (159,482)
--------- --------- ------- ---------
Cash flows from financing activities:
Borrowings on line of credit facility 190,000 -- -- 190,000
Payments on line of credit facility and term A loan (138,206) -- -- (138,206)
Payments on long-term borrowings and obligations (43) -- -- (43)
Proceeds from stock awards and exercise of stock options
and warrants, net of stock tendered in payment 6,213 -- -- 6,213
Dividends paid (4,680) -- -- (4,680)
Other (43,242) 43,242 -- --
--------- --------- ------- ---------
Net cash flows from financing activities 10,042 43,242 -- 53,284
--------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- (1,304) (1,304)
--------- --------- ------- ---------
Net decrease in cash and cash equivalents (10,765) (6,070) (876) (17,711)
Cash and cash equivalents at beginning of period - unrestricted 134,513 48,940 3,960 187,413
--------- --------- ------- ---------
Cash and cash equivalents at end of period - unrestricted $ 123,748 $ 42,870 $ 3,084 $ 169,702
========= ========= ======= =========
20
12. Guarantor Subsidiaries (Continued)
Condensed Consolidating Statements of Cash Flows - Continued
(in thousands) Six Months Ended June 30,
----------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2003: Parent Subsidiaries Subsidiaries and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 22,749 $ 431 $ 23,180
Other (7,050) 105,265 (1,365) 96,850
-------- --------- ------- ---------
Net cash flows from operating activities (7,050) 128,014 (934) 120,030
-------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses -- (489,415) (2,742) (492,157)
Capital expenditures -- (7,080) (75) (7,155)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust -- (2,672) -- (2,672)
Other -- 53 -- 53
-------- --------- ------- ---------
Net cash flows from investing activities -- (499,114) (2,817) (501,931)
-------- --------- ------- --------
Cash flows from financing activities:
Borrowings on line of credit facilities and term A loan 749,000 -- -- 749,000
Payments on line of credit facilities and term A loan (549,000) -- -- (549,000)
Proceeds from long-term borrowings 485,221 -- -- 485,221
Fees paid for financing arrangements (19,511) -- -- (19,511)
Proceeds from stock offering, net of issuance costs 178,774 -- -- 178,774
Other (377,215) 369,293 (38) (7,960)
-------- --------- ------- ---------
Net cash flows from financing activities 467,269 369,293 (38) 836,524
-------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- 1,973 1,973
-------- --------- ------- ---------
Net increase (decrease) in cash and cash equivalents 460,219 (1,807) (1,816) 456,596
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 $555,912 $ 34,384 $ 4,236 $ 594,532
======== ========= ======= =========
21
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."
Three and Six Months Ended June 30, 2004 Overview
Omnicare, Inc. ("Omnicare" or the "Company") is a leading provider of
pharmaceutical care for the elderly. Omnicare primarily serves residents in
long-term care facilities comprising approximately 1,054,000 beds in 47 states
and the District of Columbia, making it the nation's largest provider of
professional pharmacy, related pharmacy consulting and other ancillary services,
data management services and medical supplies to skilled nursing, assisted
living and other providers of healthcare services. Omnicare also provides
clinical research services for the pharmaceutical and biotechnology industries
in 29 countries worldwide.
A summary of the key operating results for the three and six month periods
ended June 30, 2004 and 2003 follows (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2004 2003 2004 2003
---------- -------- ---------- ----------
Consolidated:
Total net sales $1,010,597 $844,033 $1,992,876 $1,649,894
========== ======== ========== ==========
Net income $ 60,454 $ 43,501 $ 123,945 $ 83,924
========== ======== ========== ==========
Diluted earnings per share ("EPS") $ 0.58 $ 0.44 $ 1.18 $ 0.86
========== ======== ========== ==========
EBITDA(a) $ 126,036 $103,575 $ 255,969 $ 197,369
========== ======== ========== ==========
(a) "EBITDA" represents earnings before interest (net of investment income),
income taxes, depreciation and amortization. See "Results of Operations" for a
reconciliation of EBITDA to net cash flows from operating activities.
Sales and profitability results are discussed at the "Pharmacy Services
Segment" and "CRO Services Segment" captions below.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2004 2003 2004 2003
---------- -------- ---------- ----------
Pharmacy Services Segment:
Sales $ 976,768 $802,828 $1,925,281 $1,565,982
========== ======== ========== ==========
Operating income $ 120,549 $ 95,825 $ 243,979 $ 181,195
========== ======== ========== ==========
22
Contributing in large measure to the increase in sales was the acquisition
of SunScript in July 2003, as well as a number of smaller acquisitions,
particularly in the first half of 2004. The improved operating income was
primarily the result of increased sales, ongoing benefits of the Company's
acquisition integration efforts and productivity initiatives throughout the
Pharmacy Services segment. These factors were partially offset, as further
discussed below, by intensified pricing pressures and drug pricing issues
(including the limitation or reduction of drug-specific prices on certain
generic drugs) under various state Medicaid programs, and a shift in the
Company's payor mix toward Medicaid during the second quarter of 2004.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
CRO Services Segment:
Revenues $33,829 $41,205 $67,595 $83,912
======= ======= ======= =======
Operating income $ 3,268 $ 4,485 $ 6,476 $ 9,215
======= ======= ======= =======
Revenues and operating income in the CRO Services segment were lower in the
three and six months ended June 30, 2004 than in the same periods of 2003 due
primarily to client-driven cancellations or delays in the commencement or
continuation of certain projects in the latter half of 2003, which resulted in
lower sales during the three and six months ended June 30, 2004.
Financial Condition, Liquidity and Capital Resources
Net cash flows from operating activities for the six months ended June 30,
2004 was $89.8 million as compared with $120.0 million for the same period of
2003. Operating cash flows during the six months ended June 30, 2004 were
unfavorably impacted by a one-time deposit of $44.0 million made during the
first quarter of 2004, owing to a change in payment terms under the Company's
new contract with its drug wholesaler. Also unfavorably impacting operating cash
flows was a statewide administrative backup in the transfer of Medi-Cal provider
numbers affecting California-based pharmacies acquired in the SunScript and
other acquisitions, creating a temporary delay in cash receipts of approximately
$24 million through June 30, 2004. Operating cash flows, as well as borrowings
on the line of credit facilities, were used primarily for acquisition-related
payments, debt repayment, capital expenditures and dividends. During the six
months ended June 30, 2004, the Company's investing activities included the
completion of several acquisitions in its institutional pharmacy business which,
individually and in the aggregate, were not significant. Borrowings on the
Company's credit facility, net of repayments of $130.0 million, totaled
$60.0 million in the six months ended June 30, 2004 and were primarily used for
payments relating to the acquisition of businesses. The Company also paid
$8.2 million on the term A loan in the first six months of 2004. At June 30,
2004, outstanding revolving credit borrowings were $60.0 million and the balance
on the term A loan was $147.7 million.
23
NeighborCare Transaction
On June 4, 2004, Omnicare commenced a tender offer for all of the
outstanding shares of the common stock of NeighborCare, Inc. ("NeighborCare")
for $30.00 per share in cash. The transaction has a total value of approximately
$1.5 billion, which includes the assumption of NeighborCare's net debt and any
related refinancing thereof, as further described at the "NeighborCare
Transaction" caption below.
Results of Operations
The following table presents the consolidated net sales and results of
operations of Omnicare for each of the three and six months ended June 30, 2004
and 2003 (in thousands, except per share amounts).
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------------
2004 2003 2004 2003
---------- -------- ---------- -----------
Total net sales $1,010,597 $844,033 $1,992,876 $1,649,894
========== ======== ========== ===========
Net income $ 60,454 $ 43,501 $ 123,945 $ 83,924
========== ======== ========== ===========
Earnings per share:
Basic $ 0.58 $ 0.45 $ 1.19 $ 0.88
========== ======== ========== ===========
Diluted $ 0.58 $ 0.44 $ 1.18 $ 0.86
========== ======== ========== ===========
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 United States
Generally Accepted Accounting Principles ("U.S. GAAP"), and should not be
considered as a substitute for operating cash flows as a measure of liquidity or
net income as an indicator of the Company's operating performance. The Company's
calculation of EBITDA may differ from the calculation of EBITDA by others.
24
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
(in thousands) 2004 2003 2004 2003
-------- -------- --------- --------
EBITDA calculation:
Net income $ 60,454 $ 43,501 $ 123,945 $ 83,924
Add:
Interest expense, net of investment income 16,338 20,709 32,416 36,577
Income taxes 35,501 26,677 71,938 51,419
Depreciation and amortization 13,743 12,688 27,670 25,449
-------- -------- --------- --------
EBITDA $126,036 $103,575 $ 255,969 $197,369
======== ======== ========= ========
EBITDA reconciliation to net cash flows
from operating activities:
EBITDA $126,036 $103,575 $ 255,969 $197,369
(Subtract)/Add:
Interest expense, net of investment income (16,338) (20,709) (32,416) (36,577)
Income taxes (35,501) (26,677) (71,938) (51,419)
Changes in assets and liabilities, net of effects
from acquisition of businesses (29,857) 39,921 (108,801) (32,426)
Provision for doubtful accounts 11,414 12,135 21,890 23,180
Deferred tax provision 10,279 5,270 25,087 18,739
Write-off of debt issuance costs -- 1,164 -- 1,164
-------- -------- --------- --------
Net cash flows from operating activities $ 66,033 $114,679 $ 89,791 $120,030
======== ======== ========= ========
Three Months Ended June 30, 2004 vs. 2003
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $976.8 million for
the three months ended June 30, 2004, exceeding the 2003 amount of $802.8
million by $174.0 million, or 21.7%. At June 30, 2004, Omnicare served long-term
care facilities comprising approximately 1,054,000 beds as compared with
approximately 938,000 beds served at June 30, 2003. Contributing in large
measure to the increase in sales and in beds served was the acquisition of
SunScript in July 2003, as discussed below, as well as other smaller
acquisitions, particularly in the first half of 2004. Additionally, Pharmacy
Services sales increased due to growth in new business, increasing occupancy in
many areas, the continued implementation and expansion of the Company's clinical
and other service programs, drug price inflation and the further market
penetration of newer branded drugs targeted at the diseases of the elderly,
which often carry higher prices but are significantly more effective in reducing
overall healthcare costs than those they replace, partially offset by the use of
generic drugs. Also offsetting, in part, the increase in sales, the Pharmacy
Services segment results and margins were unfavorably impacted by three factors.
First, competitive pricing pressures intensified in the institutional pharmacy
market. Second, the Company experienced a reduction or limitation on the pricing
of certain generic drugs under various state Medicaid programs. Third, the
Company experienced a shift in its payor mix toward Medicaid during the quarter
which, as lower-margin business, had an
25
unfavorable impact on the Company's margins. While the Company is working to
mitigate the impact of these aforementioned factors, there can be no assurance
that these or other pricing and governmental reimbursement pressures will not
continue to impact the Pharmacy Services segment financial results.
Operating income of the Pharmacy Services segment was $120.5 million in the
second quarter of 2004, a $24.7 million improvement as compared with the $95.8
million earned in the comparable period of 2003. The improved operating income
was primarily the result of increased sales and the overall synergies from the
integration of the NCS HealthCare, Inc. ("NCS") business and, to a lesser
extent, the SunScript acquisition, as well as productivity initiatives
throughout the Pharmacy Services segment. Although operating margins were
initially unfavorably impacted by the addition of these lower-margin businesses,
the integration efforts resulted in drug purchasing improvements, consolidation
of redundant pharmacy locations and economies of scale, which serve to leverage
the Company's operating cost structure. Partially offsetting the improved
operating income and margins in the three months ended June 30, 2004 was the
previously mentioned increased pricing pressures and drug-specific pricing
issues, and a shift in payor mix toward lower-margin Medicaid business. Further,
Pharmacy Services operating income in the quarter benefited from a one-time net
operating profit impact of $7.7 million attributable to the Company's ancillary
information resource offerings, which was offset by the impact of one-time
charges of approximately $6 million, primarily comprised of the settlement of
contractual issues with certain customers as well as two state Medicaid audits.
On July 15, 2003, Omnicare acquired the SunScript pharmacy services
business from Sun Healthcare Group, Inc. The acquisition, accounted for as a
purchase business combination, included cash consideration and transaction costs
of approximately $83 million. Up to an additional $15.0 million may become
payable post-closing, subject to adjustment.
At the time of the acquisition, SunScript provided pharmaceutical products
and related consulting services to skilled nursing and assisted living
facilities comprised of approximately 43,000 beds located in 19 states
(excluding beds in Sun Healthcare facilities that Sun Healthcare is divesting in
unrelated transactions). SunScript served these facilities through its network
of 31 long-term care pharmacies. The net assets and operating results of
SunScript have been included from the date of acquisition in the Company's
financial statements.
On January 15, 2003, Omnicare closed its acquisition of NCS. The
acquisition of NCS, accounted for as a purchase business combination, included
cash consideration and transaction costs of approximately $500 million. The cash
consideration included the payoff of certain NCS debt totaling approximately
$325.5 million, which was retired by Omnicare immediately following the
acquisition.
At the time of the acquisition, NCS provided professional pharmacy and
related services to long-term care facilities, including skilled nursing and
assisted living facilities in 33 states, and managed hospital pharmacies in 10
states. NCS added approximately 182,000 beds served in the first quarter of
2003. The net assets and operating results of NCS have been included from the
date of acquisition in the Company's financial statements.
26
As part of ongoing operations, the Company and its customers are subject to
regulatory changes in the level of reimbursement received from the Medicare and
Medicaid programs. On July 30, 2004, the Centers for Medicare and Medicaid
Services ("CMS") issued a notice announcing a 2.8 percent payment increase to
Medicare skilled nursing facilities, effective October 1, 2004. CMS also stated
that it is still working on refinements to the case-mix classification system,
and therefore the temporary add-ons to the payment rates currently in effect
will continue through fiscal year 2005. In addition, healthcare funding issues,
including pressures on federal and state Medicaid budgets due to the economy,
coupled with growth in enrollees, the escalation in drug costs owing to higher
drug utilization as the population ages and the introduction of new, more
effacious, albeit more expensive medications, have led to decreasing
reimbursement rates and other cost control measures in certain states. On May
28, 2003, President Bush signed into law the "Jobs and Growth Reconciliation Tax
Act," which included $20 billion in temporary aid to the states, $10 billion of
which was earmarked for state Medicaid programs. This additional funding expired
on June 30, 2004. Legislation has been introduced in Congress to extend the
supplemental funding, but there is no assurance that such legislation will be
adopted, or if adopted, the effective date of such additional funding. Economic
conditions have improved in many areas; however, some states continue to
experience budget shortfalls or other funding pressures, and they may consider
implementing further reductions in Medicaid reimbursement and other cost control
measures. Such pricing pressures are likely to continue or escalate if economic
recovery does not fully emerge, and there can be no assurance that such
occurrence will not continue to have an adverse impact on the Company's
business.
In December 2003, Congress enacted the Medicare Prescription Drug
Improvement and Modernization Act of 2003 ("MMA"), which includes a major
expansion of the Medicare prescription drug benefit under a new Medicare Part D.
Under the MMA, Medicare beneficiaries may enroll in prescription drug plans
offered by private entities, which will provide coverage of outpatient
prescription drugs. Beginning in 2006, Medicare beneficiaries who are also
entitled to benefits under a state Medicaid program (so-called "dual eligibles")
will have their prescription drug costs covered by the new Medicare drug
benefit, including nursing home residents served by the Company whose drug costs
are currently covered by state Medicaid programs. Implementation of the new
Medicare drug benefit requires regulations. On August 3, 2004, CMS issued a
proposed rule to implement the new Part D drug benefit. The proposed rule would
permit long-term care pharmacies to provide covered Part D drugs to enrollees of
the new Part D plans. Under the proposed rule, long-term care pharmacies could
participate on an in-network basis by contracting directly with the plan
sponsor, or on an out-of-network basis. The Company is currently analyzing the
proposed rule. CMS has requested comments on many provisions of its proposed
rule, including those relating to long-term care pharmacies; such comments are
due October 4. CMS expects to issue the final rule in early 2005. Given the
recent publication of the proposed rule and potential revisions to the rule when
issued in final form, the Company cannot determine at this time the impact of
the proposed rule, nor the final rule, on the Company's business. In addition,
the Secretary of the Department of Health and Human Services is required to
conduct a study of current standards of practice for pharmacy services provided
to patients in long-term care settings, and, among other things, make
recommendations regarding necessary actions and appropriate reimbursement to
ensure the provision of prescription drugs to Medicare
27
beneficiaries in nursing facilities consistent with existing patient safety and
quality of care standards. Until the Part D benefit goes into effect on January
1, 2006, Medicare beneficiaries can receive assistance with their outpatient
prescription drug costs beginning in June 2004 through a new prescription drug
discount card program, which gives enrollees access to negotiated discounted
prices for prescription drugs. PBM Plus Inc., an Omnicare subsidiary, has been
selected by CMS as an endorsed sponsor to offer a Medicare prescription drug
discount card. PBM Plus also received a special endorsement for long-term care
to administer a transitional assistance benefit of $600 per year to certain
qualified low-income seniors not currently receiving drug benefits from the
Medicare and Medicaid programs. In addition, Omnicare is a member, together with
several other national institutional pharmacies, in Long Term Care Pharmacy
Alliance, LLC, which has also received the special long-term care endorsement
from CMS to administer the transitional assistance benefit. The MMA also reforms
the Medicare Part B prescription drug payment methodology. The Company's
revenues for drugs dispensed under Medicare Part B are not significant in
comparison to total revenues. The MMA also includes provisions that will
institute administrative reforms designed to improve Medicare program
operations. It is uncertain at this time the impact that the MMA's legislative
reforms ultimately will have on the Company.
CRO Services Segment
Omnicare's CRO Services segment recorded revenues of $33.8 million for the
three months ended June 30, 2004, which were $7.4 million, or 18.0%, lower than
the $41.2 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 $4.5 million and $5.9 million
of reimbursable out-of-pockets in its CRO Services segment reported revenue and
direct cost amounts for the quarters ended June 30, 2004 and 2003, respectively.
Revenues for the three months ended June 30, 2004 were lower than in the same
prior year period largely due to the impact of client-driven cancellations or
delays in the commencement or continuation of certain projects in the latter
half of 2003, which resulted in lower sales during the three months ended June
30, 2004, and a reduction in reimbursable out-of-pockets of $1.4 million under
EITF No. 01-14.
Operating income in the CRO Services segment was $3.3 million in the second
quarter of 2004 compared with $4.5 million in the same 2003 period. Operating
income was unfavorably impacted primarily by the lower revenues. Although the
CRO Services segment experienced a year-over-year decline in revenues and
operating income, the continued productivity improvements and cost reduction
efforts led to modestly improving quarterly profitability on a sequential basis.
Further, the CRO Services segment continued to gain new business during the
second quarter. Backlog at June 30, 2004 was $199.5 million, representing an
increase of $0.9 million from the June 30, 2003 backlog of $198.6 million, and
$16.7 million from the December 31, 2003 backlog of $182.8 million due to an
increase in new business.
28
Consolidated
The Company's consolidated gross profit of $255.6 million increased $34.6
million during the second quarter of 2004 from the same prior-year period amount
of $221.0 million. Gross profit as a percentage of total net sales of 25.3% in
the three months ended June 30, 2004, was lower than the 26.2% experienced
during the same period of 2003, and the 25.9% experienced in the first quarter
of 2004. Positively impacting overall gross profit margin were the Company's
purchasing leverage associated with the procurement of pharmaceuticals due, in
part, to the completion of the integration of the NCS business and, to a lesser
extent, the SunScript business (net of the initial impact of adding these
lower-margin businesses) and benefits realized from the Company's formulary
compliance program, as well as the increased use of generic drugs. These
favorable factors were offset by the previously mentioned intensified pricing
pressures and drug pricing issues (including the limitation or reduction of
drug-specific prices on certain generic drugs) under various state Medicaid
programs, and a shift in the Company's payor mix toward Medicaid during the
second quarter of 2004. Also unfavorably impacting gross profit as a percentage
of total net sales was the further market penetration of newer branded drugs
targeted at the diseases of the elderly that typically produce higher gross
profit but lower gross profit margins.
Omnicare's selling, general and administrative ("operating") expenses for
the quarter ended June 30, 2004 of $143.3 million were higher than the
comparable year amount of $130.1 million by $13.2 million, due primarily to the
overall growth of the business, including the acquisition of SunScript as well
as other smaller acquisitions. Operating expenses as a percentage of total net
sales, however, totaled 14.2% in the second quarter 2004, representing a
decrease from the 15.4% experienced in the comparable prior-year period. This
decrease is primarily due to the realization of synergies from the NCS and
SunScript acquisitions, and the leveraging of fixed and variable overhead costs
over a larger sales base in 2004 than that which existed in 2003.
Investment income for the three months ended June 30, 2004 of $0.9 million
was marginally lower than the $1.2 million in the comparable prior year quarter.
Interest expense for the three months ended June 30, 2004 of $17.2 million
was lower than the $21.9 million in the comparable prior-year period primarily
relating to the inclusion of a call premium and the write-off of unamortized
debt issuance costs aggregating $4.1 million before taxes ($2.5 million
aftertax, or $0.02 per diluted share) in the three months ended June 30, 2003.
The call premium and the write-off of a ratable portion of the unamortized debt
issuance costs related to the Company's early redemption and retirement of
$106.5 million of its $345.0 million aggregate principal amount of 5%,
convertible subordinated debentures in the second quarter of 2003, in connection
with its refinancing transactions, as further described at the "Financial
Condition, Liquidity and Capital Resources" caption below.
The effective income tax rate was 37% in the second quarter of 2004,
slightly lower than the comparable prior year rate of 38%. The effective tax
rates in 2004 and 2003 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.
29
Six Months Ended June 30, 2004 vs. 2003
Consolidated
Total net sales for the six months ended June 30, 2004 rose to $1,992.9
million from $1,649.9 million in the comparable prior year period. Diluted
earnings per share for the six months ended June 30, 2004 were $1.18 versus
$0.86 in the same prior year period. Net income for the six months ended June
30, 2004 was $123.9 million versus $83.9 million earned in the comparable 2003
period. EBITDA totaled $256.0 million for the six months ended June 30, 2004 as
compared with $197.4 million for the same period of 2003.
Included in the 2003 second quarter was a charge of $4.1 million pretax
($2.5 million aftertax, or $0.02 per diluted share), relating to the call
premium and write-off of unamortized debt issuance costs associated with the
Company's early redemption of its 5%, $345.0 million convertible subordinated
debentures, as further described at the "Financial Condition, Liquidity and
Capital Resources" caption below.
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $1,925.3 million for
the six months ended June 30, 2004, exceeding the same prior year period amount
of $1,566.0 million by $359.3 million. Contributing in large measure to the
increase in sales was the previously discussed acquisition of SunScript in July
2003, as well as other smaller acquisitions, particularly in the first half of
2004. Additionally, Pharmacy Services sales increased due to growth in new
business, increasing occupancy in many areas, the continued implementation and
expansion of the Company's clinical and other service programs, drug price
inflation and the further market penetration of newer branded drugs targeted at
the diseases of the elderly, which often carry higher prices but are
significantly more effective in reducing overall healthcare costs than those
they replace. These factors were partially offset by intensified pricing
pressures and drug pricing issues (including the limitation or reduction of
drug-specific prices on certain generic drugs) under various state Medicaid
programs, and a shift in the Company's payor mix toward Medicaid during the
second quarter of 2004, coupled with the increasing number and usage of generic
drugs.
Operating income of the Pharmacy Services segment was $244.0 million for
the six months ended June 30, 2004, a $62.8 million improvement from the $181.2
million earned in the comparable period of 2003. The improved operating income
was primarily the result of increased sales and the overall synergies from the
integration of the NCS business and, to a lesser extent, the SunScript
acquisition, as well as productivity initiatives throughout the Pharmacy
Services segment. Although operating margins were initially unfavorably impacted
by the addition of these lower-margin businesses, the integration efforts
resulted in drug purchasing improvements, consolidation of redundant pharmacy
locations and economies of scale, which serve to leverage the Company's
operating cost structure. Partially offsetting the improved operating income in
the six months ended June 30, 2004 was the previously mentioned increased
pricing pressures and drug-specific pricing issues, and a shift in payor mix
toward lower-margin Medicaid business.
30
CRO Services Segment
Omnicare's CRO Services segment recorded revenues of $67.6 million during
the six months ended June 30, 2004, which were $16.3 million lower than the
$83.9 million recorded in the same prior year period. In accordance with EITF
No. 01-14, the Company included $9.1 million and $14.0 million of reimbursable
out-of-pockets in its CRO Services segment reported revenue and direct cost
amounts for the six months ended June 30, 2004 and 2003, respectively. Revenues
for the six months ended June 30, 2004 were lower than in the same prior year
period largely due to the impact of client-driven cancellations or delays in the
commencement or continuation of certain projects in the latter half of 2003,
which resulted in lower sales during the six months ended June 30, 2004, and a
reduction in reimbursable out-of-pockets of $4.9 million under EITF No. 01-14.
Operating income in the CRO Services segment was $6.5 million for the six
months ended June 30, 2004 compared with $9.2 million in the same 2003 period.
Operating income was unfavorably impacted primarily by the lower revenues.
Although the CRO Services segment experienced a year-over-year decline in
revenues and operating income, the continued productivity improvements and cost
reduction efforts led to improving profitability on a sequential basis. Further,
the CRO Services segment continued to gain new business during the first six
months of 2004.
Consolidated
The Company's consolidated gross profit of $510.3 million increased $81.4
million during the six months ended June 30, 2004 from the same prior-year
period amount of $428.9 million. Gross profit as a percentage of total net sales
of 25.6% in the six months ended June 30, 2004, was lower than the 26.0%
experienced during the same period of 2003. Positively impacting overall gross
profit margin were the Company's purchasing leverage associated with the
procurement of pharmaceuticals due, in part, to the completion of the
integration of the NCS business and, to a lesser extent, the SunScript business
(net of the initial impact of adding these lower-margin businesses) and benefits
realized from the Company's formulary compliance program, as well as the
increased use of generic drugs. These favorable factors were offset by the
previously mentioned intensified pricing pressures and drug pricing issues
(including the limitation or reduction of drug-specific prices on certain
generic drugs) under various state Medicaid programs, and a shift in the
Company's payor mix toward Medicaid during the second quarter of 2004. Also
unfavorably impacting gross profit as a percentage of total net sales was the
further market penetration of newer branded drugs targeted at the diseases of
the elderly that typically produce higher gross profit but lower gross profit
margins.
Omnicare's operating expenses for the six months ended June 30, 2004 of
$282.0 million were higher than the comparable year amount of $257.0 million by
$25.0 million, due primarily to the overall growth of the business, including
the acquisition of SunScript as well as other smaller acquisitions. Operating
expenses as a percentage of total net sales, however, totaled 14.1% in the six
months ended June 30, 2004, representing a decrease from the 15.6% experienced
in the comparable prior-year period. This decrease is primarily due to the
31
realization of synergies from the NCS and SunScript acquisitions, and the
leveraging of fixed and variable overhead costs over a larger sales base in 2004
than that which existed in 2003.
Investment income for the six months ended June 30, 2004 of $1.5 million
was marginally lower than the $1.8 million in the comparable prior year period.
Interest expense for the six months ended June 30, 2004 of $34.0 million
was lower than the $38.3 million in the comparable prior-year period primarily
relating to the inclusion of the previously mentioned call premium and
write-off of a ratable portion of the unamortized debt issuance costs relating
to the Company's early redemption and retirement of a portion of its 5%
convertible subordinated debentures, totaling $4.1 million pretax ($2.5 million
aftertax, or $0.02 per diluted share).
The effective income tax rate was 36.7% in the year-to-date 2004 period,
slightly lower than the comparable prior year rate of 38%. The effective tax
rates in 2004 and 2003 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 Program
In connection with the previously disclosed second phase of its
productivity and consolidation initiative (the "Phase II Program"), the Company
had liabilities of $4.1 million at December 31, 2003, of which $0.7 million was
utilized in the six months ended June 30, 2004. The remaining liabilities at
June 30, 2004 of $3.4 million represent amounts not yet paid relating to actions
taken (consisting primarily of lease payments), and will be adjusted as these
matters are settled.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2004 were $175.5 million compared
with $188.1 million at December 31, 2003 (including restricted cash amounts of
$5.8 million and $0.7 million, respectively).
The Company generated positive net cash flows from operating activities of
$89.8 million during the six months ended June 30, 2004, compared with net cash
flows from operating activities of $120.0 million during the six months ended
June 30, 2003. Net cash flows from operating activities during the six months
ended June 30, 2004 was driven primarily by earnings growth, as previously
discussed under the "Results of Operations" caption above. Impacting cash flow
during the six months ended June 30, 2004 was a one-time deposit of $44.0
million made during the first quarter of 2004, owing to a change in payment
terms under the Company's new contract with its drug wholesaler. Also, a
statewide administrative backup in the transfer of
32
Medi-Cal provider numbers affecting California-based pharmacies acquired in the
SunScript and other acquisitions created a temporary delay in cash receipts of
approximately $24 million through June 30, 2004. Operating cash flows, as well
as borrowings on the line of credit facilities, were used primarily for
acquisition-related payments, debt repayment, capital expenditures and
dividends.
Net cash used in investing activities was $159.5 million and $501.9 million
for the six months ended June 30, 2004 and 2003, respectively. Acquisitions of
businesses required cash payments of $144.6 million (including amounts payable
pursuant to acquisition agreements relating to pre-2004 acquisitions) in 2004,
which were primarily funded by borrowings under the Company's credit facility
and existing cash balances. Acquisitions of businesses during 2003 required
$492.2 million of cash payments (including amounts payable pursuant to
acquisition agreements relating to pre-2003 acquisitions) which were primarily
funded by borrowings under the Company's then existing revolving credit
facility. Omnicare's capital requirements are primarily comprised of its
acquisition program, including the possible acquisition of NeighborCare, Inc.
which is discussed below under the caption "NeighborCare Transaction," and
capital expenditures, largely relating to investments in the Company's
information technology systems.
Net cash provided by financing activities was $53.3 million for the six
months ended June 30, 2004. Borrowings on the credit facility, net of repayments
of $130.0 million, totaled $60.0 million in the six months ended June 30, 2004
and were primarily used for payments relating to the acquisition of businesses.
The Company also paid $8.2 million on the term A loan in the six months ended
June 30, 2004. At June 30, 2004, outstanding revolving credit borrowings were
$60.0 million and the balance on the term A loan was $147.7 million. Net cash
provided by financing activities was $836.5 million for the six months ended
June 30, 2003. In connection with the aforementioned NCS acquisition, the
Company borrowed $499.0 million under its then existing revolving credit
facility in the first quarter of 2003. The Company also completed its
refinancing plan in June 2003, as discussed below, in which it raised $1,033.6
million. Partially offsetting these borrowings were payments on debt of $549.0
million during the six months ended June 30, 2003, as well as the early
redemption and retirement of $106.5 million of the 5% convertible subordinated
debentures due 2007 ("5% Convertible Debentures") in the second quarter of 2003.
On May 18, 2004, the Company's Board of Directors declared a quarterly cash
dividend of 2.25 cents per share for an indicated annual rate of 9 cents per
common share for 2004. Aggregate dividends of $4.7 million paid during the six
months ended June 30, 2004 were relatively consistent with those paid in the
comparable prior year period.
NeighborCare Transaction
On June 4, 2004, Omnicare commenced a tender offer for all of the
outstanding shares of the common stock of NeighborCare for $30.00 per share in
cash. The transaction has a total value of approximately $1.5 billion, which
includes the assumption of NeighborCare's net debt and any related refinancing
thereof. The acquisition of NeighborCare is expected to be financed with
proceeds from a $2.4 billion commitment letter the Company has secured in
anticipation of
33
the transaction or from such other financings that are sufficient, together with
cash on hand, to consummate the tender offer and the proposed merger. The
Company's $2.4 billion commitment letter consists of a $600 million five-year
revolving credit facility, a $700 million five-year senior term A loan facility
and a $1.1 billion 364-day facility. On July 13, 2004, Omnicare announced that
it received a request for additional information from the Federal Trade
Commission ("FTC") relating to its filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 ("HSR Act") in connection with its tender offer for
NeighborCare. The request extends the waiting period under the HSR Act during
which the FTC is permitted to review the proposed transaction until 10 days
after Omnicare has substantially complied with the request. Omnicare is
continuing to work with the FTC with respect to the filing. The Company's tender
offer is scheduled to expire at 5:00 p.m., New York City time, on August 31,
2004, unless extended.
Disclosures About Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations
At June 30, 2004, the Company had one unconsolidated entity, Omnicare
Capital Trust I (the "Trust"), which was established for the purpose of
facilitating the convertible trust preferred securities offering, due 2033
("trust PIERS" or "Preferred Income Equity Redeemable Securities"). For
financial reporting purposes, the Trust is treated as an equity method
investment of Omnicare. The Trust is a 100%-owned finance subsidiary of the
Company. The Company has fully and unconditionally guaranteed the securities of
the Trust. The contingent convertible notes issued by the Company to the Trust
in connection with the issuance by the Trust of the trust PIERS are presented as
a separate line item on Omnicare's consolidated balance sheet, and the related
disclosures concerning the trust PIERS, the guarantee and the contingent
convertible notes are included in Omnicare's notes to consolidated financial
statements. Omnicare records interest payable to the Trust as interest expense
in its consolidated statement of income.
At June 30, 2004, the Company had no other unconsolidated entities, or any
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which might have been established for the purpose
of facilitating off-balance sheet arrangements.
Except for the Company's long-term debt and purchase obligations,
Omnicare's contractual obligations did not significantly change from December
31, 2003. The following table sets forth the Company's contractual long-term
debt and purchase obligations at June 30, 2004 to reflect changes from December
31, 2003 (particularly relating to long-term debt obligations, including the net
borrowings on the credit facility of $60.0 million during the six months ended
June 30, 2004, as well as the impact of payments on the term A loan of $8.2
million). The table summarizes the effect such long-term debt obligations are
expected to have on the Company's liquidity and cash flows in future periods.
34
Contractual Long-Term Debt and Purchase Obligations at June 30, 2004 (in
thousands):
Less Than After 5
Total 1 Year 1-3 Years 4-5 Years Years
---------- --------- --------- --------- --------
Long-term debt obligations(a) $1,177,692 $24,615 $183,077 $ -- $970,000
========== ======= ======== ====== ========
Purchase obligations(b) $ 39,184 $33,184 $ 4,000 $2,000 $ --
========== ======= ======== ====== ========
(a) The above long-term debt obligation amounts represent the principal portion
of the associated debt obligations.
(b) Purchase obligations primarily consist of open inventory purchase orders,
as well as obligations for other goods and services, at period end.
During the second quarter of 2003, the Company completed its offering of
$250.0 million aggregate principal amount of 6.125% senior subordinated notes
due 2013 ("6.125% Senior Notes"), issued at par, and 6,468,750 shares of common
stock, $1 par value, at $29.16 per share for gross proceeds of approximately
$189 million, and the offering, through the Trust, of $345.0 million aggregate
principal amount of convertible trust preferred securities due 2033.
In early 2001, the Company entered into a three-year syndicated $500.0
million revolving line of credit facility (the "Revolving Credit Facility"),
including a $25.0 million letter of credit subfacility, with various lenders. In
January 2003, the Company borrowed $499.0 million under the Revolving Credit
Facility to finance its acquisition of NCS (see Note 4 of the Notes to
Consolidated Financial Statements). The Revolving Credit Facility was retired in
connection with the mid-2003 refinancing transactions, as further discussed
below.
In connection with the mid-2003 refinancings, the Company entered into a
new, four-year $750.0 million credit facility ("Credit Facility") consisting of
a $250.0 million term A loan commitment and a $500.0 million revolving credit
commitment, including a $25.0 million letter of credit subfacility. The new
Credit Facility bears interest at the Company's option at a rate equal to
either: (i) the London Interbank Offered Rate ("LIBOR") plus a margin that
varies depending on certain ratings on the Company's senior long-term debt; or
(ii) the higher of (a) the prime rate or (b) the sum of the federal funds
effective rate plus 0.50%. Additionally, the Company is charged a commitment fee
on the unused portion of the revolving credit portion of the Credit Facility,
which also varies depending on such ratings. At June 30, 2004, the interest rate
was LIBOR plus 1.375% and the commitment fee was 0.375%. There is no utilization
fee associated with the Credit Facility.
The Company used the net proceeds from the 6.125% Senior Notes offering and
borrowings of $250.0 million under the term A loan portion of the new Credit
Facility to repay the balance of the Company's existing Revolving Credit
Facility of $474.0 million, with remaining proceeds being used for general
corporate purposes. The Company paid down $8.2 million on the term A loan during
the six months ended June 30, 2004. The $147.7 million outstanding at June 30,
2004 under the term A loan is due in quarterly installments, in varying amounts,
through 2007, with approximately $24.6 million due within one year. There was
$60.0 million outstanding as of June 30, 2004 under the revolving credit
commitment of the Credit Facility.
35
The Company used a portion of the net proceeds from the common stock
offering and the net proceeds from the trust PIERS offering to redeem the entire
outstanding $345 million aggregate principal amount of the Company's 5%
Convertible Debentures, with remaining proceeds being used for general corporate
purposes. A portion of the 5% Convertible Debentures (approximately $106.5
million) were redeemed in June 2003 and the remaining 5% Convertible Debentures
outstanding were redeemed by July 14, 2003. In connection with the early
redemption of the 5% Convertible Debentures, a charge of $4.1 million pretax
($2.5 million aftertax, or $0.02 per diluted share) was recognized in interest
expense in the second quarter of 2003, representing the proportionate share of
the call premium and the write-off of unamortized debt issuance costs.
In connection with its offering of $250.0 million of 6.125% Senior Notes
due 2013, during the second quarter of 2003, the Company entered into an
interest rate swap agreement ("Swap Agreement") on all $250.0 million of its
aggregate principal amount of the 6.125% Senior Notes. Under the Swap Agreement,
which hedges against exposure to long-term U.S. dollar interest rates, the
Company will receive a fixed rate of 6.125% and pay a floating rate based on
LIBOR with a maturity of six months plus a spread of 2.27%. The floating rate is
determined semi-annually, in arrears, two London Banking Days prior to the first
of each December and June. The Company records interest expense on the 6.125%
Senior Notes at the floating rate. The estimated LIBOR-based floating rate was
4.17% at June 30, 2004. The Swap Agreement, which matches the terms of the
6.125% Senior Notes, is designated and accounted for as a fair value hedge. The
Company is accounting for the Swap Agreement in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended ("SFAS 133"), so changes in
the fair value of the Swap Agreement are offset by changes in the recorded
carrying value of the related 6.125% Senior Notes. The fair value of the
Swap Agreement of $28.0 million at June 30, 2004 is recorded as a noncurrent
liability and a reduction to the carrying value of the related 6.125% Senior
Notes.
In connection with the offering of the trust PIERS in the second quarter of
2003, the Company issued a corresponding amount of contingent convertible notes
due 2033 to the Trust. The Trust is a 100%-owned finance subsidiary of the
Company. The Company has fully and unconditionally guaranteed the securities
of the Trust. The trust PIERS offer fixed cash distributions at a rate
of 4.0% per annum payable quarterly, and a fixed conversion price of $40.82
under a contingent conversion feature whereby the holders may convert their
trust PIERS if the closing sales price of Omnicare common stock for a
predetermined period, beginning with the quarter ending September 30, 2003, is
more than 130% of the then-applicable conversion price or, during a
predetermined period, if the daily average of the trading prices for the trust
PIERS is less than 105% of the average of the conversion values for the trust
PIERS through 2028 (98% for any period thereafter through maturity). The trust
PIERS also will pay contingent distributions, commencing with the quarterly
distribution period beginning June 15, 2009, if the average trading prices of
the trust PIERS for a predetermined period equals 115% or more of the stated
liquidation amount of the trust PIERS. Embedded in the trust PIERS are two
derivative instruments, specifically, a contingent interest provision and a
contingent conversion parity provision. The embedded derivatives are
periodically valued by a third-party advisor, and at June 30, 2004, the values
of both derivatives were not material. However, the values are subject to
change, based on market conditions, which could affect the Company's future
financial position, cash flows and results of
36
operations. Omnicare irrevocably and unconditionally guarantees, on a
subordinated basis, certain payments to be made by the Trust in connection with
the trust PIERS.
The Company believes that net cash flows from operating activities, credit
facilities and other short- and long-term debt financings, if any, will be
sufficient to satisfy its future working capital needs, acquisition contingency
commitments, debt servicing, capital expenditures and other financing
requirements for the foreseeable future. Although the Company has no current
plans to refinance its indebtedness, issue additional indebtedness, or issue
additional equity, other than those associated with the tender offer for
NeighborCare, discussed above at the "NeighborCare Transaction" caption, the
Company believes that external sources of financing are readily available and
will access them as it deems appropriate.
Recently Issued Accounting Standards
In July 2004, the EITF released the draft abstract for EITF Issue No. 04-8,
"The Effect of Contingently Convertible Debt on Diluted Earnings per Share"
("EITF No. 04-8"). The proposal would require contingently convertible debt
instruments to be included in diluted earnings per share, if dilutive,
regardless of whether the market-price contingency is met. The EITF is currently
deliberating on EITF No. 04-8. As drafted, the proposal would be applied by
retroactively restating previously reported diluted earnings per share. It is
estimated that the proposed EITF No. 04-8 would have reduced Omnicare's diluted
earnings per share by approximately $0.05 for the six months ended June 30,
2004, if it had been effective during this period.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Regarding Forward-Looking Information
In addition to historical information, this report contains certain
statements that constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are made on the basis of management's views and assumptions regarding
business performance as of the time the statements are made, and management does
not undertake any obligation to update these statements. These forward-looking
statements include, but are not limited to, all statements regarding the intent,
belief or current expectations regarding the matters discussed or incorporated
by reference in this document (including statements as to "beliefs,"
"expectations," "anticipations," "intentions" or similar words) and all
statements which are not statements of historical fact. Forward-looking
statements in this report include, but are not limited to, the following:
expectations concerning the Company's financial performance, results of
operations, sales, earnings or business outlook; trends in the long-term
healthcare and contract research industries generally; expectations concerning
the Company's ability to leverage its core business; anticipated growth in
alternative institutional markets such as correctional facilities, mental health
and personal care or supportive living facilities; expectations concerning
continued relative stability in the operating environment in the long-term care
industry; the ability to leverage the Company's CRO business and its core
pharmacy business as anticipated; volatility in the CRO business; anticipated
business performance of the CRO; expectations in the CRO business resulting from
streamlining and globalization efforts, the Company's unique capabilities in the
geriatric market and strength of
37
presence in the drug development marketplace; trends in healthcare funding
issues, including, but not limited to, state Medicaid budgets, enrollee
eligibility, escalating drug prices due to higher utilization among seniors and
the aging of the population; expectations concerning increasing Medicare
admissions and improving occupancy rates; the introduction of more expensive
medications and the increasing use of generic medications; the impact of any
changes in healthcare policy relating to the future funding of the Medicaid and
Medicare programs; the cost-effectiveness of pharmaceuticals in treating chronic
illnesses for the elderly; the impact of the Medicare drug benefit, signed into
law in December 2003 and effective in 2006, and its implementing regulations;
the effect of any changes and considerations in long-term healthcare funding
policies for Medicare and Medicaid programs; the ability of the Company to
utilize its expertise in geriatric pharmaceutical care and pharmaceutical cost
management and its database on drug utilization and outcomes in the elderly to
meet the anticipated challenges of the healthcare environment and the
implementation of the Medicare drug benefit; the effectiveness of the Company's
growth strategy in allowing the Company to maximize cash flow, maintain a strong
financial position, enhance the efficiency of its operations and continue to
develop the Company's franchise in the geriatric pharmaceutical market; the
ability of expansion in the Company's core business to provide the Company
greater ability to leverage its clinical services and information business,
thereby enhancing cost advantages in the institutional pharmacy market; and
expectations concerning opportunities for future growth. These forward-looking
statements, together with other statements that are not historical, involve
known and unknown risks, uncertainties, contingencies and other factors that
could cause results, performance or achievements to differ materially from those
stated. Such risks, uncertainties, contingencies and other factors, many of
which are beyond the control of the Company, include, but are not limited to:
overall economic, financial, political and business conditions; trends in the
long-term healthcare and contract research industries; competition in the
pharmaceutical, long-term care and contract research industries; the impact of
consolidation in the pharmaceutical and long-term care industries; trends in
long-term care occupancy rates and demographics; the ability to attract new
clients and service contracts and retain existing clients and service contracts;
trends for the continued growth of the Company's businesses; expectations
concerning the development and performance of the Company's informatics
business; the effectiveness of the Company's formulary compliance program;
trends in drug pricing, including the impact and pace of pharmaceutical price
increases; delays and reductions in reimbursement by the government and other
payors to customers and to the Company as a result of pressures on federal and
state budgets or for other reasons; the overall financial condition of the
Company's customers; the ability of the Company to assess and react to the
financial condition of its customers; the effectiveness of the Company's
pharmaceutical purchasing programs and its ability to obtain discounts and
manage pharmaceutical costs; the ability of vendors and business partners to
continue to provide products and services to the Company; the continued
successful integration of acquired companies and the ability to realize
anticipated sales, economies of scale, cost synergies and profitability; the
continued availability of suitable acquisition candidates; pricing and other
competitive factors in the industry; increases or decreases in reimbursement
rates and the impact of other cost control measures; the impact on the Company's
sales, profits and margins resulting from market trends in the use of newer
branded drugs versus generic drugs; the number and usage of generic drugs and
price competition in the drug marketplace; the ability to attract and retain
needed management; competition for qualified staff in the healthcare industry;
the impact and pace of technological advances; the ability to obtain or maintain
rights to data,
38
technology and other intellectual property; the demand for the Company's
products and services; variations in costs or expenses; the ability to implement
productivity, consolidation and cost reduction efforts and to realize
anticipated benefits; the ability of clinical research projects to produce
revenues in future periods; the ability to benefit from streamlining and
globalization efforts at the CRO; trends concerning CRO backlog; the
effectiveness of the Company's implementation and expansion of its clinical and
other service programs; the effect of new legislation, government regulations,
and/or executive orders, including those relating to reimbursement and drug
pricing policies and changes in the interpretation and application of such
policies; the impact of the Medicare drug benefit and its implementing
regulations; legislation and regulations affecting payment and reimbursement
rates for skilled nursing facilities; trends in federal and state budgets and
their impact on Medicaid reimbursement rates; government budgetary pressures and
shifting priorities; the Company's ability to adjust to federal and state budget
shortfalls; efforts by payors to control costs; the failure of the Company or
the long-term care facilities it serves to obtain or maintain required
regulatory approvals or licenses; loss or delay of contracts pertaining to the
CRO business for regulatory or other reasons; the outcome of litigation;
potential liability for losses not covered by, or in excess of, insurance; the
impact of differences in actuarial assumptions and estimates pertaining to
employee benefit plans; events or circumstances which result in an impairment of
goodwill; market conditions; the outcome of audit, compliance, administrative or
investigatory reviews; volatility in the market for the Company's stock and in
the financial markets generally; access to adequate capital and financing;
changes in international economic and political conditions and currency
fluctuations between the U.S. dollar and other currencies; changes in tax laws
and regulations; changes in accounting rules and standards; and other risks and
uncertainties described in the Company's reports and filings with the Securities
and Exchange Commission. Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect, the Company's
actual results, performance or achievements could differ materially from those
expressed in, or implied by, such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Except as otherwise required by law, the
Company does not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
39
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 June 30, 2004
include $147.7 million outstanding under the term A loan portion, and $60.0
million drawn on the revolving credit commitment portion, of its June 2003
four-year, variable-rate Credit Facility at an interest rate of LIBOR plus
1.375%, or 2.68% at June 30, 2004 (a 100 basis point change in the interest rate
would impact pretax interest expense by approximately $2.1 million per year);
$375.0 million outstanding under its fixed-rate 8.125% senior subordinated notes
("8.125% Senior Notes"), due 2011; $250.0 million outstanding under its
fixed-rate 6.125% Senior Notes, due 2013; and $345.0 million outstanding under
its 4.0% fixed-rate convertible debentures (the "4.0% Convertible Debentures"),
due 2033. In connection with its offering of $250.0 million of 6.125% Senior
Notes, during the second quarter of 2003, the Company entered into a Swap
Agreement on all $250.0 million of its aggregate principal amount of the 6.125%
Senior Notes. Under the Swap Agreement, which hedges against exposure to
long-term U.S. dollar interest rates, the Company will receive a fixed rate of
6.125% and pay a floating rate based on LIBOR with a maturity of six months plus
a spread of 2.27%. The estimated LIBOR-based floating rate was 4.17% at June 30,
2004 (a 100 basis point change in the interest rate would impact pretax interest
expense by approximately $2.5 million per year). The Swap Agreement, which
matches the terms of the 6.125% Senior Notes, is designated and accounted for as
a fair value hedge. The Company is accounting for the Swap Agreement in
accordance with SFAS 133, as amended, so changes in the fair value of the Swap
Agreement are offset by changes in the recorded carrying value of the related
6.125% Senior Notes. The fair value of the Swap Agreement of $28.0 million at
June 30, 2004 is recorded as a noncurrent liability and a reduction to the
carrying value of the related 6.125% Senior Notes. At June 30, 2004, the fair
value of Omnicare's Credit Facility approximates its carrying value, and the
fair value of the 8.125% Senior Notes, 6.125% Senior Notes and 4.0% Convertible
Debentures is approximately $401.3 million, $238.8 million and $428.0 million,
respectively.
Embedded in the trust PIERS are two derivative instruments, specifically, a
contingent interest provision and a contingent conversion parity provision. The
embedded derivatives are periodically valued by a third-party advisor, and at
June 30, 2004, the values of both derivatives were not material. However, the
values are subject to change, based on market conditions, which could affect the
Company's future financial position, cash flows and results of operations.
The Company has operations and revenue that occur outside of the U.S. and
transactions that are settled in currencies other than the U.S. dollar, exposing
it to market risk related to changes in foreign currency exchange rates.
However, the substantial portion of the 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.
40
ITEM 4. CONTROLS AND PROCEDURES
(a) Based on a recent evaluation, as of the end of the period covered by
this Quarterly Report on Form 10-Q, the 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-15(e) and 15d-15(e))
are effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
periodic reports filed or submitted under the Securities Exchange Act of 1934.
(b) There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
41
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
A summary of the Company's repurchases of Omnicare, Inc. common stock
during the quarter ended June 30, 2004 is as follows (in thousands):
Maximum Number (or
Total Number of Approximate Dollar
Total Shares Purchased as Value) of Shares that
Number of Part of Publicly May Yet Be
Shares Average Price Announced Purchased Under the
Period Purchased (a) Paid per Share Plans or Programs Plans or Programs
- ---------------- ------------- -------------- ------------------- ---------------------
April 1-30, 2004 -- $ -- -- --
May 1-31, 2004 10 40.62 -- --
June 1-30, 2004 -- -- -- --
--- --- ---
Total 10 $40.62 -- --
=== ====== === ===
(a) During the second quarter of 2004, the Company purchased 10,000 shares of
Omnicare common stock in connection with its employee benefit plans, including
purchases associated with the vesting of restricted stock awards. These
purchases were not made pursuant to a publicly announced repurchase plan or
program.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Omnicare held its Annual Meeting of Stockholders on May 18, 2004.
(b) The names of each director elected at this Annual Meeting, as well as the
corresponding number of shares voted for, and withheld from, each nominee
follows:
Votes For Votes Withheld
---------- --------------
Edward L. Hutton 89,203,749 6,070,392
Joel F. Gemunder 91,543,599 3,730,542
Charles H. Erhart, Jr. 87,211,339 8,062,802
David W. Froesel, Jr. 87,845,070 7,429,071
Sandra E. Laney 89,257,237 6,016,904
Andrea R. Lindell, DNSc, RN 90,698,910 4,575,231
Sheldon Margen, M.D. 89,248,529 6,025,612
John H. Timoney 90,234,006 5,040,135
Amy Wallman 93,730,170 1,543,971
42
(c) The Stockholders approved the Company's 2004 Stock and Incentive Plan. A
total of 62,849,252 votes were cast in favor of the proposal; 23,236,535
were cast against it; 113,572 votes abstained; and there were 9,074,782
Broker non-votes.
(d) The Stockholders ratified the appointment by the Audit Committee of the
Board of Directors of PricewaterhouseCoopers LLP as independent accountants
for the Company and its consolidated subsidiaries for the 2004 year. A
total of 92,401,205 votes were cast in favor of the proposal; 2,808,460
votes were cast against it; 64,476 votes abstained; and there were no
Broker non-votes.
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 June 30, 2004, the Company submitted, on
April 29, 2004, a Report on Form 8-K reporting that it had issued a
press release announcing its financial results for the first quarter
of 2004.
(II) During the quarter ended June 30, 2004, the Company submitted, on May
24, 2004, a Report on Form 8-K reporting that it had issued a press
release announcing its offer to acquire all of the outstanding shares
of NeighborCare, Inc.
43
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: August 9, 2004 By: /s/ David W. Froesel, Jr.
------------------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
44
INDEX OF EXHIBITS
Document Incorporated by Reference from a
Number and Description of Exhibit Previous Filing, Filed Herewith or Furnished
(Numbers Coincide with Item 601 of Regulation S-K) Herewith, as Indicated Below
- -------------------------------------------------- --------------------------------------------
(10.1) Omnicare, Inc. 2004 Stock and Incentive Appendix B to the Company's Definitive Proxy
Plan Statement for 2004 Annual Meeting of
Stockholders filed on April 9, 2004
(12) Computation of Ratio of Earnings to Fixed Filed Herewith
Charges
(31.1) Rule 13a-14(a) Certification of Chief Filed Herewith
Executive Officer of Omnicare, Inc. in
accordance with Section 302 of the
Sarbanes-Oxley Act of 2002
(31.2) Rule 13a-14(a) Certification of Chief Filed Herewith
Financial Officer of Omnicare, Inc. in
accordance with Section 302 of the
Sarbanes-Oxley Act of 2002
(32.1) Section 1350 Certification of Chief Furnished Herewith
Executive Officer of Omnicare, Inc. in
accordance with Section 906 of the
Sarbanes-Oxley Act of 2002*
(32.2) Section 1350 Certification of Chief Furnished Herewith
Financial Officer of Omnicare, Inc. in
accordance with Section 906 of the
Sarbanes-Oxley Act of 2002*
E-1
INDEX OF EXHIBITS
Document Incorporated by Reference from a
Number and Description of Exhibit Previous Filing, Filed Herewith or Furnished
(Numbers Coincide with Item 601 of Regulation S-K) Herewith, as Indicated Below
- -------------------------------------------------- --------------------------------------------
(99) Commitment Letter Agreement among JPMorgan Exhibit (b)(1) to the Schedule TO-T of the
Chase Bank, J.P. Morgan Securities Inc., Company and Nectarine Acquisition Corp. as
Lehman Commercial Paper Inc., Lehman filed with the Securities and Exchange
Brothers Inc., SunTrust Bank, SunTrust Commission on June 4, 2004
Capital Markets, Inc., Canadian Imperial
Bank of Commerce, CIBC World Markets Corp.,
Merrill Lynch Bank USA, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and
Omnicare, Inc., dated June 3, 2004
* A signed original of this written statement required by Section 906 has been
provided to Omnicare, Inc. and will be retained by Omnicare, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
E-2