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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 No. 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)
OMNICARE, INC.
1600 RIVERCENTER II
100 EAST RIVERCENTER BOULEVARD
COVINGTON, KENTUCKY 41011
(Address of Principal Executive Offices)
859-392-3300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
------------------- -----------------------------------------
Common Stock ($1.00 Par Value) New York Stock Exchange
Preferred Share Purchase Rights (No Par Value) New York Stock Exchange
4.00% Trust Preferred Income Equity Redeemable Securities issued
by Omnicare Capital Trust I and guaranteed by Omnicare, Inc. New York Stock Exchange
Series B 4.00% Trust Preferred Income Equity Redeemable
Securities issued by Omnicare Capital Trust II and guaranteed
by Omnicare, Inc. New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Aggregate market value of the registrant's voting stock held by non-affiliates,
based upon the closing price of said stock on the New York Stock Exchange
Composite Transaction Listing on the last business day of the registrant's most
recently completed second fiscal quarter (i.e., June 30, 2004) ($42.81 per
share): $4,316,217,861.
As of January 31, 2005, the registrant had 104,549,073 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Omnicare, Inc.'s ("Omnicare", the "Company" or the "Registrant")
definitive Proxy Statement for its 2005 Annual Meeting of Stockholders, to be
held May 17, 2005, are incorporated by reference into Part III of this report.
Definitive copies of its 2005 Proxy Statement will be filed with the Securities
and Exchange Commission within 120 days of the end of the Company's fiscal year.
OMNICARE, INC.
2004 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
PAGE
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 21
Item 3. Legal Proceedings............................................. 26
Item 4. Submission of Matters to a Vote of Security Holders........... 26
Executive Officers of the Company............................. 26
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities................................................. 27
Item 6. Selected Financial Data ...................................... 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 66
Item 8. Financial Statements and Supplementary Data................... 67
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 114
Item 9A. Controls and Procedures....................................... 114
Item 9B. Other Information............................................. 115
PART III
Item 10. Directors and Executive Officers of the Registrant............ 115
Item 11. Executive Compensation........................................ 116
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................. 117
Item 13. Certain Relationships and Related Transactions................ 117
Item 14. Principal Accountant Fees and Services........................ 117
PART IV
Item 15. Exhibits and Financial Statement Schedules.................... 118
As used in this document, unless otherwise specified or the context otherwise
requires, the terms "Omnicare," "Company," "its," "we," "our" and "us" refer to
Omnicare, Inc. and its consolidated subsidiaries.
PART I
ITEM 1 - BUSINESS
Background
Omnicare, Inc. ("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 1,086,000 beds in 47 states
in the United States and in Canada at December 31, 2004, 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 30 countries worldwide.
We operate in two business segments. The larger business segment, Pharmacy
Services, provides distribution of pharmaceuticals, related pharmacy consulting,
data management services and medical supplies to long-term care facilities
throughout the United States and in Canada. Pharmacy Services purchases,
repackages and dispenses pharmaceuticals, both prescription and
non-prescription, and provides computerized medical record-keeping and
third-party billing for residents in these facilities. We also provide
consultant pharmacist services, including evaluating residents' drug therapy,
monitoring the drug distribution system within the nursing facility, assisting
in compliance with state and federal regulations and providing proprietary
clinical and health management programs. In addition, our Pharmacy Services
segment provides ancillary services, such as administering medications and
nutrition intravenously and furnishing dialysis and respiratory services,
medical supplies and clinical care planning and financial software information
systems to our client facilities. Since 1989, we have been involved in a program
to acquire providers of pharmaceutical products and related pharmacy management
services and medical supplies to long-term care facilities and their residents.
Additional information regarding acquisitions is presented at Note 2
(Acquisitions) of the Notes to our 2004 Consolidated Financial Statements,
included at Item 8 of this Filing. We also provide pharmaceutical case
management services for retirees, employees and dependents who have drug
benefits under corporate-sponsored healthcare programs. In addition, we provide
operational software and support systems to long-term care pharmacy providers
across the United States. The Pharmacy Services segment has no operating
locations outside of the United States of America ("United States") and Canada.
Our other business segment is contract research organization services ("CRO
Services"). CRO Services is a leading international provider of comprehensive
product development and research services to client companies in the
pharmaceutical, biotechnology, medical device and diagnostics industries. Our
CRO Services segment provides support for the design of regulatory strategy and
clinical development of pharmaceuticals by offering comprehensive and fully
integrated clinical, quality assurance, data management, medical writing and
regulatory support for our client's drug
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development programs. As of December 31, 2004, our CRO Services segment operated
in 30 countries around the world.
Financial information regarding our business segments is presented at Note 15
(Segment Information) of the Notes to our 2004 Consolidated Financial
Statements, included at Item 8 of this Filing.
Pharmacy Services
We purchase, repackage and dispense prescription and non-prescription medication
in accordance with physician orders and deliver such prescriptions to the
nursing facility for administration to individual residents by the facility's
nursing staff. We typically service nursing homes within a 150-mile radius of
our pharmacy locations. We maintain a 24-hour, seven-day per week, on-call
pharmacist service for emergency dispensing and delivery and for consultation
with the facility's staff or the resident's attending physician.
Upon receipt of a prescription, the relevant resident information is entered
into our computerized dispensing and billing systems. At that time, the
dispensing system checks the prescription for any potentially adverse drug
interactions, duplicative therapy or resident sensitivity. When required and/or
specifically requested by the physician or patient, branded drugs are dispensed
and generic drugs are substituted in accordance with applicable state and
federal laws as requested by the physician or resident. Subject to physician
approval and oversight, and in accordance with our pharmaceutical care
guidelines, we also provide for patient-specific therapeutic interchange of more
efficacious and/or safer drugs for those presently being prescribed. See "The
Omnicare Geriatric Pharmaceutical Care Guidelines(R)" below for further
discussion.
We provide a unit-of-use drug distribution system. This means that we purchase,
repackage and dispense pharmaceuticals in single doses in tamper-resistant,
drug-specific packaging labeled for individual residents. This differs from
prescriptions filled by retail pharmacies, which typically are dispensed in
vials or other bulk packaging requiring measurement of each dose by or for the
patient. We believe the unit-of-use system improves control over drugs in the
nursing facility, reduces medication errors and improves resident compliance
with drug therapy by increasing the accuracy and timeliness of drug
administration.
Integral to our drug distribution system is our computerized medical records and
documentation system. We provide the facility with computerized medication
administration records, physician's order sheets and treatment records for each
resident. Data extracted from these computerized records is also formulated into
monthly management reports on resident care and quality assurance. We believe
the computerized documentation system, in combination with the unit-of-use drug
delivery system, results in greater efficiency in nursing time, improved
control, reduced drug waste in the facility and lower error rates in both
dispensing and administration. We believe these benefits improve drug efficacy
and result in fewer drug-related hospitalizations, thereby lowering overall
healthcare costs.
4
Consultant Pharmacist Services
Federal and state regulations mandate that long-term care facilities, in
addition to providing a source of pharmaceuticals, retain consultant pharmacist
services to monitor and report on prescription drug therapy in order to maintain
and improve the quality of resident care. The Omnibus Budget Reconciliation Act
("OBRA") implemented in 1990 sought to further upgrade and standardize care by
setting forth more stringent standards relating to planning, monitoring and
reporting on the progress of prescription drug therapy, as well as overall drug
usage. We provide consultant pharmacist services, which help clients comply with
the federal and state regulations applicable to nursing homes. The services
offered by our consultant pharmacists include:
o monthly drug regimen reviews for each resident in the facility to
assess the appropriateness and efficacy of drug therapies, including a
review of the resident's current medication usage, monitoring drug
reactions to other drugs or food, monitoring lab results and
recommending alternate therapies, dosing adjustments or discontinuing
unnecessary drugs;
o participation on the pharmacy and therapeutics, quality assurance and
other committees of client facilities, as well as periodic involvement
in staff meetings;
o monitoring and monthly reporting on overall drug usage;
o development and maintenance of pharmaceutical policy and procedures
manuals; and
o assistance to the nursing facility in complying with state and federal
regulations as they pertain to drug use.
We have also developed a proprietary software system for use by our consultant
pharmacists. The system, called OSC2OR(R) (Omnicare System of Clinical and Cost
Outcomes Retrieval), enables our pharmacists not only to perform their functions
more efficiently, but also provides the platform for consistent data retrieval
for health and outcomes management.
Additionally, we offer specialized consulting services, which help long-term
care facilities enhance care and reduce and contain costs, as well as to comply
with state and federal regulations. Under these consulting services, we offer:
o data required for OBRA and other regulatory purposes, including
reports on usage of chemical restraints known as psychotropic drugs,
antibiotic usage (infection control) and other drug usage;
o plan of care programs, which assess each patient's state of health
upon admission and monitor progress and outcomes using data on drug
usage as well as dietary, physical therapy and social service inputs;
o counseling related to appropriate drug usage and implementation of
drug protocols;
o on-site educational seminars for the nursing facility staff on topics
such as drug information relating to clinical indications, adverse
drug reactions, drug protocols and special geriatric considerations in
drug therapy and information and training on intravenous drug therapy
and updates on OBRA and other regulatory compliance issues; and
5
o nurse consultant services and consulting for dietary and medical
records.
The Omnicare Geriatric Pharmaceutical Care Guidelines(R)
In June 1994, to enhance the pharmaceutical care management services that we
offer, Omnicare introduced to our client facilities and their attending
physicians the Omnicare Geriatric Pharmaceutical Care Guidelines(R) ("Omnicare
Guidelines(R)"). We believe the Omnicare Guidelines(R) is the first drug
formulary ranking drugs by disease state according to their clinical
effectiveness independent of their cost, specifically designed for the elderly
residing in long-term care institutions and the community. The Omnicare
Guidelines(R) ranks drugs used for specific diseases as preferred, acceptable or
unacceptable based solely on their disease-specific clinical effectiveness in
treating the elderly. The formulary takes into account such factors as
pharmacology, safety and toxicity, efficacy, drug administration, quality of
life and other considerations specific to the frail elderly population residing
in facilities and for those living independently. The clinical evaluations and
rankings are developed exclusively for us by the University of the Sciences in
Philadelphia (formerly the Philadelphia College of Pharmacy), an academic
institution recognized for its expertise in geriatric long-term care. The
Omnicare Guidelines(R) is extensively reviewed and updated at least annually by
the University of Sciences in Philadelphia, taking into account, among other
factors, the latest advances as documented in the medical literature. In
addition, the Omnicare Guidelines(R) provides relative cost information
comparing the prices of the drugs to patients, their insurers or other payors of
the pharmacy bill.
As the Omnicare Guidelines(R) focuses on health benefits, rather than solely on
cost, we believe that use of the Omnicare Guidelines(R) assists physicians in
making the best clinical choices of drug therapy for the patient in a manner
that is cost efficient for the payor of the pharmacy bill. Accordingly, we
believe that the development of and compliance with the Omnicare Guidelines(R)
is important in lowering costs for SNFs operating under the federal government's
Prospective Payment System ("PPS") as well as state Medicaid programs, managed
care and other payors, including residents or their families.
Health and Outcomes Management
We have expanded upon the data in the Omnicare Guidelines(R) to develop health
and outcomes management programs targeted at major categories of disease
commonly found in the elderly, such as congestive heart failure, stroke
prevention, Alzheimer's disease, fracture prevention and pain management. These
programs seek to identify patients who may be candidates for more clinically
efficacious drug therapy and to work with physicians to optimize pharmaceutical
care for these geriatric patients. We believe these programs can enhance the
quality of care of elderly patients while reducing costs to the healthcare
system, which arise from the adverse outcomes of sub-optimal or inappropriate
drug therapy.
Outcomes-Based Algorithm Technology
Combining data provided by our proprietary systems, the Omnicare Guidelines(R)
and health management programs, our pharmacists seek to determine the best
clinical and most cost-effective drug therapies and make recommendations for the
most appropriate pharmaceutical treatment.
6
Since late 1997, we have augmented their efforts with the development of
proprietary, computerized, database-driven technology that electronically
screens and identifies patients at risk for particular diseases and assists in
determining treatment protocols. This system combines pharmaceutical, clinical
and care planning data and screens the data utilizing algorithms derived from
medical best practice standards, allowing our pharmacists to make
recommendations to improve the effectiveness of drug therapy in seniors,
including identifying potentially underdiagnosed and undertreated conditions.
Pharmaceutical Case Management
Combining our clinical resources, including the Omnicare Guidelines(R), health
and outcomes management programs and our comprehensive database of medical and
pharmacy data, we are providing pharmaceutical case management services to
community dwelling retirees, employees and dependents who receive drug benefits
under employer-sponsored healthcare programs. Because seniors living
independently are often under the care of multiple practitioners with no
coordination of prescribing, this population is highly susceptible to
drug-related problems. Omnicare Senior Health Outcomes addresses this need
through programs designed to reduce unnecessary and inappropriate drug use, to
add necessary drug therapy according to current practice standards for certain
at-risk groups and to make therapeutic interventions in accordance with the
Omnicare Guidelines(R) and health management programs. These services are
provided on behalf of large corporate employers sponsoring healthcare benefits,
including prescription drug benefits, that seek to protect the safety and
quality of healthcare for their retirees, employees and dependents while
containing or reducing their costs.
Ancillary Services
We provide the following ancillary products and services:
Infusion Therapy Products and Services. With cost containment pressures in
healthcare, SNFs and nursing facilities ("NFs") are increasingly called upon to
treat patients requiring a high degree of medical care and who would otherwise
be treated in the more costly hospital environment. We provide intravenous, or
infusion, therapy products and services for these client facilities and, to a
lesser extent, hospice and home care patients. Infusion therapy consists of the
product (a nutrient, antibiotic, chemotherapy or other drugs in solution) and
the intravenous administration of the product.
We prepare the product to be administered using proper equipment in an aseptic
environment and then deliver the product to the nursing home for administration
by the nursing staff. Proper administration of intravenous ("IV") drug therapy
requires a highly trained nursing staff. Upon request, our consultant
pharmacists and nurse consultants provide an education and certification
program on IV therapy to assure proper staff training and compliance with
regulatory requirements in client facilities offering an IV therapy program.
By providing an infusion therapy program, we enable our client SNFs and NFs to
admit and retain patients who otherwise would need to be cared for in a hospital
or another type of acute-care facility. The most common infusion therapies we
provide are total parenteral nutrition, which
7
provides nutrients intravenously to patients with chronic digestive or
gastro-intestinal problems, antibiotic therapy, chemotherapy, pain management
and hydration.
Wholesale Medical Supplies/Medicare Part B Billing. We distribute disposable
medical supplies, including urological, ostomy, nutritional support and wound
care products and other disposables needed in the nursing home environment. In
addition, we bill Medicare directly for certain of these product lines for
patients eligible under the Medicare Part B program. As part of this service, we
determine patient eligibility, obtain certifications, order products and
maintain inventory at the nursing facility. We also contract to act as billing
agent for certain nursing homes that supply these products directly to the
patient.
Other Services. We provide clinical care plan and financial information systems
to long-term care facilities to assist them in preparing and monitoring plans of
care for their residents, as well as in predicting and tracking revenues and
costs. We also offer operational software for long-term care pharmacies. We
offer respiratory therapy products, durable medical equipment and specialty
pharmacy services along with pharmacy benefit management and mail order pharmacy
services. We provide comprehensive dialysis services on site in certain client
long-term care facilities for residents with kidney failure or end-stage renal
disease. Such services eliminate the need for transport of residents to off-site
clinics for treatment, reducing trauma for the resident and costs for our client
facilities. We recently formed a new pharmaceutical informatics service to
capitalize on our unique geriatric pharmaceutical database, by providing a
unique new offering of Omnicare's broad-based long-term care data to augment the
pharmaceutical industry's ability to monitor performance in the long-term care
channel. We continue to review the expansion of these as well as other products
and services that may further enhance the Company's ability or that of its
clients to provide quality healthcare services for their patients in a
cost-effective manner.
Contract Research Organization
Our CRO segment provides comprehensive product development and research services
globally to client companies in the pharmaceutical, biotechnology, medical
devices and diagnostics industries. CRO Services provides support for the design
of regulatory strategy and clinical development (phases I through IV) of
pharmaceuticals by offering comprehensive and fully integrated project
management, clinical monitoring, quality assurance, data management, statistical
analysis medical writing and regulatory support for our clients' drug
development programs. As of December 31, 2004, the CRO Services segment operated
in 30 countries, including the United States.
We believe that our involvement in the CRO business is a logical adjunct to our
core institutional pharmacy business and will serve to leverage our assets and
strengths, including our access to a large geriatric population and our ability
to appropriately collect data for health and outcomes management. We believe
such assets and strengths can be of value in developing new drugs targeted at
diseases of the elderly and in meeting the Food and Drug Administration's
geriatric dosing and labeling requirements for all prescription drugs provided
to the elderly, as well as in documenting health outcomes to payors and plan
sponsors in a managed care environment. In December 2004, we expanded our CRO
business through the acquisition of Clinimetrics Research Associates, Inc.
("Clinimetrics"). We believe this acquisition will enhance our position in
capitalizing on the rapidly growing trend in biotechnology research.
8
Product and Market Development
Our Pharmacy Services and CRO Services businesses engage in a continuing program
for the development of new services and for marketing these services. While new
service and new market development are important factors for the growth of these
businesses, we do not expect that any new service or marketing efforts,
including those in the developmental stage, will require the investment of a
significant portion of our assets.
Materials/Supply
We purchase pharmaceuticals through a wholesale distributor with whom we have a
prime vendor contract, at prices based primarily upon contracts negotiated by us
directly with pharmaceutical manufacturers. We also are a member of industry
buying groups, which contract with manufacturers for discounted prices. We have
numerous sources of supply available to us and have not experienced any
difficulty in obtaining pharmaceuticals or other products and supplies used in
the conduct of our business.
Patents, Trademarks, and Licenses
Our business operations are not dependent upon any material patents, trademarks
or licenses.
Seasonality
Our business operations are not significantly impacted by seasonality.
Inventories
We seek to maintain adequate on site inventories of pharmaceuticals and supplies
to ensure prompt delivery service to our customers. Our primary wholesale
distributor also maintains local warehousing in most major geographic markets in
which we operate.
Competition
The long-term care pharmacy business is highly regional or local in nature, and
within a given geographic area of operations, highly competitive. We are the
nation's largest provider of pharmaceuticals and related pharmacy services to
long-term care institutions such as SNFs, NFs, assisted living facilities
("ALFs"), retirement centers and other institutional healthcare facilities. In
the geographic regions we serve, we compete with local, regional and other
national institutional pharmacies, pharmacies owned by long-term care facilities
and numerous retail pharmacies. We compete in these markets on the basis of
quality, price, terms, and overall cost-effectiveness, along with the clinical
expertise, pharmaceutical technology and professional support we offer.
Our CRO business competes against other full-service CROs and client internal
resources. The CRO industry is highly fragmented with a number of full-service
CROs and many small, limited-service providers, some of which serve only local
markets. Clients choose a CRO based on, among other reasons, reputation,
references from existing clients, the client's relationship with
9
the CRO, the CRO's experience with the particular type of project and/or
therapeutic area of clinical development, the CRO's ability to add value to
the client's development plan, the CRO's financial stability and the CRO's
ability to provide the full range of services on a global basis as required
by the client. We believe that we compete favorably in these respects.
Backlog
Backlog is not a relevant factor in our Pharmacy Services segment since this
segment's products and services are sold promptly on an as ordered basis.
Our CRO Services segment reports backlog based on anticipated net revenue for
services or projects, yet to be provided, that have been authorized by the
customer through signed contracts, letter agreements and certain verbal
commitments. Once work begins on a project, net revenue is recognized as the
work is completed. Using this method of reporting backlog, at December 31, 2004,
backlog was approximately $276.9 million, as compared with approximately $182.8
million at December 31, 2003. The large increase in backlog is primarily
attributable to the late 2004 Clinimetrics acquisition. Backlog may not be a
consistent indicator of future results of our CRO Services segment because it
can be affected by a number of factors, including the variable size and duration
of projects, many of which are performed over several years. Additionally,
projects may be delayed or terminated by the customer or indirectly delayed by
regulatory authorities. Moreover, the scope of work can be increased or
decreased during the course of a project.
Customers
At December 31, 2004, our Pharmacy Services segment served long-term care
facilities comprising approximately 1,086,000 beds in 47 states in the United
States and in Canada.
Our CRO Services segment operates in 30 countries, including the United States,
and serves a broad range of clients, including many of the major multi-national
pharmaceutical and biotechnology companies, as well as smaller companies in the
pharmaceutical, biotechnology and medical device industries.
No single customer comprised more than 10% of consolidated revenues in 2004,
2003 or 2002.
Government Regulation
Institutional pharmacies, as well as the long-term care facilities they serve,
are subject to extensive federal, state and local regulation. These regulations
cover required qualifications, day-to-day operations, reimbursement and the
documentation of activities. In addition, our CRO Services are subject to
substantial regulation, both domestically and abroad. We continuously monitor
the effects of regulatory activity on our operations.
Licensure, Certification and Regulation. States generally require that companies
operating a pharmacy within the state be licensed by the state board of
pharmacy. At December 31, 2004, we had pharmacy licenses, or pending
applications, for each pharmacy we operate. In addition, at
10
December 31, 2004, we delivered prescription products from our licensed
pharmacies to two states, in which we do not operate a pharmacy. These states
regulate out-of-state pharmacies, however, as a condition to the delivery of
prescription products to patients in these states. Our pharmacies hold the
requisite licenses applicable in these states. In addition, our pharmacies are
registered with the appropriate state and federal authorities pursuant to
statutes governing the regulation of controlled substances.
Client long-term care facilities are also separately required to be licensed in
the states in which they operate and, if serving Medicaid or Medicare patients,
must be certified to be in compliance with applicable program participation
requirements. Client facilities are also subject to the nursing home reforms of
the Omnibus Budget Reconciliation Act of 1987 ("OBRA of 1987"), as amended,
which imposed strict compliance standards relating to quality of care for
nursing home operations, including vastly increased documentation and reporting
requirements. In addition, pharmacists, nurses and other healthcare
professionals who provide services on our behalf are in most cases required to
obtain and maintain professional licenses and are subject to state regulation
regarding professional standards of conduct.
Federal and State Laws Affecting the Repackaging, Labeling and Interstate
Shipping of Drugs. Federal and state laws impose certain repackaging, labeling
and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail outlets. A drug repackager must register with the Food and
Drug Administration ("FDA") as a manufacturing establishment, and is subject to
FDA inspection for compliance with relevant good manufacturing practices
("GMP"). We hold all required registrations and licenses, and we believe our
repackaging operations are in compliance with applicable federal and state GMP
requirements. In addition, we believe we comply with all relevant requirements
of the Prescription Drug Marketing Act for the transfer and shipment of
pharmaceuticals.
State Laws Affecting Access to Services. Some states have enacted "freedom of
choice" or "any willing provider" requirements as part of their state Medicaid
programs or in separate legislation. These laws may preclude a nursing facility
from requiring their patients to purchase pharmacy or other ancillary medical
services or supplies from particular providers that deal with the nursing home.
Limitations such as these may increase the competition which we face in
providing services to nursing facility residents.
Medicare and Medicaid. The nursing home pharmacy business has long operated
under regulatory and cost containment pressures from state and federal
legislation primarily affecting Medicaid and, to a lesser extent, Medicare.
11
As is the case for nursing home services generally, we receive reimbursement
from the Medicaid and Medicare programs, directly from individual residents or
their responsible parties (private pay), long-term care facilities and from
other payors such as third-party insurers. The table below represents our
approximated payor mix for the last three years:
2004 2003 2002
---- ---- ----
State Medicaid programs 48% 47% 46%
Private pay and long-term care facilities(a) 45% 45% 44%
Federal Medicare programs(b) 2% 2% 2%
Other private sources(c) 5% 6% 8%
--- --- ---
Totals 100% 100% 100%
=== === ===
(a) Includes payments from skilled nursing facilities on behalf of their
federal Medicare program-eligible residents (Medicare Part A) and for other
services and supplies, as well as payments from third-party insurers and
private pay.
(b) Includes direct billing for medical supplies.
(c) Includes our CRO revenues.
For those patients who are not covered by government-sponsored programs or
private insurance, we generally directly bill the patient or the patient's
responsible party on a monthly basis. Depending upon local market practices, we
may alternatively bill private patients through the nursing facility. Pricing
for private pay patients is based on prevailing regional market rates or "usual
and customary" charges.
The Medicaid program is a cooperative federal-state program designed to enable
states to provide medical assistance to aged, blind or disabled individuals or
members of families with dependent children whose income and resources are
insufficient to meet the costs of necessary medical services. State
participation in the Medicaid program is voluntary. To become eligible to
receive federal funds, a state must submit a Medicaid "state plan" to the
Secretary of the Department of Health and Human Services ("HHS") for approval.
The federal Medicaid statute specifies a variety of requirements which the state
plan must meet, including requirements relating to eligibility, coverage of
services, payment and administration. We have provider agreements to participate
in state Medicaid programs.
Federal law and regulations contain a variety of requirements relating to the
furnishing of prescription drugs under Medicaid. First, states are given
authority, subject to certain standards, to limit or specify conditions for the
coverage of particular drugs. Second, federal Medicaid law establishes standards
affecting pharmacy practice. These standards include general requirements
relating to patient counseling and drug utilization review and more specific
standards for SNFs and NFs relating to drug regimen reviews for Medicaid
patients in such facilities. Regulations clarify that, under federal law, a
pharmacy is not required to meet the general requirements for drugs dispensed to
nursing facility residents if the nursing facility complies with the drug
regimen review standards. However, the regulations indicate that states may
nevertheless require pharmacies to comply with the general requirements,
regardless of whether the nursing facility satisfies the drug regimen review
requirement, and the states in which we operate currently do require our
pharmacies to comply with these general standards. Third, federal regulations
impose certain requirements relating to reimbursement for prescription drugs
furnished to Medicaid patients.
12
Among other things, regulations establish "upper limits" on payment levels. In
addition to requirements imposed by federal law, states have substantial
discretion to determine administrative, coverage, eligibility and payment
policies under their state Medicaid programs that may affect our operations.
The Medicare program is a federally funded and administered health insurance
program for individuals age 65 and over, or who are disabled. The Medicare
program currently consists of three parts: Medicare Part A, which covers, among
other things, inpatient hospital, skilled nursing facility, home healthcare and
certain other types of healthcare services; Medicare Part B, which covers
physicians' services, outpatient services, items and services provided by
medical suppliers, and a limited number of specifically designated prescription
drugs; and Medicare Part C, established by the Balanced Budget Act of 1997
("BBA"), which generally allows beneficiaries to enroll in additional types of
managed care programs beyond the traditional Medicare fee for service program.
Part C has generally been referred to as "Medicare+Choice" and is now known as
"Medicare Advantage." Many Medicare beneficiaries are being served through such
Medicare Advantage organizations. In addition to the limited Medicare coverage
for specified products described above, some of these payor organizations
providing healthcare benefits to Medicare beneficiaries offer expanded drug
coverage. The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 ("MMA"), enacted in December 2003, established a Medicare Part D, which
will provide a new prescription drug benefit starting January 1, 2006 (discussed
below).
The Medicare program establishes requirements for participation of providers and
suppliers in the Medicare program. Pharmacies are not subject to such
certification requirements. SNFs and suppliers of medical equipment and
supplies, however, including our supplier operations, are subject to specified
standards. Failure to comply with these requirements and standards may adversely
affect an entity's ability to participate in the Medicare program and receive
reimbursement for services provided to Medicare beneficiaries.
Medicare and Medicaid providers and suppliers are subject to inquiries or audits
to evaluate their compliance with requirements and standards set forth under
these government-sponsored programs. These audits and inquiries, as well as our
own internal compliance program, from time to time have identified overpayment
and other billing errors resulting in repayment or self-reporting. We believe
that our billing practices materially comply with applicable state and federal
requirements. However, the requirements may be interpreted in the future in a
manner inconsistent with our interpretation and application.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings,
executive orders and freezes and funding reductions, all of which may adversely
affect our business. Payments for pharmaceutical supplies and services under the
Medicare and Medicaid programs may not continue to be based on current
methodologies or remain comparable to present levels. In this regard, we may be
subject to rate reductions as a result of federal budgetary or other legislation
related to the Medicare and Medicaid programs. In addition, various state
Medicaid programs periodically experience budgetary shortfalls which may
result in Medicaid payment reductions and delays in payment to us.
13
In addition, the failure, even if inadvertent, of our and/or our client
institutions to comply with applicable reimbursement regulations could adversely
affect our business. Additionally, changes in reimbursement programs or in
regulations related thereto, such as reductions in the allowable reimbursement
levels, modifications in the timing or processing of payments and other changes
intended to limit or decrease the growth of Medicaid and Medicare expenditures,
could adversely affect our business.
Referral Restrictions. We have to comply with federal and state laws which
govern financial and other arrangements between healthcare providers. These laws
include the federal anti-kickback statute, which prohibits, among other things,
knowingly and willfully soliciting, receiving, offering or paying any
remuneration directly or indirectly in return for or to induce the referral of
an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under federal healthcare programs. We
are also subject to the federal physician self-referral statute, which prohibits
physicians from referring Medicare and Medicaid patients for certain "designated
health services," including outpatient prescription drugs, durable medical
equipment, and enteral supplies and equipment to an entity if the referring
physician (or a member of the physician's immediate family) has a "financial
relationship," through ownership or compensation with the entity. Many states
have enacted similar statutes which are not necessarily limited to items and
services for which payment is made by federal healthcare programs. Violations of
these laws may result in fines, imprisonment, denial of payment for services,
and exclusion from the federal programs and/or other state-funded programs.
Other provisions in the Social Security Act and in other federal and state laws
authorize the imposition of penalties, including criminal and civil fines and
exclusions from participation in Medicare, Medicaid and other federal healthcare
programs for false claims, improper billing and other offenses.
In addition, a number of states have undertaken enforcement actions against
pharmaceutical manufacturers involving pharmaceutical marketing programs,
including programs containing incentives to pharmacists to dispense one
particular product rather than another. These enforcement actions arose under
state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like.
We believe our contract arrangements with other healthcare providers, our
pharmaceutical suppliers and our pharmacy practices are in compliance with
applicable federal and state laws. These laws may, however, be interpreted in
the future in a manner inconsistent with our interpretation and application.
Healthcare Reform and Federal Budget Legislation. In recent years, federal
legislation has resulted in major changes in the healthcare system, which
significantly affected healthcare providers, either nationally or at the state
level. The BBA sought to achieve a balanced federal budget by, among other
things, reducing federal spending on the Medicare and Medicaid programs. With
respect to Medicare, the law mandated establishment of a PPS for SNFs under
which facilities are paid a federal per diem rate for virtually all covered SNF
services, including ancillary services such as pharmacy. Payment is determined
by one of 44 resource utilization group ("RUG") categories.
14
PPS was implemented for cost reporting periods beginning on or after July 1,
1998. The BBA also imposed numerous other cost-saving measures affecting
Medicare SNF services.
In 1999 and 2000, Congress passed legislation to mitigate the impact of the
reimbursement cuts resulting from the BBA. We believe this legislation improved
the financial condition of SNFs and provided incentives to increase occupancy
and Medicare admissions, particularly among the more acutely ill. While certain
of the payment increases mandated by these laws expired October 1, 2002, SNFs
continue to benefit from temporary rate increases for certain high-acuity
patients, including medically-complex patients with generally higher pharmacy
costs, pending revisions to the RUG categories. The increases will continue
until the Centers for Medicare & Medicaid Services ("CMS") implements a refined
RUG system that better accounts for medically-complex patients. The Secretary of
HHS did not implement such refinements in fiscal years 2003, 2004 or 2005.
President Bush's proposed fiscal year 2006 budget indicates that CMS intends to
implement the refinements in fiscal year 2006, resulting in $1.5 billion in
decreased expenditures in 2006. However, it is unclear at this time whether CMS
will implement RUG refinement as described in the President's budget proposal.
As noted, certain payment increases in Medicare reimbursement for SNFs expired
on October 1, 2002. The impact of these expirations on its customers has not
resulted in a significant impact on Omnicare. Moreover, SNF PPS rates for fiscal
years 2004 and 2005 increased 3.0% and 2.8%, respectively. In addition, rates
for fiscal year 2004 were increased by an additional 3.26% to reflect cumulative
forecast errors since the start of the SNF PPS on July 1, 1998. CMS estimates
that these adjustments resulted in an estimated $850 million increase in
Medicare payments to SNFs in fiscal year 2004. The fiscal year 2005 payment
increase will result in an estimated $440 million increase in Medicare payments
to SNFs and the continuation of the high-acuity patient add-on will result in an
estimated additional $1 billion in payments for the same period. Nonetheless,
the loss of revenues associated with future changes in SNF payment rates could,
in the future, have an adverse effect on the financial condition of our SNF
clients which could, in turn, adversely affect the timing or level of their
payments to Omnicare.
The MMA includes a major expansion of the Medicare prescription drug benefit
under a new Medicare Part D, which goes into effect on January 1, 2006. Until
the Part D benefit goes into effect, Medicare beneficiaries are able to receive
assistance with their outpatient prescription drug costs through a new
prescription drug discount card program, which began in June 2004, and which
gives enrollees access to negotiated discounted prices for prescription drugs.
PBM-Plus, Inc., an Omnicare subsidiary, was 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 eligible
seniors not currently receiving drug benefits from the Medicare and Medicaid
programs. In addition, the Long Term Care Pharmacy Alliance, LLC ("LTCPA") (of
which we are a member, together with several other national institutional
pharmacies) has also received the special long-term care endorsement from CMS to
administer the transitional assistance benefit.
Under the new prescription drug benefit, Medicare beneficiaries will be able to
enroll in prescription drug plans offered by private entities (or in a
"fallback" plan offered on behalf of the
15
government through a contractor, to the extent private entities fail to offer
a plan in a given area), which will provide coverage for prescription drugs
(collectively, "Part D Plans"). Part D Plans will include both plans providing
the drug benefit on a stand alone basis ("PDPs"), and Medicare Advantage plans
providing drug coverage as a supplement to an existing medical benefit under
that Medicare Advantage plan (an "MA-PD"), most commonly a health maintenance
organization plan. Medicare beneficiaries generally will have to pay a premium
to enroll in a Part D Plan, with the premium amount varying from plan to plan,
although CMS will provide various federal subsidies to Part D Plans to reduce
the cost to beneficiaries.
On January 28, 2005, CMS published the final rule to implement the Medicare Part
D drug benefit. Under these regulations, Medicare beneficiaries who are also
entitled to benefits under a state Medicaid program (so-called "dual eligibles")
will have their outpatient prescription drug costs covered by the new Medicare
drug benefit, subject to certain limitations. Most of the nursing home residents
we serve, whose drug costs are currently covered by state Medicaid programs, are
dual-eligibles who will be moved to the new Medicare drug benefit. Pursuant to
the MMA, CMS will provide premium and cost-sharing subsidies to Part D Plans
with respect to dual eligible residents of nursing homes. As a consequence, such
dual eligibles will not be required to pay a premium for enrollment in a Part D
Plan, so long as the premium for the Part D Plan in which they are enrolled is
at or below the premium subsidy. Dual eligible residents of nursing homes will
be entitled to have all of their prescription drug costs covered by a Part D
Plan, provided that the prescription drugs which they are taking are either on
the Part D Plan's formulary, or an exception to the plan's formulary is granted.
CMS will review the formularies of Part D Plans and has indicated that it will
require their formularies to include the types of drugs most commonly needed by
Medicare beneficiaries, and that plans' formulary exceptions criteria provide
for coverage of drugs determined by the plan to be medically appropriate for the
enrollee. The MMA also makes available partial premium and cost-sharing
subsidies for certain other classes of low-income enrollees who do not qualify
for Medicaid.
Pursuant to the final rule, we will obtain reimbursement for drugs we provide to
enrollees of a given Part D Plan in accordance with the terms of agreements
negotiated between us and that Part D Plan. We intend to negotiate such
agreements with Part D Plans under which we would provide drugs and associated
services to their enrollees. Until such agreements are negotiated, we will not
be able to determine what changes, if any, there may be to the terms and
conditions under which we provide drugs and services to Medicare beneficiaries
who become enrollees of Part D Plans.
CMS will be issuing subregulatory guidance on many aspects of the final rule
throughout 2005 as the new program is implemented. Additionally, the Secretary
of HHS 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
beneficiaries in nursing facilities is consistent with existing patient safety
and quality of care standards. The results of this study are due to be reported
to Congress by June 2005. We are continuing to review the final Part D
regulations and relevant subregulatory guidance and cannot predict the ultimate
effect of the final rule or the outcome of other potential developments relating
to its implementation on our business or results of operations.
16
The MMA does not alter the federal reimbursement scheme for residents of SNFs
whose stay at the facility is covered under Medicare Part A's PPS. Accordingly,
Medicare's fixed per diem payments to SNFs under PPS continue to include a
portion attributable to the expected cost of drugs provided to such residents,
and we will continue to receive reimbursement for drugs provided to such
residents from the SNFs, in accordance with the terms of the agreements we have
negotiated with each SNF.
The MMA also reforms the Medicare Part B prescription drug payment methodology.
With certain exceptions, in 2004 most Part B drugs were reimbursed at 85 percent
of the April 1, 2003 average wholesale price. In 2005, Medicare Part B payment
generally equals 106 percent of the lesser of (i) the wholesale acquisition cost
of the product, or (ii) the average sales price ("ASP") of the product, with
certain exceptions and adjustments. More significant reforms are planned for
2006, when most drugs will be reimbursed under either an ASP methodology or
under a "competitive acquisition program." The 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 or future Medicare reform
legislation ultimately will have on us.
Discounted average wholesale price ("AWP") plus a dispensing fee is the basis
for many state Medicaid programs' reimbursement of drugs to pharmacy providers
for Medicaid beneficiaries generally as well as under certain private
reimbursement programs. If government or private health insurance programs
discontinue or modify the use of AWP or otherwise implement payment methods that
reduce the reimbursement for drugs and biologicals, it could adversely affect
the Company's level of reimbursement.
With respect to Medicaid, the BBA repealed the "Boren Amendment" federal payment
standard for Medicaid payments to Medicaid NFs effective October 1, 1997, giving
states greater latitude in setting payment rates for such facilities. The law
also granted states greater flexibility to establish Medicaid managed care
programs without the need to obtain a federal waiver. Although these waiver
programs generally exempt institutional care, including NFs and institutional
pharmacy services, some states do use managed care principles in their long-term
care programs. Moreover, no assurances can be given that additional Medicaid
programs ultimately will not change the reimbursement system for long-term care,
including pharmacy services, from fee-for-service to managed care negotiated or
capitated rates. Our operations have not been adversely affected in states with
managed care programs in effect. In addition, some states, continue to face
budget shortfalls, and most states are taking steps to implement cost controls
within their Medicaid programs. Likewise, the federal government may consider
changes to Medicaid designed to rein in program spending. There can be no
assurance that future changes in Medicaid payments to pharmacies, NFs or
managed care systems will not have an adverse impact on our business.
Contract Research Organization Services. The clinical services performed by our
CRO Services are subject to various regulatory requirements designed to ensure
the quality and integrity of the data produced as a result of these services.
17
The industry standard for conducting clinical testing is embodied in the good
clinical practice ("GCP") and Investigational New Drugs ("IND") regulations
administered by the FDA. Research conducted at institutions supported by funds
from the National Institutes of Health ("NIH") must also comply with multiple
project assurance agreements and guidelines administered by NIH and the HHS
Office of Research Protection. The requirements for facilities engaging in
pharmaceutical, clinical trial, supply preparation, labeling and distribution
are set forth in the good manufacturing practices ("GMP") regulations and in GCP
guidelines. The United States and European Union ("EU") also recognize the
Guidelines for Good Clinical Practice adopted by the International Conference on
Harmonisation ("ICH"). GCP, IND and GMP regulations, and ICH guidelines, have
been mandated by the FDA and the European Medicines Evaluation Agency (the
"EMEA") and have been adopted by similar regulatory authorities in other
countries. GCP, IND and GMP regulations, and ICH guidelines, stipulate
requirements for facilities, equipment, supplies and personnel engaged in the
conduct of studies to which these regulations apply. The regulations require
that written, standard operating procedures ("SOPs") are followed during the
conduct of studies and for the recording, reporting and retention of study data
and records. To help assure compliance, our CRO Services has a worldwide staff
of experienced quality assurance professionals who monitor ongoing compliance
with these regulations and guidelines by auditing study data and conducting
regular inspections of testing procedures and facilities. The FDA and other
regulatory authorities require that study results and data submitted to such
authorities are based on studies conducted in accordance with GCP and IND
provisions. These provisions include:
o complying with specific regulations governing the selection of
qualified investigators;
o obtaining specific written commitments from the investigators;
o disclosure of financial conflicts of interest;
o verifying that patient informed consent is obtained;
o instructing investigators to maintain records and reports;
o verifying drug or device accountability; and
o permitting appropriate governmental authorities access to data and
study sites for their review and inspection.
Records for clinical studies must be maintained for specific periods for
inspection by the FDA, EU or other authorities during audits. Non-compliance
with GCP or IND requirements can result in the disqualification of data
collected during the clinical trial and may lead to debarment of an investigator
or CRO if fraud is detected.
CRO Services' SOPs related to clinical studies are written in accordance with
regulations and guidelines appropriate to a global standard with regional
variations in the regions where they will be used, thus helping to ensure
compliance with GCP. CRO Services also generally complies with a reasonable
interpretation of the ICH Guideline for Good Clinical Practice, EU GCP
regulations and U.S. GCP regulations for North America. In addition, we believe
that our CRO Services are in compliance with the federal Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") and our CRO Services
employees have been trained to comply with this legislation.
18
Although we believe that we are in compliance in all material respects with
federal, state and local laws, failure to comply could subject us to denial of
the right to conduct business, fines, criminal penalties and other enforcement
actions.
Health Information Practices. The Company, along with the healthcare industry in
general, is impacted by HIPAA, which mandates, among other things, the adoption
of standards for the exchange of electronic health information in an effort to
enhance the efficiency and simplify the administration of the healthcare system.
In addition, HIPAA requires HHS to adopt standards for electronic transactions
and code sets; unique identifiers for providers, employers, health plans and
individuals; security and electronic signatures; privacy; and enforcement. While
HIPAA ultimately is designed to reduce administrative expenses within the
healthcare system, the law has resulted in some costly changes for the industry.
Compliance with the Electronic Healthcare Transactions and Code Sets was
required in 2003. On February 27, 2004, CMS instructed Medicare carriers and
fiscal intermediaries that, as of July 6, 2004, HIPAA non-compliant claims may
be paid no earlier than 27 days after receipt, while HIPAA compliant claims are
eligible for payment 14 days from receipt. The Company is fully compliant with
all HIPAA-related electronic transactions, and is not experiencing any
HIPAA-related claims processing problems. Most health plans and healthcare
providers such as the Company were required to comply with the HIPAA privacy
standards by April 14, 2003. The Company adheres to the relevant organizational
structure provisions of HIPAA's privacy regulation in order that the Company's
business units and divisions may permissibly use and disclose protected health
information with each other. Omnicare's Employee Retirement Income Security Act
health benefit plans are HIPAA covered entities. As required by the statute,
Omnicare has appointed privacy and security officers. The privacy regulations
require healthcare providers like Omnicare, to provide a notice describing
patient's privacy rights and our privacy practices to all of the patients to
whom we provide healthcare products or services. In addition to HIPAA, the
Company works to ensure that it adheres to state privacy laws and other state
privacy requirements not preempted by HIPAA, including those which furnish
greater privacy protection for the individual than HIPAA. In February 2003, HHS
published standards for the security of electronic health information. The
Company is prepared to comply with the requirements of the security standards no
later than April 20, 2005. In addition, in January 2004, CMS published a rule
announcing the adoption of the National Provider Identifier as the standard
unique health identifier for healthcare providers to use in filing and
processing healthcare claims and other transactions. The Company is prepared to
make application for these identifiers in accordance with the rule which is
effective May 23, 2005, with a compliance date of May 23, 2007.
Although we believe our contract arrangements with healthcare payors and
providers and our business practices are materially in compliance with
applicable federal and state electronic transmission, privacy and security laws,
failure to comply could subject us to denial of the right to conduct business,
fines, criminal penalties and other enforcement actions.
Compliance Program. The Office of Inspector General ("OIG") has issued guidance
to various sectors of the healthcare industry to help providers design effective
voluntary compliance programs to prevent fraud, waste and abuse in healthcare
programs, including Medicare and Medicaid. In addition, the Company and its
operating units are subject in the ordinary course of business to audit,
compliance, administrative and investigatory reviews by federal and state
authorities
19
covering various aspects of its business. In 1998, Omnicare voluntarily adopted
a compliance program to assist us in complying with applicable government
regulations, and the Company continues to maintain and support its compliance
program.
Environmental Matters
In operating our facilities, historically we have not encountered any major
difficulties in effecting compliance with applicable pollution control laws. No
material capital expenditures for environmental control facilities are expected.
While we cannot predict the effect which any future legislation, regulations or
interpretations may have upon our operations, we do not anticipate any changes
that would have a material adverse impact to Omnicare.
Employees
At December 31, 2004, we employed approximately 12,900 persons (including
approximately 4,000 part-time employees), of which approximately 12,400 are
located within, and approximately 500 outside of, the United States.
Available Information
We make available free of charge on or through our Corporate Web site, at
www.omnicare.com, our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission ("SEC"). Additionally, the public may read
and copy any materials we file with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C., 20549. Information regarding
operation of the Public Reference Room is available by calling the SEC at
1-800-SEC-0330. Information that we file with the SEC is also available at the
SEC's Web site at www.sec.gov.
-----------
We also post on our corporate website the following corporate governance
documents and committee charters:
o Corporate Governance Guidelines
o Code of Business Conduct and Ethics
o Code of Ethics for CEO and Senior Financial Officers
o Audit Committee Charter
o Compensation and Incentive Committee Charter
o Executive Committee Charter
o Nominating and Governance Committee Charter
Copies of these documents are also available in print to any stockholder who
requests them by writing our Corporate Secretary at:
Omnicare, Inc.
1600 RiverCenter II
100 East RiverCenter Boulevard
Covington, Kentucky 41011
20
ITEM 2 - PROPERTIES
We have offices, distribution centers and other key operating facilities in
various locations in and outside the United States. As of December 31, 2004, we
operated a total of 224 facilities, five of which we owned. A list of the 66
more significant facilities, defined as having at least 15,000 square feet ("sq.
ft."), we operated as of December 31, 2004 follows, grouped by reporting segment
and summarized by geographic location. The owned properties are held in fee and
are not subject to any material encumbrance. We consider all of these facilities
to be in good operating condition and generally to be adequate for present and
anticipated needs.
Owned Leased Area
Area ------------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------------ --------- --------- ------------------
Pharmacy Services:
Livonia, Michigan Offices and Distribution -- 50,438 May 31, 2007
Center
Des Plaines, Illinois Offices and Distribution -- 47,971 May 31, 2008
Center
Perrysburg, Ohio Offices and Distribution 44,000 -- --
Center
Indianapolis, Indiana Warehouse -- 42,651 March 30, 2007
Milwaukee, Wisconsin Offices and Distribution -- 41,816 March 31, 2009
Center
Indianapolis, Indiana Offices and Distribution -- 39,740 May 1, 2014
Center
Kirkland, Washington Offices and Distribution -- 38,689 July 31, 2008
Center
Cheshire, Connecticut Offices and Distribution -- 38,400 June 30, 2010
Center
Florissant, Missouri Offices and Distribution 38,014 -- --
Center
Louisville, Kentucky Offices and Distribution -- 37,400 April 30, 2008
Center
Kansas City, Missouri Offices and Distribution -- 36,048 December 31, 2009
Center
Toledo, Ohio Distribution Center -- 36,039 July 31, 2007
21
Owned Leased Area
Area ------------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------------ --------- --------- ------------------
Eastlake, Ohio Offices and Distribution -- 35,066 January 31, 2006
Center
Glasgow, Kentucky Offices and Distribution 33,070 -- --
Center
Hunt Valley, Maryland Offices and Distribution -- 30,600 January 31, 2007
Center
Decatur, Illinois Offices and Distribution -- 29,998 October 30, 2014
Center
Blue Ash, Ohio Warehouse -- 29,139 December 31, 2008
Rockford, Illinois Offices and Distribution -- 29,100 November 30, 2009
Center
Salt Lake City, Utah Offices and Distribution -- 28,400 January 31, 2009
Center
Crystal, Minnesota Offices and Distribution -- 28,255 January 31, 2008
Center
Portland, Oregon Offices and Distribution -- 28,150 April 30, 2008
Center
San Diego, California Offices and Distribution -- 27,000 June 30, 2006
Center
Des Plaines, Illinois Offices and Distribution -- 26,673 May 31, 2008
Center
Plainview, New York Offices and Distribution -- 25,500 June 30, 2005
Center
Englewood, Ohio Offices and Distribution -- 25,000 January 31, 2009
Center
Sharon, Pennsylvania Offices and Distribution -- 24,619 March 31, 2009
Center
Milford, Ohio Offices and Distribution -- 24,450 December 31, 2007
Center
22
Owned Leased Area
Area ------------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------------ --------- --------- ------------------
Chestnut Ridge, New York Offices and Distribution -- 24,429 May 31, 2009
Center
Cincinnati, Ohio Offices and Distribution -- 24,375 September 30, 2009
Center
Oklahoma City, Oklahoma Offices and Distribution -- 24,000 Month-to-Month
Center
Hickory, North Carolina Offices and Distribution 24,000 -- --
Center
Griffith, Indiana Offices and Distribution -- 23,600 April 1, 2012
Center
Wadsworth, Ohio Offices and Distribution -- 22,960 June 30, 2006
Center
Pittsburgh, Pennsylvania Offices and Distribution -- 22,677 January 31, 2009
Center
Reno, Nevada Offices and Distribution -- 22,593 June 30, 2008
Center
Londondery, New Hampshire Offices and Distribution -- 22,400 May 31, 2011
Center
Mentor, Ohio Offices and Distribution -- 22,364 August 1, 2007
Center
Dublin, Ohio Offices -- 21,468 January 31, 2009
Malta, New York Offices and Distribution -- 20,930 September 30, 2005
Center
Los Angeles, California Offices and Distribution -- 20,408 January 31, 2009
Center
Springfield, Missouri Offices and Distribution -- 20,350 June 30, 2006
Center
Bucks City, Pennsylvania Offices and Distribution -- 20,000 September 30, 2009
Center
Greensburg, Pennsylvania Offices and Distribution -- 20,000 February 3, 2006
Center
23
Owned Leased Area
Area ------------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------------ --------- --------- ------------------
Henderson, Kentucky Offices and Distribution -- 20,000 December 31, 2007
Center
St. Petersburg, Florida Offices and Distribution -- 19,835 April 30, 2007
Center
Spartanburg, South Carolina Offices and Distribution 9,500 10,000 Month-to-Month
Center
Longwood, Florida Offices and Distribution -- 19,200 September 30, 2007
Center
Rochester, New York Offices and Distribution -- 18,675 June 30, 2006
Center
Boca Raton, Florida Offices and Distribution -- 18,661 December 31, 2007
Center
Springfield, Ohio Offices and Distribution -- 18,000 Month-to-Month
Center
Peabody, Massachusetts Offices and Distribution -- 17,500 April 30, 2007
Center
Naperville, Illinois Offices -- 17,400 Month-to-Month
Mesa, Arizona Offices and Distribution -- 16,512 March 31, 2007
Center
Redlands, California Offices and Distribution -- 16,492 July 31, 2005
Center
Pompton Plains, New Jersey Offices and Distribution -- 16,041 August 5, 2005
Center
Mason, Ohio Offices and Distribution -- 15,892 October 31, 2009
Center
Allentown, Pennsylvania Offices and Distribution -- 15,475 March 31, 2006
Center
Hayward, California Offices and Distribution -- 15,100 August 1, 2005
Center
24
Owned Leased Area
Area ------------------------------
Location Type (sq. ft.) (sq. ft.) Expiration Date
- ----------------------------- ------------------------ --------- --------- ------------------
West Boylston, Massachusetts Offices and Distribution -- 15,000 August 31, 2005
Center
West Seneca, New York Offices and Distribution -- 15,000 September 1, 2006
Center
CRO Services:
King of Prussia, Pennsylvania Offices -- 150,000 July 31, 2010
San Jose, California Offices -- 59,316 October 14, 2010
Troy, New York Offices -- 28,569 March 31, 2005
Cologne, Germany Offices -- 25,155 June 30, 2005
Chippenham, United Kingdom Offices -- 22,800 June 23, 2016
Corporate:
Covington, Kentucky Offices -- 92,585 February 28, 2016
25
ITEM 3 - LEGAL PROCEEDINGS
There are no pending legal or governmental proceedings to which we are a party
to which any of our property is subject that we believe will have a material
adverse effect on the Company's consolidated financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers as of February 28, 2005 are as follows:
First Elected to
Name Age Office(1) Present Office
---- --- --------------------------- ----------------
Joel F. Gemunder 65 President and May 20, 1981
Chief Executive Officer(2)
Patrick E. Keefe 59 Executive Vice February 5, 1997
President - Operations
Timothy E. Bien 54 Senior Vice President - May 20, 1996
Professional Services
and Purchasing
David W. Froesel, Jr. 53 Senior Vice President March 4, 1996
and Chief Financial Officer
Cheryl D. Hodges 53 Senior Vice President February 8, 1994
and Secretary
Kirk M. Pompeo 48 Senior Vice President, Sales April 7, 2004
and Marketing(3)
(1) Executive officers are elected for one-year terms at the annual
organizational meeting of the Board of Directors, which follows the annual
meeting of stockholders.
(2) Mr. Gemunder was appointed Chief Executive Officer of the Company on May
21, 2001, having served as the President and a principal executive officer
of the Company since 1981.
(3) Mr. Pompeo was appointed Senior Vice President-Sales and Marketing on April
7, 2004. From April 2003 until April 2004, Mr. Pompeo served as Senior Vice
President-Sales and Marketing of NeighborCare, Inc. (an institutional
pharmacy provider). Prior to that time, Mr. Pompeo served as Senior Vice
President-Sales and Marketing of Integrated Health Services, Inc. (a
diversified health services provider of post-acute medical and
rehabilitative services) from 1997 until April 2003.
26
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock; Holders of Record
Our Common Stock is listed on the New York Stock Exchange, and the following
table sets forth the ranges of high and low closing prices during each of the
calendar quarters of 2004 and 2003.
2004 2003
--------------- ---------------
High Low High Low
------ ------ ------ ------
First Quarter $47.07 $40.87 $27.21 $23.46
Second Quarter $44.43 $38.42 $33.79 $25.03
Third Quarter $41.63 $26.61 $36.62 $32.89
Fourth Quarter $34.80 $27.10 $41.68 $35.73
The number of holders of record of our Common Stock on January 31, 2005 was
2,410. This amount does not include stockholders with shares held under
beneficial ownership in nominee name or within clearinghouse positions of
brokerage firms and banks.
Dividends
On February 23, 2005, the Board of Directors approved a quarterly cash dividend
of $0.0225, for an indicated annual rate of $0.09 per common share for 2005,
which is consistent with annual dividends paid per common share for the 2004 and
2003 years. It is presently intended that cash dividends on common shares will
continue to be paid on a quarterly basis; however, future dividends are
necessarily dependent upon our future earnings and financial condition and other
factors not currently determinable.
27
Stock Repurchases
A summary of the Company's repurchases of Omnicare, Inc. common stock during the
quarter ended December 31, 2004 is as follows (in thousands, except per share
data):
Total Number of Maximum Number (or
Shares Purchased as Approximate Dollar Value)
Total Number Average Price Part of Publicly of Shares that Must Yet
of Shares Paid per Announced Plans or Be Purchased Under the
Period Purchased (a) Share Programs Plans or Programs
- ------ ------------- ------------- ------------------- -------------------------
October 1 - 31, 2004 1 $28.91 -- --
November 1 - 30, 2004 1 30.47 -- --
December 1 - 31, 2004 -- -- -- --
--- --- ---
Total 2 $30.06 -- --
=== ====== === ===
(a) During the fourth quarter of 2004, the Company purchased 2 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.
28
ITEM 6 - SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data, which should be
read in conjunction with our Consolidated Financial Statements and related
Notes, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included at Items 8 and 7, respectively, of this Filing.
Five-Year Summary of Selected Financial Data
Omnicare, Inc. and Subsidiary Companies
(In thousands, except per share data)
For the years ended and at December 31,
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:(a)(b)(c)
Total net sales (d) $4,119,891 $3,499,174 $2,632,754 $2,183,036 $1,987,839
========== ========== ========== ========== ==========
Net income $ 236,011 $ 194,368 $ 125,906 $ 74,271 $ 48,817
========== ========== ========== ========== ==========
Earnings per share data:
Basic $ 2.29 $ 1.97 $ 1.34 $ 0.80 $ 0.53
========== ========== ========== ========== ==========
Diluted $ 2.17(e) $ 1.89(e) $ 1.33 $ 0.79 $ 0.53
========== ========== ========== ========== ==========
Dividends per share $ 0.09 $ 0.09 $ 0.09 $ 0.09 $ 0.09
========== ========== ========== ========== ==========
Weighted average number of
common shares outstanding:
Basic 103,238 98,800 94,168 93,124 92,012
========== ========== ========== ========== ==========
Diluted 112,819(e) 107,896(e) 94,905 93,758 92,012
========== ========== ========== ========== ==========
BALANCE SHEET DATA:(a)
Cash and cash equivalents, plus
restricted cash $ 84,431 $ 188,127 $ 141,083 $ 171,318 $ 113,907
Working capital (current assets less
current liabilities) 1,082,297 920,328 704,908 658,321 560,729
Total assets 3,899,181 3,395,021 2,427,585 2,290,276 2,210,218
Long-term debt (excluding current portion)(f) 1,234,067 1,082,677 720,187 750,669 780,706
Stockholders' equity(f) 1,927,108 1,676,024 1,275,062 1,149,783 1,068,423
OTHER FINANCIAL DATA:(a)
Net cash flows from operating activities $ 168,858 $ 174,066 $ 150,719 $ 155,878 $ 127,397
EBITDA(g) 498,732 440,603 301,849 247,564 204,660
Net cash flows from investing activities (415,973) (678,049) (152,383) (46,802) (76,116)
Capital expenditures(h) 17,926 17,115 24,648 26,222 32,423
Net cash flows from financing activities 144,442 549,902 (29,576) (52,346) (36,473)
See the related notes to Five-Year Summary of Selected Financial Data on the
following pages.
29
(a) Omnicare, Inc. ("Omnicare" or the "Company") has had an active acquisition
program in effect since 1989. See Note 2 of the Notes to Consolidated
Financial Statements for additional information concerning acquisitions
which can impact the comparability of our results.
(b) The following aftertax charges are included in net income for the years
ended December 31 (in thousands, except per share data):
2004 2003 2002 2001 2000
---- ------ ------- ------- -------
Call premium and write-off of unamortized
debt issuance costs $-- $7,853(1) $ -- $ -- $ --
Restructuring and other related charges -- -- 14,381(2) 11,374 17,135
Other Expense -- -- -- 2,987(3) --
---- ------ ------- ------- -------
Total $-- $7,853 $14,381 $14,361 $17,135
==== ====== ======= ======= =======
(1) See Note 7 of the Notes to Consolidated Financial Statements.
(2) See Note 12 of the Notes to Consolidated Financial Statements.
(3) Represents items totaling $1,817 pretax ($1,127 aftertax, or $0.01 per
diluted share) and $3,000 pretax ($1,860 aftertax, or $0.02 per diluted
share). The $1,817 special charge represents a repayment to the Medicare
program of overpayments made to one of the Company's pharmacy units during
the period from January 1997 through April 1998. As part of its corporate
compliance program, the Company learned of the overpayments, which related
to Medicare Part B claims that contained documentation errors, and notified
the Health Care Financing Administration (now known as the Centers for
Medicare & Medicaid Services) for review and determination of the amount of
overpayment. The $3,000 special charge represents a settlement during June
2001 of certain contractual issues with a customer, which issues and amount
relate to prior-year periods.
(c) In accordance with the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
Omnicare discontinued amortization of goodwill as of January 1, 2002.
Accordingly, no goodwill amortization was recorded during the years ended
December 31, 2004, 2003 and 2002. The following aftertax goodwill
amortization expense amounts are included in net income for the years ended
December 31 (in thousands):
2004 2003 2002 2001 2000
---- ---- ---- ------- -------
Goodwill amortization $-- $-- $-- $20,583 $20,582
=== === === ======= =======
(d) 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"), Omnicare has recorded
reimbursements received for "out-of-pocket" expenses on a grossed-up basis
in the income statement as revenues and direct costs. EITF No. 01-14
relates solely to the Company's contract research services business.
(e) In connection with the adoption of EITF No. 04-8 in the fourth quarter of
2004, the Company restated previously reported diluted earnings per share
and the diluted weighted average number of common shares outstanding for
all periods since the second quarter of 2003, the period the 4.00% junior
subordinated convertible debentures were outstanding. See further
discussion in Note 1 and Note 11 of the Notes to Consolidated Financial
Statements for additional information.
30
(f) In 2003, the Company completed a refinancing plan in which it raised
$1,033.6 million. See Note 7 of the Notes to Consolidated Financial
Statements for further information on these transactions.
(g) "EBITDA" represents earnings before interest (net of investment income),
income taxes, depreciation and amortization. The Company believes that
certain investors find EBITDA to be a useful tool for measuring a company's
ability to service its debt, which is also the primary purpose for which
management uses this financial measure. However, EBITDA does not represent
net cash flows from operating activities, as defined by United States
Generally Accepted Accounting Principles ("U.S. GAAP"), and should not be
considered as a substitute for operating cash flows as a measure of
liquidity. Omnicare's calculation of EBITDA may differ from the calculation
of EBITDA by others. The following is a reconciliation of EBITDA to net
cash flow from operating activities for the years ended December 31 (in
thousands):
2004 2003 2002 2001 2000
--------- --------- -------- -------- --------
EBITDA $ 498,732 $ 440,603 $301,849 $247,564 $204,660
Subtract:
Interest expense, net of
investment income (67,237) (77,134) (53,535) (53,709) (53,164)
Income taxes (139,188) (116,081) (77,145) (45,514) (28,706)
Changes in assets and liabilities,
net of effects from acquisition
of businesses (226,715) (165,442) (76,101) (38,069) (48,693)
Add:
Provision for doubtful accounts 45,112 44,680 31,163 25,490 26,729
Deferred tax provision 58,154 43,685 15,428 17,305 19,767
Write-off of debt issuance costs -- 3,755 -- -- --
Non-cash portion of restructuring
charges -- -- 9,060 2,811 6,804
--------- --------- -------- -------- --------
Net cash flows from operating activities $ 168,858 $ 174,066 $150,719 $155,878 $127,397
========= ========= ======== ======== ========
(h) Primarily represents the purchase of computer equipment and software,
machinery and equipment, and furniture, fixtures and leasehold
improvements.
31
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ("MD&A")
The following discussion should be read in conjunction with the consolidated
financial statements, related notes and other financial information appearing
elsewhere in this report. In addition, see the "Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking
Information" caption below.
Overview of 2004
- --------------------------------------------------------------------------------
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 1,086,000 beds in 47 states
in the United States and in Canada at December 31, 2004, 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 30 countries worldwide.
A summary of the key operating results for the years ended December 31, 2004 and
2003 follows (in thousands, except per share amounts):
Year Ended December 31,
2004 2003
---------- ----------
Consolidated:
- ------------
Total Net Sales $4,119,891 $3,499,174
========== ==========
Net Income $ 236,011 $ 194,368
========== ==========
Diluted Earnings Per Share ("EPS") (a) $ 2.17 $ 1.89
========== ==========
Sales and profitability results are discussed at the "Pharmacy Services Segment"
and "CRO Services Segment" captions below.
(a) In 2004, the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board adopted Issue No. 04-8, "The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share" ("EITF No. 04-8") which requires the
shares underlying contingently convertible debt instruments to be included in
diluted earnings per share computations using the "if-converted" accounting
method, regardless of whether the market price trigger has been met. Under that
method, the 4.00% junior subordinated convertible debentures ("4.00% 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 4.00% Convertible Debentures is added back
to net income. Diluted earnings per common share amounts have been restated for
2003 to give effect to the application of EITF No. 04-8 as it relates to the
Company's 4.00% Convertible Debentures issued in the second quarter of 2003. The
effect of Omnicare's adoption of EITF No. 04-8 was to decrease diluted earnings
per share $0.04 for the year ended December 31, 2003.
32
Year Ended December 31,
-----------------------
2004 2003
---------- ----------
Pharmacy Services Segment:
- -------------------------
Net Sales $3,983,641 $3,345,301
========== ==========
Operating Income $ 478,232 $ 412,986
========== ==========
For the Pharmacy Services Segment, despite the challenges presented by
competitive pricing and governmental reimbursement pressures, the year 2004 was
one of growth and development, owing largely to the success of its acquisition
and integration model. The Company essentially completed the integration of its
prior-period acquisitions and undertook the integration of current-year
acquisitions. The integration plan for these acquisitions included the
realization of economies of scale and cost synergies in purchasing of
pharmaceuticals and in consolidation of overlapping geographic locations and
redundant functions. Sales growth in Omnicare's existing pharmacy operations
also served to further leverage its cost structure. In addition to the benefits
of economies of scale generated by these growth programs, the Company also
instituted other cost-saving initiatives designed to respond to pricing and
reimbursement pressures and to improve the overall cost-efficiency of its
operations.
Contributing in large measure to the increase in sales for the full year ended
December 31, 2004 was the impact of the Company's acquisition programs, which
included 19 acquisitions during the year. The total increase in 2004 sales as a
result of these transactions is estimated at approximately $240 million.
Additionally, sales increased for the full year ended December 31, 2004, as
compared to the prior year period, due to the acquisition of SunScript in July
2003. Further, Pharmacy Services sales increased due to the continued
implementation and expansion of the Company's clinical and other service
programs, drug price inflation and the 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. The increased 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, favorably affecting sales and operating income, were partially
offset by intensified price competition, Medicaid reimbursement pressures, a
special charge of $7.4 million (lowering gross profit by approximately $2.7
million and increasing operating expenses by $4.7 million, as further described
below), and a continued shift in the Company's payor mix toward lower-margin
Medicaid business during 2004. Operating income was also affected by the initial
impact of the lower-margin acquisitions recently completed, which impact is
expected to diminish as the Company achieves drug purchasing improvements,
consolidation of redundant pharmacies and other economies of scale.
33
Year Ended December 31,
-----------------------
2004 2003
-------- --------
CRO Services Segment:
- --------------------
Net Sales $136,250 $153,873
======== ========
Operating Income $ 13,005 $ 12,562
======== ========
Revenues in the CRO Service Segment were lower for the year ended December 31,
2004 than in the same period of 2003 due primarily to client-driven
cancellations or delays in the commencement or continuation of certain projects.
Backlog at December 31, 2004 was approximately $94 million higher than at
December 31, 2003, largely related to the Clinimetrics acquisition in late 2004.
Operating income for the full year ended December 31, 2004 was higher than the
prior year despite lower revenues. The improvement in operating income is
attributable primarily to productivity improvements and cost reduction efforts
during the year ended December 31, 2004.
For a discussion regarding the Company's outlook, please see the Outlook section
of the MD&A.
Financial Condition, Liquidity and Capital Resources
- -------------------------------------------------------------------------------
Net cash flows from operating activities for the year ended December 31, 2004
were $168.9 million, compared with $174.1 million for the same period of 2003.
Operating cash flows during the year ended December 31, 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. In addition, in the fourth quarter of 2004, another
broad-based slowdown in Medicaid reimbursement from the State of Illinois,
unfavorably impacted cash flow by approximately $27 million. Furthermore, cash
flow for the full years 2004 and 2003 was unfavorably impacted by the reduction
in an acquired company's payable to its previous drug wholesaler for
approximately $18 million and $15 million, respectively. 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 2004, the Company's investing activities included 19
acquisitions in its institutional pharmacy business and one in its CRO business,
which although not individually significant, aggregated approximately $399
million as compared with approximately $663 million in 2003, including amounts
payable pursuant to acquisition agreements relating to prior year acquisitions.
Net borrowings on the Company credit facility totaled $170.0 million in the year
ended December 31, 2004 and were primarily used for payments relating to the
acquisition of businesses. The Company also paid $20.5 million on the term A
loan in 2004. At December 31, 2004, outstanding revolving credit borrowings were
$170.0 million and the balance on the term A loan was $135.4 million.
34
Results of Operations
- ---------------------
The following summary table presents consolidated net sales and results of
operations for Omnicare for each of the years ended December 31, 2004, 2003 and
2002 (in thousands, except per share amounts). In accordance with the SEC's
release entitled "Conditions for Use of Non-GAAP Financial Measures," the
Company has disclosed in this MD&A, with the exception of EBITDA (discussed
below), only those measures that are in accordance with U.S. GAAP.
For the years ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Total net sales $4,119,891 $3,499,174 $2,632,754
========== ========== ==========
Net income $ 236,011 $ 194,368 $ 125,906
========== ========== ==========
Earnings per share:
Basic $ 2.29 $ 1.97 $ 1.34
========== ========== ==========
Diluted $ 2.17 $ 1.89 $ 1.33
========== ========== ==========
EBITDA(a) $ 498,732 $ 440,603 $ 301,849
========== ========== ==========
(a)"EBITDA" represents earnings before interest (net of investment income),
income taxes, depreciation and amortization. The Company believes that certain
investors find EBITDA to be a useful tool for measuring a company's ability to
service its debt, which is also the primary purpose for which management uses
this financial measure. However, EBITDA does not represent net cash flows from
operating activities, as defined by United States (U.S.) GAAP, and should not be
considered as a substitute for operating cash flows as a measure of liquidity.
The Company's calculation of EBITDA may differ from the calculation of EBITDA by
others. See Five-Year Summary of Selected Financial Data for a reconciliation of
EBITDA to net cash flows from operating activities at Item 6 of this Report.
2004 vs. 2003
- --------------------------------------------------------------------------------
Consolidated
- ------------
Total net sales for 2004 increased to $4,119.9 million from $3,499.2 million in
2003. Diluted earnings per share were $2.17 for the year ended December 31, 2004
versus $1.89 in 2003. Net income for 2004 was $236.0 million versus $194.4
million in 2003. EBITDA for 2004 totaled $498.7 million in comparison with
$440.6 million for 2003.
Included in 2004 was a special charge totaling $7.4 million pretax ($4.6 million
aftertax or $0.04 per diluted share) in connection with certain state Medicaid
audits related to prior periods, lowering gross profit by approximately $2.7
million and increasing operating expenses by approximately $4.7 million.
35
Included in 2003 interest expense was a charge of $12.7 million pretax ($7.9
million aftertax, or $0.07 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 5.0%, $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 $3,983.6 million for the
year ended December 31, 2004, exceeding the 2003 amount of $3,345.3 million by
$638.3 million, or 19.1%. At December 31, 2004, Omnicare served long-term care
facilities comprising approximately 1,086,000 beds as compared with
approximately 1,003,000 beds served at December 31, 2003. Contributing in large
measure to the growth in Pharmacy Services was the completion of 19 acquisitions
in 2004, which individually were not significant but added approximately $240
million to 2004 sales in the aggregate, as well as the acquisition of SunScript
in July 2003. Additionally, Pharmacy Services sales increased due to the
continued implementation and expansion of the Company's clinical and other
service programs, drug price inflation and the 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. The Company estimates that drug price
inflation for its highest dollar volume products in 2004 was approximately 5%.
These factors were partially offset by continued intensified competitive pricing
pressures, Medicaid reimbursement reductions, including overall reimbursement
formula changes in certain states, as well as drug-specific pricing reductions
or limitations on certain generic drugs, and a continued shift in its payor mix
toward lower-margin Medicaid business. Also impacting the 2004 results was the
increased use of generic drugs and a special charge during 2004 in connection
with certain state Medicaid audits related to prior periods, which lowered sales
by approximately $2.7 million. While the Company is focused on reducing the
impact of competitive pricing and governmental reimbursement issues, there can
be no assurance that such issues will not continue to impact the Pharmacy
Services segment.
Operating income of the Pharmacy Services segment was $478.2 million in 2004, a
$65.2 million improvement as compared with the $413.0 million earned in 2003. As
a percentage of the segment's sales, operating income was 12.0% in 2004,
compared with 12.3% in 2003. The increased operating income was primarily the
result of increased sales and the overall synergies from the integration of the
aforementioned 2004 acquisitions, the NCS Healthcare ("NCS") business and, to a
lesser extent, the SunScript acquisition, as well as productivity initiatives
throughout the Pharmacy Services segment. Although operating margins are
initially unfavorably impacted by the addition of lower-margin businesses when
acquired, the integration efforts result in drug purchasing improvements,
consolidation of redundant pharmacy locations and other economies of scale,
which serve to leverage the Company's operating cost structure. Partially
offsetting the improved operating income in 2004 was the intensified competitive
pricing and Medicaid reimbursement pressures, the previously discussed special
charge during the third and fourth quarters of 2004, which lowered operating
income by approximately $7.4 million, the initial impact of recently completed
acquisitions on margins, which impact is
36
expected to diminish as the Company achieves drug purchasing improvements,
consolidation of redundant pharmacies and other economies of scale, and a
continued shift in payor mix toward lower-margin Medicaid business.
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 in 2005, subject to adjustment.
At the time of the acquisition, SunScript provided pharmaceutical products and
related consulting services to skilled nursing and assisted living facilities
comprising approximately 43,000 beds located in 19 states (excluding beds in Sun
Healthcare facilities that Sun Healthcare intended to divest 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.
CRO Services Segment
Like others in the contract research ("CRO") industry, the performance of the
Company's CRO business reflects the somewhat volatile nature of this business
given the numerous variables outside the Company's control. The softness in
revenues in 2004 was attributable to several client-driven cancellations or
delays in the commencement or continuation of certain projects.
Omnicare's CRO Services segment recorded revenues of $136.3 million for the year
ended December 31, 2004, which were $17.6 million, or 11.4%, lower than the
$153.9 million recorded in the same period in 2003. In accordance with EITF
Issue No. 01-14, the Company included $18.7 million and $24.8 million of
reimbursable out-of-pockets in its CRO Services segment reported revenue and
direct cost amounts for the years ended December 31, 2004 and 2003,
respectively. Revenues for 2004 were lower than in 2003 largely due to the
impact of client-driven cancellations or delays in the commencement or
continuation of certain projects, and a reduction in reimbursable out-of-pockets
of $6.1 million under EITF No. 01-14.
Operating income in the CRO Services segment was $13.0 million in 2004 compared
with $12.6 million in 2003. As a percentage of the segment's revenue, operating
income was 9.5% in 2004 compared with 8.2% in 2003. Operating income, while
benefiting from productivity improvements and cost reduction efforts, was
unfavorably impacted primarily by the lower revenues during 2004. Backlog at
December 31, 2004 of $276.9 million was $94.1 million greater than the December
31, 2003 backlog of $182.8 million, primarily driven by the late 2004
Clinimetrics acquisition.
Consolidated
The Company's consolidated gross profit of $1,030.4 million increased $132.8
million in 2004 from the prior-year amount of $897.6 million. Gross profit as a
percentage of total net sales of 25.0% in the year ended December 31, 2004, was
slightly lower than the 25.7% experienced during 2003. Positively impacting
overall gross profit margin were the Company's purchasing
37
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 and other acquisitions along with the benefits realized from
the Company's formulary compliance program, as well as the increased use of
generic drugs. These favorable factors were more than offset by the intensified
pricing and Medicaid reimbursement pressures, the previously discussed special
charge during 2004, which lowered gross profit by approximately $2.7 million,
the initial impact of the lower-margin acquisitions completed in 2004, which
impact is expected to diminish as the Company achieves drug purchasing
improvements, consolidation of redundant pharmacies and other economies of
scale, and a continued shift in the Company's payor mix toward Medicaid during
the latter part 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.
Increased leverage in purchasing favorably impacts gross profit and is primarily
derived through discounts from suppliers. Leveraging of fixed and variable
overhead costs primarily relates to generating higher sales volumes from
pharmacy facilities with no increase in fixed costs (e.g., rent) and minimal
increases in variable costs (e.g., utilities), as well as the elimination of
pharmacies through the Company's productivity and consolidation initiatives,
further discussed below. The Company believes it will be able to continue to
leverage fixed and variable overhead costs through internal and acquired growth.
Government and other reimbursement formulas generally adjust to take into
account drug price inflation or deflation. In order to enhance its gross profit
margins, the Company strategically allocates its resources to those activities
that will increase internal sales growth and favorably impact sales mix or will
lower costs. In addition, through the ongoing development of its pharmaceutical
purchasing programs, the Company is able to obtain volume discounts and thereby
manage its pharmaceutical costs.
Omnicare's selling, general and administrative ("operating") expenses for the
year ended December 31, 2004 of $587.9 million were higher than the 2003 amount
of $510.0 million by $77.9 million, due primarily to the overall growth of the
business, including the aforementioned completion of several acquisitions in
2004, which individually were not significant. Operating expenses as a
percentage of total net sales, however, totaled 14.3% in 2004, representing a
decrease from the 14.6% experienced in 2003. This decrease was 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. Operating expenses for the year ended December
31, 2004 also included the previously discussed special charges, which increased
operating expenses by approximately $4.7 million, as well as expenses relating
to the implementation of Section 404 of the Sarbanes-Oxley Act of 2002 ("Section
404") which approximated $5 million. Management anticipates such costs
associated with its efforts to maintain compliance with Section 404 continuing
in 2005, and beyond.
Investment income for the year ended December 31, 2004 of $3.2 million was lower
than the $4.2 million earned in the 2003 year. Lower average invested cash
balances during 2004 as compared with 2003 was the primary driver for the
decrease in investment income.
38
Interest expense for the year ended December 31, 2004 of $70.4 million was lower
than the $81.3 million in the 2003 year primarily relating to the inclusion in
2003 results of the previously mentioned call premium and write-off of the
unamortized debt issuance costs relating to the Company's early redemption and
retirement of its $345 million aggregate principal amount of 5.0% convertible
subordinated debentures totaling $12.7 million pretax ($7.9 million aftertax,
or $0.07 per diluted share).
The effective income tax rate was 37.1% in 2004, relatively consistent with the
prior-year rate of 37.4%. 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.
2003 vs. 2002
- --------------------------------------------------------------------------------
Consolidated
Total net sales for 2003 increased to $3,499.2 million from $2,632.8 million in
2002. Net income for 2003 was $194.4 million versus $125.9 million in 2002.
Diluted earnings per share were $1.89 for the year ended December 31, 2003
versus $1.33 in 2002. EBITDA for 2003 totaled $440.6 million in comparison with
$301.8 million for 2002.
In connection with the adoption of EITF No. 04-8 in the fourth quarter of 2004,
the Company restated previously reported diluted earnings per share for the year
ended December 31, 2003. See further discussion at the "Recently Issued
Accounting Standards" caption below.
Included in 2003 interest expense was a charge of $12.7 million pretax ($7.9
million aftertax, or $0.07 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 5.0% convertible subordinated debentures discussed under the
"Financial Condition, Liquidity and Capital Resources" caption below.
Included in 2002 net income were aggregate charges of $23.2 million ($14.4
million aftertax, or $0.15 per diluted share) relating to the Phase II
productivity and consolidation program described hereafter under the
"Restructuring Charges" caption below. The charges were primarily comprised of
employee severance pay, employment agreement buy-out costs, lease termination
costs, the write-off of leasehold improvements and other assets, and
professional fees and other facility exit costs.
Pharmacy Services Segment
Omnicare's Pharmacy Services segment recorded sales of $3,345.3 million for the
year ended December 31, 2003, exceeding the 2002 amount of $2,467.2 million by
$878.1 million, or 35.6%. At December 31, 2003, Omnicare served long-term care
facilities comprising approximately 1,003,000 beds as compared with
approximately 754,000 beds served at December 31, 2002. The increase in revenues
and in beds served was primarily a result of the
39
acquisitions of NCS in January 2003 and SunScript in July 2003, as discussed
below. The results of the NCS and SunScript acquisitions were included only
from their date of acquisition, or January 15, 2003 and July 15, 2003,
respectively. Annualized sales relating to the ongoing NCS and SunScript
businesses aggregated approximately $815 million at the time of acquisition.
Additionally, Pharmacy Services sales increased due to growth in new business,
increasing occupancy, the continued implementation and expansion of the
Company's clinical and other service programs, drug price inflation, and the
increased market penetration of newer branded drugs targeted at the diseases
of the elderly, which often carry higher prices but are significantly more
effective in reducing overall healthcare costs than those they replace.
Partially offsetting the increase in sales were pricing pressures, including
lower government reimbursement formulas and other cost control measures in
some states, and the increasing number and usage of generic drugs. The Company
estimates that drug price inflation for its highest dollar volume products in
2003 was approximately 5%.
Operating income of the Pharmacy Services segment was $413.0 million in 2003, a
$124.8 million improvement as compared with the $288.2 million earned in 2002.
As a percentage of the segment's sales, operating income was 12.3% in 2003,
compared with 11.7% in 2002. The improved operating income was primarily the
result of increased sales, as discussed above, a lower operating cost structure
reflecting principally the impact of the productivity and consolidation
initiative completed at the end of the third quarter of 2002 (the "Phase II
Program"), the completion of the integration of American Pharmaceutical
Services, Inc. and related entities (collectively, "APS"), the overall synergies
(including economies of scale, drug purchasing improvements and consolidation of
redundant pharmacy locations, which serve to leverage the Company's operating
cost structure) from the NCS and SunScript integrations (although operating
margins were initially unfavorably impacted in the first and third quarters of
2003, respectively, by the addition of the lower-margin NCS and SunScript
business), and the $6.8 million year-over-year pretax impact of restructuring
charges in 2002 (as compared to no such charges in 2003).
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
comprising 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.
40
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.
CRO Services Segment
Omnicare's CRO Services segment recorded revenues of $153.9 million for the year
ended December 31, 2003, which were $11.6 million, or 7.0%, lower than the
$165.5 million recorded in 2002. In accordance with EITF Issue No. 01-14, the
Company included $24.8 million and $26.3 million of reimbursable out-of-pockets
in its CRO Services segment reported revenue and direct cost amounts for the
years ended December 31, 2003 and 2002, respectively. Revenues for the year
ended December 31, 2003 were lower than in 2002 largely due to the impact of
client-driven cancellations or delays in the commencement or continuation of
certain projects.
Operating income in the CRO Services segment was $12.6 million in 2003 compared
with $4.6 million in 2002. As a percentage of the segment's revenue, operating
income was 8.2% in 2003 compared with 2.8% in 2002. The improvement in operating
income was primarily attributable to the year-over-year impact of restructuring
charges associated with the Phase II productivity and consolidation program,
which resulted in $16.4 million of pretax expense in 2002 and no expense in 2003
(as the Phase II Program was finalized in 2002). This improvement was partially
offset by the unfavorable impact on operating income of the lower revenues
discussed above. Backlog at December 31, 2003 of $182.8 million was relatively
consistent with the December 31, 2002 backlog of $181.6 million.
Consolidated
The Company's consolidated gross profit of $897.6 million increased $206.5
million in 2003 from the prior-year amount of $691.1 million. Gross profit as a
percentage of total net sales of 25.7% in the year ended December 31, 2003, was
slightly lower than the 26.2% experienced during 2002. 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 APS business and benefits realized from the Company's
formulary compliance program, as well as the increased use of generic drugs, and
leveraging of fixed and variable overhead costs at the Company's pharmacies as a
result of the reduced cost structure brought about by the Phase II Program.
These favorable factors were offset primarily by the initial impact of the
lower-margin NCS and SunScript business in the first and third quarters,
respectively (which impact diminished as the Company achieved economies of
scale, drug purchasing improvements, and consolidated redundant pharmacy
locations), and, to a lesser extent, by the previously mentioned shift in mix
toward newer, branded drugs targeted at the diseases of the elderly that
typically produce higher gross profit but lower gross profit margins, and
pricing pressures, including lower government reimbursement formulas and other
cost control measures in some states.
41
Omnicare's selling, general and administrative ("operating") expenses for the
year ended December 31, 2003 of $510.0 million were higher than the 2002 amount
of $411.3 million by $98.7 million, due to the overall growth of the business,
including the acquisitions of NCS and SunScript in the first and third quarters
of 2003, respectively.
Operating expenses as a percentage of total net sales, however, totaled 14.6% in
2003, representing a decline from the 15.6% experienced in 2002. This decline is
primarily due to the year-over-year favorable impact of the Phase II Program
completed at the end of the third quarter of 2002, as well as realization of
operational efficiencies from the APS, NCS and SunScript acquisitions, and the
leveraging of fixed and variable overhead costs over a larger sales base in 2003
than that which existed in 2002.
Investment income for the year ended December 31, 2003 was $4.2 million, an
improvement of $0.9 million over the 2002 year. Larger average invested cash
balances during 2003 as compared with 2002 was the primary driver of the
increase in investment income.
Interest expense for the year ended December 31, 2003 was $81.3 million compared
with $56.8 million in the 2002 year. The increase primarily related to the
financing of the NCS acquisition in January 2003, initially through borrowings
on the Company's three-year $500.0 million revolving credit facility ("Revolving
Credit Facility") of $499.0 million. The interest expense for the 2003 year also
included a call premium and the write-off of unamortized debt issuance costs
aggregating $12.7 million before taxes ($7.9 million aftertax, or $0.07 per
diluted share) related to the Company's early redemption and retirement of its
$345 million aggregate principal amount of 5.0% convertible subordinated
debentures, as further described in the "Financial Condition, Liquidity and
Capital Resources" caption below. Partially offsetting this increase was reduced
interest expense associated with Omnicare's repayment of $94.1 million on the
term A loan during 2003.
The effective income tax rate was 37.4% in 2003, relatively consistent with the
prior-year rate of 38.0%. The effective tax rates in 2003 and 2002 are higher
than the federal statutory rate largely as a result of the combined impact of
state and local income taxes, various nondeductible expenses and tax-accrual
adjustments.
Restructuring Charges
In 2002, the Company completed its previously disclosed second phase of its
productivity and consolidation initiative (the "Phase II Program"). The Phase II
Program further streamlined operations, increased efficiencies and helped
enhance the Company's position as a high quality, cost-effective provider of
pharmaceutical services. Building on the previous efforts, the Phase II Program
included the merging or closing of seven pharmacy locations and the
reconfiguration in size and function of an additional 10 locations. The Phase II
Program also included a reduction in occupied building space in certain
locations and the rationalization or reduction of staffing levels in the CRO
business in order to better garner the efficiencies of the integration and
functional reorganization of that business. The Phase II Program encompassed a
net reduction of approximately 460 employees, or about 5% of the Company's total
workforce, across both the Pharmacy Services and CRO Services segments.
42
In connection with the Phase II Program, the Company expensed a total of $18.3
million pretax ($11.4 million aftertax, or $0.12 per diluted share) for
restructuring charges during the year ended December 31, 2001. Further,
approximately $23.2 million pretax ($14.4 million aftertax, or $0.15 per
diluted share) was recorded during the year ended December 31, 2002, when the
amounts were required to be recognized in accordance with U.S. GAAP. The
restructuring charges included severance pay, the buy-out of employment
agreements, the buy-out of lease obligations, the write-off of leasehold
improvements and other assets, and related fees and facility exit costs.
Details of the pretax restructuring charges relating to the Phase II Program
follow (in thousands):
Balance at 2002 Utilized Balance at Utilized
January 1, Provision/ during December 31, during
2002 Accrual 2002 2002 2003
---------- ---------- -------- ------------ --------
Restructuring charges:
Employee severance $1,642 $ 2,177 $ (2,655) $1,164 $(1,164)
Employment agreement buy-outs 508 -- (214) 294 (294)
Lease terminations 606 5,862 (1,846) 4,622 (1,155)
Other assets, fees and facility exit costs 3,027 15,156 (14,690) 3,493 (2,878)
------ ------- -------- ------ -------
Total restructuring charges $5,783 $23,195 $(19,405) $9,573 $(5,491)
====== ======= ======== ====== =======
Balance at Utilized Balance at
December 31, during December 31,
2003 2004 2004
------------ -------- ------------
Restructuring charges:
Employee severance $ -- $ -- $ --
Employment agreement buy-outs -- -- --
Lease terminations 3,467 (530) 2,937
Other assets, fees and facility exit costs 615 (220) 395
------ ----- ------
Total restructuring charges $4,082 $(750) $3,332
====== ===== ======
As of December 31, 2004, the Company had paid approximately $8.5 million of
severance and other employee-related costs relating to the reduction of
approximately 460 employees. The remaining liabilities recorded at December 31,
2004 represent amounts not yet paid or settled relating to actions taken
(primarily consisting of remaining lease payments), and will be adjusted in
future periods as these matters are finalized.
Impact of Inflation
- --------------------------------------------------------------------------------
As previously mentioned, the Company estimates that drug price inflation for its
highest dollar volume products in 2004 approximated 5%, which tends to impact
sales and costs of sales at approximately the same level. Therefore, inflation
has not materially affected Omnicare's income from operations, inasmuch as
government and other reimbursement formulas generally adjust to take into
account drug price inflation or deflation.
43
Financial Condition, Liquidity and Capital Resources
- -------------------------------------------------------------------------------
Cash and cash equivalents plus restricted cash at December 31, 2004 were $84.4
million compared with $188.1 million at December 31, 2003 (including restricted
cash amounts of $0.3 million and $0.7 million, respectively).
The Company generated positive net cash flows from operating activities of
$168.9 million during the year ended December 31, 2004, compared with net cash
flows from operating activities of $174.1 million and $150.7 million during the
years ended December 31, 2003 and 2002, respectively. Net cash flows from
operating activities during 2004 was driven primarily by operating results.
Unfavorably impacting cash flow during 2004 was a one-time deposit of $44.0
million made early in 2004, owing to a change in payment terms under the
Company's new contract with its drug wholesaler. In addition, in the fourth
quarter of 2004, another broad-based slowdown in Medicaid reimbursement occurred
from the state of Illinois, unfavorably impacting cash flow by approximately $27
million. Furthermore, cash flow for the full years 2004 and 2003 was unfavorably
impacted by the reduction in an acquired company's payable to its previous drug
wholesaler for approximately $18 million and $15 million, respectively.
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 $416.0 million, $678.0 million and
$152.4 million in 2004, 2003 and 2002, respectively. Acquisitions of businesses
required cash payments of $398.6 million (including amounts payable pursuant to
acquisition agreements relating to pre-2004 acquisitions) in 2004 relating to 19
acquisitions, none of which were individually significant, and which were
primarily funded by borrowings under the Company's credit facility, existing
cash balances and operating cash flows. Acquisitions of businesses during 2003
and 2002 required $663.4 million and $127.8 million, respectively, of cash
payments (including amounts payable pursuant to acquisition agreements relating
to pre-2003 and pre-2002 acquisitions, respectively) which were primarily funded
by borrowings, existing cash balances and operating cash flows. The Company'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 $144.4 million for the year ended
December 31, 2004. Net borrowings on the credit facility totaled $170.0 million
in the year ended December 31, 2004 and were primarily used for payments
relating to the acquisition of businesses. The Company also paid $20.5 million
on the term A loan in the year ended December 31, 2004. At December 31, 2004,
outstanding revolving credit borrowings were $170.0 million and the balance on
the term A loan was $135.4 million. Net cash provided by financing activities
was $549.9 million in 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 $593.1 million during 2003, as well as the early redemption and
retirement during 2003 of $345.0 million of 5.0% convertible subordinated
debentures due 2007 ("5% Convertible
44
Debentures"). Net cash used for financing activities was $29.6 million in 2002.
During 2002, the Company used $120.0 million in cash generated from its
operations to fully pay down the outstanding obligations under its Revolving
Credit Facility, including the $90.0 million drawn down in early 2002 in
connection with the APS acquisition.
On February 23, 2005, 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 2005, which is consistent with annual dividends paid per common
share for the 2004, 2003 and 2002 years. Aggregate dividends of $9.4 million
paid during 2004 were relatively consistent with the $8.9 million and $8.5
million paid in 2003 and 2002, respectively.
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 $1.6 billion, which includes the
assumption of NeighborCare's net debt and any related refinancing thereof. As of
December 31, 2004, the Company has deferred approximately $5.6 million of
pre-acquisition costs relating to this transaction. 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 April 1, 2005, unless extended.
There were no material commitments and contingencies outstanding at December 31,
2004, other than the contractual obligations summarized in the "Disclosures
About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations"
caption below, certain acquisition-related payments potentially due in the
future, including deferred payments, indemnification payments and payments
originating from earnout provisions that may become payable (including up to an
additional $15.0 million relating to SunScript, that may become payable
post-closing, subject to adjustment) and the matters discussed in Note 14,
"Commitments and Contingencies," of the Notes to Consolidated Financial
Statements.
Disclosures About Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations
At December 31, 2004, the Company had one unconsolidated entity, Omnicare
Capital Trust I (the "Old Trust"), which was established for the purpose of
facilitating the offering of 4.00% Trust Preferred Income Equity Redeemable
Securities of the Old Trust (the "Old Trust PIERS"). For financial reporting
purposes, the Old Trust is treated as an equity method investment of
45
Omnicare. The Old Trust is a 100%-owned finance subsidiary of the Company. The
Company has fully and unconditionally guaranteed the securities of the Old
Trust. The 4.00% junior subordinated convertible debentures issued by the
Company to the Old Trust in connection with the issuance by the Old Trust of
the Old Trust PIERS are presented as a separate line item on Omnicare's
consolidated balance sheet, and the related disclosures concerning the Old
Trust PIERS, the guarantee and the 4.00% junior subordinated convertible
debentures are included in Omnicare's notes to consolidated financial
statements. Omnicare records interest payable to the Old Trust as interest
expense in its consolidated statements of income.
At December 31, 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.
On March 8, 2005, the Company completed the exchange of $333,766,950 aggregate
liquidation amount of the Old Trust PIERS (representing approximately 96.7% of
the total liquidation amount of the Old Trust PIERS outstanding) for an equal
amount of newly issued Series B 4.00% Trust Preferred Income Equity Redeemable
Securities (the "New Trust PIERS") of Omnicare Capital Trust II (the "New
Trust"), plus an exchange fee of $0.125 per $50 stated liquidation amount of Old
Trust PIERS. Following the consummation of the exchange, approximately
$11,233,050 aggregate liquidation amount of Old Trust PIERS remain outstanding.
In connection with the issuance of the New Trust PIERS, the Company issued
a corresponding amount of Series B 4.00% junior subordinated convertible
debentures due June 15, 2033 to the New Trust. For financial reporting purposes,
the New Trust also is treated as an equity method investment of Omnicare. The
New Trust is a 100%-owned finance subsidiary of the Company. The Company has
fully and unconditionally guaranteed the securities of the New Trust. The Series
B 4.00% junior subordinated convertible debentures issued by the Company to the
New Trust will be presented as a separate line item on Omnicare's consolidated
balance sheet, and the related disclosures concerning the New Trust PIERS, the
guarantee and the Series B 4.00% junior subordinated convertible debentures will
be included in Omnicare's notes to consolidated financial statements for periods
following the exchange. Omnicare will record interest payable to the New Trust
as interest expense in its consolidated statements of income.
46
The following summarizes the Company's contractual obligations at December 31,
2004, and the effect such obligations are expected to have on the Company's
liquidity and cash flows in future periods.
Contractual Obligations at December 31, 2004 (in thousands):
Less Than After 5
Total 1 Year 1-3 Years 4-5 Years Years
---------- --------- --------- --------- ----------
Long-term debt obligations $1,275,385 $ 24,615 $280,770 $ -- $ 970,000
Capital lease obligations 1,392 603 591 124 74
Operating lease obligations 116,122 28,897 43,947 24,046 19,232
Purchase obligations(a) 53,068 46,337 4,571 2,160 --
Other current obligations(b) 299,746 299,746 -- -- --
Other long-term liabilities(c) 132,931 -- 34,946 1,816 96,169
---------- -------- -------- ------- ----------
Total contractual cash obligations $1,878,644 $400,198 $364,825 $28,146 $1,085,475
========== ======== ======== ======= ==========
(a) Purchase obligations primarily consist of open inventory purchase orders at
December 31, 2004.
(b) Other current obligations primarily consist of accounts payable at December
31, 2004.
(c) Other long-term liabilities is largely comprised of pension and excess
benefit plan obligations, acquisition related liabilities and the
obligation associated with the interest rate Swap Agreement discussed
below.
As of December 31, 2004, the Company had approximately $13.1 million outstanding
relating to standby letters of credit, substantially all of which are subject to
automatic annual renewals.
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 Old 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 2 of the Notes to Consolidated
Financial Statements). The Revolving Credit Facility was retired in connection
with the mid-2003 refinancing transactions, as further described below.
In connection with the mid-2003 financings, 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
47
(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 December 31, 2004, the weighted-average interest rate on funds
drawn was 4.06%, the LIBOR interest rate margin was 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 $20.5 million on the term A loan
during 2004. The $135.4 million outstanding at December 31, 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 $170.0 million
outstanding as of December 31, 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 Old Trust PIERS offering to redeem the entire
outstanding $345.0 million aggregate principal amount of the Company's 5.0%
Convertible Debentures, with remaining proceeds being used for general corporate
purposes. The total redemption price, including the call premium, was
approximately $353.9 million. Accordingly, a $12.7 million pretax charge ($7.9
million aftertax, or $0.07 per diluted share) was recognized in interest expense
during the year ended December 31, 2003 for the call premium and the write-off
of remaining unamortized debt issuance costs associated with the redemption of
the 5.0% Convertible Debentures.
In 2001, the Company completed the issuance, at par value, of $375.0 million of
8.125% senior subordinated notes due 2011 ("8.125% Senior Notes"). The 8.125%
Senior Notes were subsequently exchanged for replacement notes with identical
terms, which were registered with the Securities and Exchange Commission.
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 5.105%
at December 31, 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 fair value of the Swap Agreement are offset by changes in the
recorded carrying value of the related 6.125% Senior Notes. The fair value of
the Swap Agreement of approximately $17.5 million at December 31, 2004 is
recorded as a noncurrent liability and a reduction to the carrying value of the
related 6.125% Senior Notes.
48
In connection with the offering of the Old Trust PIERS in the second quarter of
2003, the Company issued a corresponding amount of 4.00% junior subordinated
convertible debentures due 2033 to the Old Trust. The Old Trust is a 100%-owned
finance subsidiary of the Company. The Company has fully and unconditionally
guaranteed the securities of the Old Trust. The Old Trust PIERS offer fixed cash
distributions at a rate of 4.00% per annum payable quarterly, and a fixed
conversion price of $40.82 under a contingent conversion feature whereby the
holders may convert their Old Trust PIERS if the closing sales price of Omnicare
common stock for a predetermined period, beginning with the quarter ending
September 30, 2003, is more than 130% of the then-applicable conversion price
or, during a predetermined period, if the daily average of the trading prices
for the Old Trust PIERS is less than 105% of the average of the conversion
values for the Old Trust PIERS through 2028 (98% for any period thereafter
through maturity). The Old Trust PIERS also will pay contingent distributions,
commencing with the quarterly distribution period beginning June 15, 2009, if
the average trading prices of the Old Trust PIERS for a predetermined period
equals 115% or more of the stated liquidation amount of the Old Trust PIERS.
Embedded in the Old Trust PIERS are two derivative instruments, specifically, a
contingent interest provision and a contingent conversion parity provision. The
embedded derivatives are periodically valued by a third-party advisor, and at
December 31, 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.
Omnicare irrevocably and unconditionally guarantees, on a subordinated basis,
certain payments to be made by the Old Trust in connection with the Old Trust
PIERS.
On March 8, 2005, the Company completed the exchange of $333,766,950 aggregate
liquidation amount of the Old Trust PIERS (representing approximately 96.7% of
the total liquidation amount of the Old Trust PIERS outstanding) for an equal
amount of New Trust PIERS, plus an exchange fee of $0.125 per $50 stated
liquidation amount of Old Trust PIERS. Each New Trust PIERS represents an
undivided beneficial interest in the assets of the New Trust, which assets
consist solely of Series B 4.00% junior subordinated convertible debentures
issued by Omnicare, Inc. Following the consummation of the exchange,
approximately $11,233,050 aggregate liquidation amount of Old Trust PIERS remain
outstanding.
The terms of the New Trust PIERS are substantially identical to the terms of the
Old Trust PIERS, except that the New Trust PIERS are convertible into cash and,
if applicable, shares of Omnicare common stock, whereas the outstanding Old
Trust PIERS are convertible only into Omnicare common stock (except for cash in
lieu of fractional shares).
The purpose of the exchange offer was to change the conversion settlement
provisions of the Old Trust PIERS. As disclosed in Note 1 to the Consolidated
Financial Statements, the Company made this change in response to the issuance
by the EITF of the FASB of EITF Issue No. 04-8, which, effective December 15,
2004, changed the accounting rules applicable to the Old Trust PIERS and
requires Omnicare to include the common stock issuable upon conversion of the
Old Trust PIERS in Omnicare's diluted shares outstanding, regardless of whether
the market trigger has been met. By committing to pay up to the stated
liquidation amount of the New Trust PIERS to be converted in cash upon
conversion, Omnicare will be able to account for the New Trust
49
PIERS under the treasury stock method, which is expected to be less dilutive
to earnings per share than the "if converted" method proscribed by EITF 04-8.
The Credit Facility, the 8.125% Senior Notes, the 6.125% Senior Notes and the
4.00% Convertible Debentures contain representations and warranties, covenants
and events of default customary for such facilities. Interest rates charged on
borrowings outstanding under the Credit Facility are based on prevailing market
rates as discussed in the following section.
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, except for the aforementioned "exchange offering," and 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.
Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
Omnicare's primary market risk exposure relates to interest rate risk exposure
through its borrowings. The Company's debt obligations at December 31, 2004
include $135.4 million outstanding under the term A loan portion and $170.0
million drawn on the revolving credit commitment portion, of its June 2003
four-year, variable-rate Credit Facility at a weighted-average interest rate of
4.06% at December 31, 2004 (a 100 basis-point change in the interest rate would
increase or decrease pretax interest expense by approximately $3.1 million per
year); $375.0 million outstanding under its fixed-rate 8.125% Senior Notes, due
2011; $250.0 million outstanding under its fixed-rate 6.125% Senior Notes, due
2013; and $345.0 million outstanding under its fixed-rate 4.00% 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 5.105% at
December 31, 2004 (a 100 basis-point change in the interest rate would increase
or decrease pretax interest expense by approximately $2.5 million per year).
The Swap Agreement, which matches the terms of the 6.125% Senior Notes, is
designated and accounted for as a fair value hedge. The Company is accounting
for the Swap Agreement in accordance with SFAS No. 133, as amended, so changes
in the fair value of the Swap Agreement are offset by changes in the recorded
carrying value of the related 6.125% Senior Notes. The fair value of the Swap
Agreement of approximately $17.5 million at December 31, 2004 is recorded as a
noncurrent liability and a reduction to the carrying value of the related 6.125%
Senior Notes. At December 31, 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 4.00% Convertible Debentures is
approximately $403.1 million, $251.3 million and $380.6 million, respectively.
50
Embedded in the Old Trust PIERS and the New Trust PIERS are two derivative
instruments, specifically, a contingent interest provision and a contingent
conversion parity provision. The embedded derivatives are periodically valued by
a third-party advisor, and at December 31, 2004, the values of both derivatives
embedded in the Old Trust PIERS were not material. However, the values are
subject to change, based on market conditions, which could affect the 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. In connection with the
acquisition of Canada-based Medico pharmacy, Omnicare entered into a $50 million
foreign exchange transaction arrangement on December 29, 2004. This arrangement
expired on January 7, 2005, and had an immaterial impact on the consolidated
financial position, income statement and cash flows of the Company during the
2004 year.
The Company does not have any financial instruments held for trading purposes.
Critical Accounting Policies
- --------------------------------------------------------------------------------
The Company's consolidated financial statements are prepared in accordance with
U.S. GAAP. In connection with the preparation of these financial statements,
Omnicare management is required to make assumptions, estimates and judgments
that affect the reported amounts of assets, liabilities, stockholders' equity,
revenues and expenses, and the related disclosure of commitments and
contingencies. On a regular basis, the Company evaluates the estimates used,
including those related to bad debts, contractual allowances, inventory
valuation, impairment of goodwill, insurance accruals, pension obligations,
income taxes, stock-based compensation, legal contingencies and other operating
allowances and accruals. Management bases its estimates on historical
experience, current conditions and on various other assumptions that are
believed to be reasonable at the time and under the current circumstances. The
Company's significant accounting policies are summarized in Note 1 of the
Notes to Consolidated Financial Statements.
In many cases, the accounting treatment of a particular transaction is
specifically dictated by U.S. GAAP and does not require significant management
judgment in its application. There are also areas in which management's judgment
in selecting among available alternatives would not produce a materially
different result. An accounting policy is considered to be critical if it is
important to the registrant's financial position and operating results, and
requires significant judgment and estimates on the part of management in its
application. Omnicare's critical accounting estimates and the related
assumptions are evaluated periodically as conditions require revision.
Application of the critical accounting policies requires management's
significant judgments, often as the result of the need to make estimates of
matters that are inherently and highly uncertain. If actual results were to
differ materially from the judgments and estimates made, the Company's reported
financial position and/or operating results could be materially affected.
Omnicare management continually reviews these estimates and assumptions to
ensure that the financial statements are presented fairly and are materially
correct. The Company
51
believes the following critical accounting policies and estimates involve more
significant judgments and estimates used in the preparation of the consolidated
financial statements.
Revenue Recognition
Revenue is recognized by Omnicare when products or services are delivered or
provided to the customer.
Pharmacy Services Segment
A significant portion of the Company's Pharmacy Service Segment revenues from
sales of pharmaceutical and medical products is reimbursed by state Medicaid
and, to a lesser extent, federal Medicare programs. Payments for services
rendered to patients covered by these programs are generally less than billed
charges. The Company monitors its revenues and receivables from these
reimbursement sources, as well as other third-party insurance payors, and
records an estimated contractual allowance for certain sales and receivable
balances to properly account for anticipated differences between billed and
reimbursed amounts. Accordingly, the total net sales and receivables reported in
the Company's financial statements are recorded at the amount ultimately
expected to be received from these payors. Since all billing functions of the
Company are computerized, enabling on-line adjudication (i.e., submitting
charges to Medicaid or other third-party payors electronically, with
simultaneous feedback of the amount to be paid) at the time of sale to record
net revenues, exposure to estimating contractual allowance adjustments is
limited primarily to unbilled and/or initially rejected Medicaid and third-party
claims (oftentimes eventually approved once additional information is provided
to the payor). The Company evaluates several criteria in developing the
estimated contractual allowances for unbilled and/or initially rejected claims
on a monthly basis, including historical trends based on actual claims paid,
current contract and reimbursement terms, and changes in customer base and
payor/product mix. Contractual allowances are adjusted to actual as cash is
received and claims are settled. Resulting adjustments were not significant to
the Company's operations for the periods presented. Further, Omnicare does not
expect the reasonably possible effects of a change in estimate related to
unsettled December 31, 2004 amounts from Medicaid and third-party payors to be
significant to future operating results and financial position.
Patient co-payments are associated with certain state Medicaid programs,
Medicare Part B and certain third party payors and are typically not collected
at the time products are delivered or services are rendered, but are billed to
the individual as part of the Company's normal billing procedures. These
co-payments are subject to the Company's normal accounts receivable collections
procedures.
A patient may be dispensed prescribed medications (typically no more than a 2-3
day supply) prior to insurance being verified in emergency situations, or for
new facility admissions after hours or on weekends. The following business day,
specific payor information is obtained to ensure that the proper payor is billed
for reimbursement.
Under certain circumstances, the Company accepts returns of medications and
issues a credit memo to the applicable payor. The Company estimates and accrues
for sales returns based on historical return experience, giving consideration to
the Company's return policies. Product
52
returns are processed in the period received, and are not significant when
compared to the overall sales and gross profit of the Company.
Contract Research Services Segment
A portion of the Company's overall revenues relate to the Contract Research
Services ("CRO") segment, and are earned by performing services under contracts
with various pharmaceutical, biotechnology, medical device and diagnostics
companies, based on contract terms. Most of the contracts provide for services
to be performed on a units of service basis. These contracts specifically
identify the units of service and unit pricing. Under these contracts, revenue
is generally recognized upon completion of the units of service. For
time-and-materials contracts, revenue is recognized at contractual hourly rates,
and for fixed-price contracts, revenue is recognized using a method similar to
that used for units of service. The Company's contracts provide for additional
service fees for scope of work changes. The Company recognizes revenue related
to these scope changes when underlying services are performed and realization is
assured. In a number of cases, clients are required to make termination payments
in addition to payments for services already rendered. Any anticipated losses
resulting from contract performance are charged to earnings in the period
identified. Billings and payments are specified in each contract. Revenue
recognized in excess of billings is classified as unbilled receivables, while
billings in excess of revenue are classified as deferred revenue.
Allowance for Doubtful Accounts
Collection of accounts receivable from customers is the Company's primary source
of operating cash flow and is critical to Omnicare's operating performance.
Omnicare's primary collection risk relates to facility and private pay
customers. The Company provides for accounts receivable that could become
uncollectible by establishing an allowance to reduce the carrying value of such
receivables to their estimated net realizable value. Omnicare establishes this
allowance for doubtful accounts using the specific identification approach, and
considering such factors as historical collection experience (i.e., payment
history and credit losses) and creditworthiness, specifically identified
credit risks, aging of accounts receivable by payor category, current and
expected economic conditions and other relevant factors. Management reviews
this allowance on an ongoing basis for appropriateness. Judgment is used to
assess the collectibility of account balances and the economic ability of
customers to pay.
The Company computes and monitors its accounts receivable days sales outstanding
("DSO") in order to evaluate the liquidity and collection patterns of its
accounts receivable. DSO is calculated by averaging the beginning and end of
quarter accounts receivable, less contractual allowances and the allowance for
doubtful accounts, to derive "average accounts receivable"; and dividing average
accounts receivable by the sales amount (excluding reimbursable out-of-pockets)
for the related quarter. The resultant percentage is multiplied by the days in
the quarter to derive the DSO amount. Omnicare's DSO was approximately 71 days
at December 31, 2004, compared with 63 days at December 31, 2003 and 71 days at
December 31, 2002. The increase in DSO during 2004 of 8 days was related, in
part, to the impact of the Medicaid reimbursement slowdown that occurred in the
state of Illinois. The allowance for doubtful accounts as of December 31, 2004
was $123.3 million compared with $108.8 million and $68.6 million at December
31, 2003 and 2002, respectively. These allowances were 12.8%, 13.8% and 11.6% of
53
gross receivables (net of contractual allowances) as of December 31, 2004, 2003
and 2002, respectively. Although no near-term changes are expected, unforeseen
changes to future allowance percentages could materially impact overall
financial results. A one percentage point increase in the allowance for doubtful
accounts as a percentage of gross receivables as of December 31, 2004, would
result in an increase to the allowance for doubtful accounts and bad debt
expense of approximately $9.6 million.
The following table is an aging of the Company's December 31, 2004 and 2003
gross accounts receivable (net of allowances for contractual adjustments, and
prior to allowances for doubtful accounts), aged based on payment terms and
categorized based on the four primary overall types of accounts receivable
characteristics (in thousands):
December 31, 2004
---------------------------------
Current and 181 Days
0-180 Days and Over
Past Due Past Due Total
----------- -------- --------
Medicaid, Medicare Part B and
Third Party payors $303,638 $ 29,871 $333,509
Facility payors 355,593 97,449 453,042
Private Pay payors 120,579 40,783 161,362
CRO 13,085 995 14,080
-------- -------- --------
Total gross accounts receivable
(net of contractual allowance adjustments) $792,895 $169,098 $961,993
======== ======== ========
December 31, 2003
---------------------------------
Current and 181 Days
0-180 Days and Over
Past Due Past Due Total
----------- -------- --------
Medicaid, Medicare Part B and
Third Party payors $244,023 $ 8,988 $253,011
Facility payors 296,671 87,221 383,892
Private Pay payors 100,803 35,773 136,576
CRO 12,540 1,049 13,589
-------- -------- --------
Total gross accounts receivable
(net of contractual allowance adjustments) $654,037 $133,031 $787,068
======== ======== ========
Patient charges pending approval from Medicaid and third-party payors are
primarily billed as private pay and, where applicable, are recorded net of an
estimated contractual allowance at period end. Once an approval to bill Medicaid
and/or third-party payors has been obtained, the private pay balance is reversed
and a corresponding Medicaid or third-party receivable amount is recorded. The
Company's policy is to resolve accounts receivable with pending status on a
weekly basis. Pending accounts receivable balances were not significant at
December 31, 2004.
Omnicare has standard policies and procedures for collection of its accounts
receivable. The Company's collection efforts generally include the mailing of
statements, followed up when
54
necessary with delinquency notices, personal and other contacts, the use of an
in-house national collections department or outside collection agencies, and
potentially mediation/arbitration or litigation when accounts are considered
unresponsive. Omnicare's collection efforts primarily relate to its facility
and private pay customers. When Omnicare becomes aware that a specific customer
is potentially unable to meet part or all of its financial obligations, for
example, as a result of bankruptcy or deterioration in the customer's operating
results or financial position, the Company includes the balance in its allowance
for doubtful accounts requirements. When a balance is deemed uncollectible by
Omnicare management (including the national collections department), collections
agencies and/or outside legal counsel, the balance is manually written off
against the allowance for doubtful accounts. At December 31, 2004, the Company
does not have a significant amount of its overall accounts receivable balance
placed in mediation/arbitration, litigation or with outside collection agencies.
Given the Company's experience, management believes that the reserves for
potential losses are adequate, but if several or more of the Company's larger
customers were to unexpectedly default on their obligations, the Company's
overall reserves for potential losses may prove to be inadequate. If economic
conditions worsen, the payor mix shifts significantly, or the Company's
customers' reimbursement rates are adversely affected, impacting Omnicare's
customers' ability to pay, management may adjust the allowance for doubtful
accounts accordingly, and the Company's accounts receivable collections, cash
flows, financial position and results of operations could be affected.
Inventories
The Company maintains inventory at lower of cost or market, with cost determined
on the basis of the first-in, first-out method. There are no significant
obsolescence reserves recorded since the Company has not historically
experienced (nor does it expect to experience) significant levels of
inventory obsolescence write-offs.
Omnicare uses a periodic inventory system. Physical inventories are typically
performed on a monthly basis at all pharmacy sites, and in all cases at least
once a quarter. Cost of goods sold is recorded based on the actual results of
the physical inventory counts, and is estimated when a physical inventory is not
performed in a particular month. The Company evaluates various criteria in
developing estimated cost of goods sold during non-inventory months, including
the historical cost of goods sold trends based on prior physical inventory
results; a review of cost of goods sold information reflecting current customer
contract terms; and consideration and analysis of changes in customer base,
product mix, payor mix, state Medicaid and third-party insurance reimbursement
levels or other issues that may impact cost of goods sold. Actual cost of goods
sold has not varied significantly from estimated amounts in non-physical
inventory months.
Goodwill
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires that
goodwill and other indefinite-lived intangible assets be reviewed for impairment
using a fair value based approach at least annually. SFAS 142 requires the
Company to assess whether there is an indication that goodwill is impaired, and
requires goodwill to be tested between annual tests if events occur or
circumstances change that would, more likely than not, reduce the fair value of
a
55
reporting unit below its carrying amount. The Company's assessments to date
have indicated that goodwill has not been impaired.
The Company's assessment of goodwill impairment requires estimates of future
cash flows and a weighted-average cost of capital. The estimates of these future
cash flows are based on assumptions and projections with respect to future
revenues and expenses believed to be reasonable and supportable at the time the
annual impairment analysis is performed. Further, they require management's
subjective judgments and take into account assumptions about overall growth
rates and increases in expenses. To the extent the carrying value of the assets
exceed their fair value, an impairment loss would be recorded. Changes in these
estimates of future cash flows or weighted-average cost of capital due to
unforeseen events and circumstances could cause Omnicare's analysis to indicate
that goodwill is impaired in subsequent periods, and could result in the
write-off of a portion or all of the Company's goodwill, which could be material
to the Company's financial position, results of operations or cash flows.
However, given the substantial margin by which fair value exceeded carrying
amounts in the latest goodwill impairment review, the Company does not
anticipate a material impact on the consolidated financial statements from
differences in these assumptions in the near term.
Insurance Accruals
Omnicare is self-insured for certain employee health insurance claims. The
Company manages its health insurance risk by obtaining individual and aggregate
stop-loss coverage in the amount of $150,000 per claim and 125% of expected
aggregate claims, or approximately $10.5 million for the 2004 year. Omnicare
insures all of its property and casualty programs (including worker's
compensation and professional liability) in excess of self-insured retentions,
or deductibles, on the various policies of insurance (which range from between
$5,000 and $1,000,000 per claim, depending on the type of coverage). Omnicare
closely monitors and continually evaluates its historical claims experience and
obtains input from third-party insurance professionals to estimate the
appropriate level of accrual for its self-insured programs, including
deductibles. These accruals include provision for incurred, as well as incurred
but not reported, claims. In developing its self-insurance accrual estimates,
the Company's liability calculation also considers the historical claim lag
periods and current payment trends of insurance claims (generally 2-3 months
for health, and 48-60 months for all other coverages). A change in the
historical claim lag period assumption by one month for health insurance claims
would affect health insurance expense by approximately $1.1 million pretax. A
change in the historical claim lag period by one month for property and casualty
insurance claims would affect property and casualty insurance expense by
approximately $0.3 million pretax.
Although significant fluctuations may occur in the short term due to unforeseen
events and claims, the Company's experience, coupled with its stop-loss
coverages, has consistently supported management's assumption that this
methodology provides for reasonable insurance expense estimates and accruals
over a long-term period. While the ultimate settlement of these claims may vary
from the Company's estimates and accruals, Omnicare believes that the accrual
amounts and resultant expense provided in the consolidated financial statements
are materially correct.
56
Employee Benefit Plans
For certain of its employee benefit plans, the Company utilizes estimates in
developing its actuarial assumptions (including such items as the expected
long-term rate of return on plan assets, discount rate and rate of compensation
increase, among other items), and relies on actuarial computations to estimate
the future potential liability, expense and funding requirements associated with
these benefits. While it is required that the actuarial assumptions be reviewed
each year as of the measurement date of December 31, the actuarial assumptions
generally do not change between measurement dates. During Omnicare's annual
review, generally near the beginning of the fiscal year, the Company reviews and
updates these assumptions, and considers current market conditions and input
from its third-party advisors, including any changes in interest rates, in
making these assumptions. These actuarial assumptions and estimates attempt to
anticipate future events, and if assessed differently or materially vary from
actual results due to changing market and economic conditions, could have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows. However, a one percentage point change in any of the
individual aforementioned assumptions used to calculate the Company's pension
obligation, holding all other assumptions constant, would not have a material
impact on the Company's operating results.
Income Taxes
The Company estimates its tax assets and liabilities based on current tax laws
in the statutory jurisdictions in which it operates. These estimates include
judgments about deferred tax assets and liabilities resulting from temporary
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities, as well as the realization of deferred tax assets
(including those relating to net operating losses). The deferred tax assets and
liabilities are determined based on the enacted tax rates expected to apply in
the periods in which the deferred tax assets or liabilities are expected to be
settled or realized. Omnicare periodically reviews its deferred tax assets for
recoverability and establishes a valuation allowance if it is more likely than
not that some portion or all of a deferred tax asset will not be realized. The
determination as to whether a deferred tax asset will be realized is made on a
jurisdictional basis and is based on the evaluation of positive and negative
evidence. This evidence includes historical taxable income, projected future
taxable income, the expected timing of the reversal of existing temporary
differences and the implementation of tax planning strategies. Projected future
taxable income is based on the Company's expected results and assumptions as to
the jurisdiction in which the income will be earned. The expected timing of the
reversals of existing temporary differences is based on current tax law and
Omnicare's tax methods of accounting. The Company also reviews its liabilities
under SFAS No. 5, "Accounting for Contingencies" ("SFAS 5") which requires an
accrual for estimated losses when it is probable that a liability has been
incurred and the amount can be reasonably estimated. These projections may
change in the future as actual results become known.
If the Company is unable to generate sufficient future taxable income, or if
there is a material change in the actual effective tax rates or the time period
within which the underlying temporary differences become taxable or deductible,
or if the tax laws change unfavorably, then the Company could be required to
increase its valuation allowance against its deferred tax assets, resulting in
an increase in the effective tax rate.
57
Omnicare operates in multiple states with varying tax laws. The Company is
subject to both federal and state audits of tax returns. While the Company
believes it has provided adequately for income tax liabilities in its
consolidated financial statements, adverse determinations by these taxing
authorities could have a material adverse effect on Omnicare's financial
position, results of operations or cash flows. If the provisions for current or
deferred taxes are not adequate, if the Company is unable to realize certain
deferred tax assets or if the tax laws change unfavorably, the Company could
experience potential losses. Likewise, if provisions for current and deferred
taxes are in excess of those eventually needed, if the Company is able to
realize additional deferred tax assets or if tax laws change favorably, the
Company could experience potential gains. A one percentage point change in the
Company's overall 2004, 2003 and 2002 effective tax rates would impact income
tax expense and net income by $3.8 million, $3.1 million and $2.0 million,
respectively (or $0.03, $0.03 and $0.02 per diluted share, respectively).
Stock-Based Compensation
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. For footnote disclosure purposes, the Company calculates
the impact of using the fair-value method in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation", as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of SFAS 123". Under the fair-value method, the cost of stock option
grants and other incentive awards to employees and directors is generally
measured by the fair value of the awards on their grant dates and is recognized
over the vesting periods of the awards. The Company estimates the fair value of
stock option grants as of the date of each grant, using a Black-Scholes
option-pricing model. This model incorporates reasoned assumptions regarding (1)
the expected volatility of the Company's common stock price, (2) estimated
risk-free interest rates, (3) the expected dividend yield, if any, all over
the expected lives of the respective options. Considering the importance of
each of the above assumptions in the calculation of fair value, the Company
re-evaluates the estimate of these assumptions on a quarterly basis. While the
Company believes its stock option fair value calculations are materially
accurate, a one percentage point change in any of the individual
aforementioned assumptions, holding all other assumptions constant, would not
have a material impact on the fair value calculated for options or the related
pro forma periodic expense recognized by the Company in its footnote disclosure.
Legal Contingencies
As part of its ongoing operations, the Company is subject to various
inspections, audits, inquiries and similar actions by governmental/regulatory
authorities responsible for enforcing the laws and regulations to which the
Company is subject, including reviews of individual Omnicare pharmacy's
reimbursement documentation and administrative practices. Oftentimes, these
inspections, audits and inquiries relate to prior periods, including periods
predating Omnicare's actual ownership of a particular acquired pharmacy. The
Company is also involved with various legal actions arising in the normal course
of business. Each quarter, the Company reviews the status of any inspections,
audits, inquiries, legal claims and legal proceedings and assesses its
58
potential financial exposure. If the potential loss from any of these is
considered probable and the amount can be reasonably estimated, the Company
accrues a liability for the estimated loss, in accordance with SFAS 5. To the
extent the amount of a probable loss is estimable only by reference to a range
of equally probable outcomes, and no amount within the range appears to be a
better estimate than any other amount, the low end of the range is accrued.
Because of uncertainties related to these matters, the use of estimates,
assumptions, judgments and external factors beyond the Company's control,
accruals are based on the best information available at the time. As additional
information becomes available, Omnicare reassesses the potential liability
related to any pending inspections, audits, inquiries, claims and litigation
and may revise its estimates. Such revisions in the estimates of the potential
liabilities could have a material impact on the Company's results of operations
and financial position.
Recently Issued Accounting Standards
In October 2004, the Financial Accounting Standards Board ("FASB") ratified EITF
No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share," which requires the shares underlying contingently
convertible debt instruments to be included in diluted earnings per share
computations using the "if-converted" accounting method, regardless of whether
the market price trigger has been met. Under that method, the convertible
debentures are assumed to be converted to common shares (weighted for the
number of days assumed to be outstanding during the period), and interest
expense, net of taxes, related to the convertible debentures is added back to
net income. Diluted earnings per common share amounts have been retroactively
restated for prior periods presented to give effect to the application of EITF
No. 04-8 as it relates to the Company's 4.00% Convertible Debentures issued in
the second quarter of 2003. The effect of Omnicare's fourth quarter 2004
adoption of EITF No. 04-8 was to decrease diluted earnings per share $0.02 for
the three months ended December 31, 2004 and 2003; and $0.09 and $0.04 for the
years ended December 31, 2004 and 2003, respectively. For purposes of the
"if-converted" calculation, 8,451,000 shares were assumed to be converted for
the quarters ended December 31, 2004 and 2003, and the year ended December 31,
2004, with 4,653,000 shares assumed to be converted for the year ended
December 31, 2003. Additionally, interest expense, net of taxes, of $2.3 million
for the quarters ended December 31, 2004 and 2003, and $9.1 million and $5.0
million for the years ended December 31, 2004 and 2003, respectively, was added
back to net income for purposes of calculating diluted earnings per share using
this method. See further discussion in Notes 1 and 11 of the Notes to
Consolidated Financial Statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4." This Statement adopts the International Accounting
Standards Board (IASB) view related to inventories, that abnormal amounts of
idle capacity, freight, handling costs, and spoilage cost should be excluded
from inventory and expensed as incurred. This Statement is effective for the
Company beginning January 1, 2006. The adoption of the standard is not expected
to have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67,"
which is not applicable to the Company.
59
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29." This Statement is a result of the
convergence project between the FASB and the IASB, and updates and clarifies
existing accounting pronouncements regarding principles surrounding non-monetary
asset exchanges. This Statement is effective for the Company beginning January
1, 2006. The adoption of the standard is not expected to have a material impact
on the Company's consolidated financial position, results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). This Statement requires the Company to record
compensation costs relating to equity-based payments, in its financial
statements, over the requisite service period (usually the vesting period). This
Statement is effective for the Company in the interim period beginning July 1,
2005. The Company will elect the "modified prospective application" method of
implementing SFAS 123R, which applies to new awards and to awards modified,
repurchased, or cancelled after June 30, 2005. Additionally, compensation cost
for the portion of awards for which the requisite service has not been rendered
that are outstanding as of June 30, 2005 shall be recognized as the requisite
service is rendered on or after June 30, 2005. Omnicare is currently
evaluating the impact of the adoption of SFAS 123R to the Company, but has not
yet quantified the effect of this new standard on its financial results
for 2005 and future years.
Outlook
The Company derives approximately one-half of its revenues directly from
government sources, principally state Medicaid and to a lesser extent federal
Medicare programs, and one-half from the private sector (including individual
residents, third-party insurers and SNFs).
As part of ongoing operations, the Company and its customers are subject to
regulatory changes in the level of reimbursement received from the Medicare and
Medicaid programs. Since 1997, Congress has passed a number of federal laws that
have effected major changes in the healthcare system.
The Balanced Budget Act of 1997 (the "BBA") sought to achieve a balanced federal
budget by, among other things, changing the reimbursement policies applicable to
various healthcare providers. In a significant change for the SNF industry, the
BBA provided for the introduction in 1998 of the prospective payment system
("PPS") for Medicare-eligible residents of SNFs. Prior to PPS, SNFs under
Medicare received cost-based reimbursement. Under PPS, Medicare pays SNFs a
fixed fee per patient per day based upon the acuity level of the resident,
covering substantially all items and services furnished during a
Medicare-covered stay, including pharmacy services. PPS resulted in a
significant reduction of reimbursement to SNFs. Admissions of Medicare
residents, particularly those requiring complex care, declined in many SNFs due
to concerns relating to the adequacy of reimbursement under PPS. This caused a
weakness in Medicare census leading to a significant reduction of overall
occupancy in the SNFs the Company serves. This decline in occupancy and acuity
levels adversely impacted Omnicare's results beginning in 1999, as the Company
experienced lower utilization of Omnicare services, coupled with PPS-related
pricing pressure from Omnicare's SNF customers.
60
In 1999 and 2000, Congress sought to restore some of the reductions in
reimbursement resulting from PPS. This legislation helped to improve the
financial condition of SNFs, motivated them to increase admissions, particularly
of higher acuity residents, and stabilized the unfavorable operating trends
attributable to PPS. One provision gave SNFs a temporary rate increase for
certain specific high-acuity patients beginning April 1, 2000, and ending when
the CMS implements a refined patient classification system under PPS. CMS did
not implement such refinements in fiscal years 2003, 2004, or 2005, thus
continuing the additional rate increases currently in place for certain
high-acuity patients. President Bush's proposed fiscal year 2006 budget
indicates that CMS intends to implement the refinements in fiscal year 2006,
resulting in $1.5 billion in decreased expenditures in 2006. However, it is
unclear at this time whether CMS will implement RUG refinement as described
in the President's budget proposal. Also, SNF payments under PPS are subject
to annual market basket increases, which in the past have partially offset
the impact of other temporary rate expirations. Nonetheless, the loss of
revenues associated with future changes in SNF payments could, in the future,
have an adverse effect on the financial condition of the Company's SNF clients
which could, in turn, adversely affect the timing or level of their payments
to Omnicare.
In December 2003, Congress enacted the MMA, which includes a major expansion of
the Medicare prescription drug benefit under a new Medicare Part D. Until the
Part D benefit goes into effect on January 1, 2006, Medicare beneficiaries can
receive assistance with their outpatient prescription drug costs through a new
prescription drug discount card program, which began in June 2004, and which
gives enrollees access to negotiated discounted prices for prescription drugs.
Under the MMA, Medicare beneficiaries may enroll in Part D Plans which will
provide coverage of outpatient prescription drugs effective as of January 1,
2006. Medicare beneficiaries generally will have to pay a premium to enroll in a
Part D Plan, with the premium amount varying from plan to plan, although CMS
will provide various federal subsidies to Part D Plans to reduce the cost to
beneficiaries. Medicare beneficiaries who are also entitled to benefits under a
state Medicaid program (so-called "dual eligibles") will have their prescription
drug costs covered by the new Medicare drug benefit, including nursing home
residents served by the Company whose drug costs are currently covered by state
Medicaid programs.
CMS will provide premium and cost-sharing subsidies to Part D Plans with respect
to dual eligible residents of nursing homes. Therefore, such dual eligibles will
not be required to pay a premium for enrollment in a Part D Plan, so long as the
premium for the Part D Plan in which they are enrolled is at or below the
premium subsidy. Dual eligible residents of nursing homes will be entitled to
have all of their prescription drug costs covered by a Part D Plan, provided
that the prescription drugs which they are taking are either on the Part D
Plan's formulary, or an exception to the plan's formulary is granted. CMS will
review the formularies of Part D Plans and has indicated that it will require
their formularies to include the types of drugs most commonly needed by Medicare
beneficiaries, and that plans' formulary exceptions criteria provide for
coverage of drugs determined by the plan to be medically appropriate for the
enrollee. The MMA also makes available partial premium and cost-sharing
subsidies for certain other classes of low-income enrollees who do not qualify
for Medicaid.
61
Pursuant to the final Part D rule, we will obtain reimbursement for drugs we
provide to enrollees of a given Part D Plan in accordance with the terms of
agreements negotiated between us and that Part D Plan. We intend to negotiate
such agreements with Part D Plans under which we would provide drugs and
associated services to their enrollees. Until such agreements are negotiated, we
will not be able to determine what changes, if any, there may be to the terms
and conditions under which we provide drugs and services to Medicare
beneficiaries who become enrollees of Part D Plans. The MMA will not change the
manner in which Medicare pays for drugs for Medicare beneficiaries covered in a
Part A stay. We will continue to receive reimbursement for drugs provided to
such residents from the SNFs pursuant to the contracts we have negotiated with
each SNF. CMS will be issuing subregulatory guidance on many aspects of the
final rule throughout 2005 as the new program is implemented. 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 beneficiaries in nursing
facilities consistent with existing patient safety and quality of care
standards. The MMA also reforms the Medicare Part B prescription drug payment
methodology, although 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.
Other healthcare funding issues remain, including pressures on federal and state
Medicaid budgets, which has led to decreasing reimbursement rates in certain
states. Some states continue to experience budget shortfalls, which may prompt
them to consider implementing reductions in Medicaid reimbursement and other
cost control measures. While the Company has endeavored to adjust to these
pricing pressures, to date, these pressures are likely to continue or escalate,
particularly if economic recovery does not emerge, and there can be no assurance
that such occurrence will not have an adverse impact on the Company's business.
Longer term, funding for federal and state healthcare programs must consider the
aging of the population and the growth in enrollees as eligibility is expanded;
the escalation in drug costs owing to higher drug utilization among seniors and
the introduction of new, more efficacious but also more expensive medications;
and the long-term financing of the Medicare and Medicaid programs. Given
competing national priorities, it remains difficult to predict the outcome and
impact on the Company of any changes in healthcare policy relating to the future
funding of the Medicare and Medicaid programs.
Demographic trends indicate that demand for long-term care will increase well
into the middle of this century as the elderly population grows significantly.
Moreover, those over 65 consume a disproportionately high level of healthcare
services, including prescription drugs, when compared with the under-65
population. There is widespread consensus that appropriate pharmaceutical care
is generally considered the most cost-effective form of treatment for the
chronic ailments afflicting the elderly and also one that is able to improve the
quality of life. Further, the pace and quality of new drug development is
yielding many promising new drugs targeted at the diseases of the elderly. These
new drugs may be more expensive than older, less
62
effective drug therapies due to rising research costs. However, they are
significantly more effective in curing or ameliorating illness and in lowering
overall healthcare costs by reducing, among other things, hospitalizations,
physician visits, nursing time and lab tests. These trends not only support
long-term growth for the geriatric pharmaceutical industry but also containment
of healthcare costs and the well-being of the nation's growing elderly
population.
In order to fund this growing demand, the Company anticipates that the
government and the private sector will continue to review, assess and possibly
alter healthcare delivery systems and payment methodologies. While it is not
possible to predict the effect of the new Medicare Part D drug benefit or any
further initiatives on Omnicare's business, management believes that the
Company's expertise in geriatric pharmaceutical care and pharmaceutical cost
management position Omnicare to help meet the challenges of today's healthcare
environment. Further, while volatility can occur from time to time in the
contract research business owing to factors such as the success or failure of
its clients' compounds, the timing or budgetary constraints of its clients, or
consolidation within our client base, new drug discovery remains an important
priority of drug manufacturers. Drug manufacturers, in order to optimize their
research and development efforts, will continue to turn to contract research
organizations to assist them in accelerating drug research development and
commercialization.
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, hospice care,
mental health and personal care or supportive living facilities; expectations
concerning continued relative stability in the operating environment in the
long-term care industry; anticipated demographic trends in the healthcare
industry; the impact of drug price inflation; changes in government and other
reimbursement formulas to take into account drug price inflation or deflation;
the ability to allocate resources in order to enhance gross profit margins; the
ability to continue the Company's value creation strategy through expanding its
core pharmaceutical business and leveraging that business through the
development and expansion of clinical information services; the Company's
ability to continue to leverage fixed and variable overhead costs through
internal and acquired growth; the impact of the 2003 refinancing in
63
enhancing the Company's financial position and providing financial flexibility
to support its ongoing growth strategies; other factors affecting the Company's
strategy for future growth; the effectiveness of the Company's unit-of-use
controls and computerized documentation system; the effectiveness of the
Company's health and outcomes management programs; the ability to leverage the
Company's CRO business and its core pharmacy business as anticipated;
expectations concerning product and market development efforts; trends
concerning the commencement, continuation or cancellation of CRO projects and
backlog; the effectiveness of recent cost reduction efforts in the CRO;
volatility in the CRO business; anticipated business performance of the CRO in
2005; expectations in the CRO business resulting from streamlining and
globalization efforts, the Company's unique capabilities in the geriatric
market and strength of presence in the drug development marketplace; trends in
healthcare funding issues, including, but not limited to, state Medicaid
budgets, enrollee eligibility, escalating drug prices due to higher utilization
among seniors and the aging of the population; expectations concerning
increasing Medicare admissions and improving occupancy rates; the introduction
of more expensive medications, and increasing use of generic medications; the
impact of any changes in healthcare policy relating to the future funding of the
Medicaid and Medicare programs; the cost-effectiveness of pharmaceuticals in
treating chronic illnesses for the elderly; the effectiveness of the Company's
formulary compliance program; the effectiveness of the Company's pharmaceutical
purchasing programs and its ability to obtain discounts and manage
pharmaceutical costs; the adequacy and availability of the Company's sources of
liquidity and capital; payments of future quarterly dividends; the adequacy of
the Company's net cash flows from operating activities, credit facilities and
other long- and short-term debt financings to satisfy the Company's future
working capital needs, acquisition contingency commitments, debt servicing,
capital expenditures and other financing requirements for the foreseeable
future; the ability, if necessary, to refinance indebtedness or issue
additional indebtedness or equity; interest rate risk on the Company's
outstanding debt; valuations of derivative instruments embedded in the Old
Trust PIERS and New Trust PIERS instruments; the adequacy of the Company's
allowance for doubtful accounts; expectations concerning inventory write-offs;
the adequacy of insurance expense estimates and methodology; the adequacy of
the provisions for current or deferred taxes; the impact of reduced government
reimbursement rates to the Company's SNF clients which could adversely affect
the timing or level of SNF payments to the Company; the impact of the MMA,
including the Medicare Part D prescription drug benefit, effective January 1,
2006, as implemented pursuant to CMS regulations and subregulatory guidance;
the impact of continued pressure on federal and state Medicaid budgets and
budget shortfalls which have led to decreasing reimbursement rates and other
cost control measures in certain states; the Company's ability to respond to
such federal and state budget shortfalls and corresponding reductions in
Medicaid reimbursement rates; the effect of any changes and considerations in
long-term healthcare funding policies for Medicare and Medicaid programs;
expected demand for long-term care; the pace and quality of new drug development
targeted at diseases of the elderly; the impact of newer drugs that, although
more expensive, are more efficient at treating illness and thereby reduce
overall healthcare costs; trends and expectations concerning long-term growth
prospects for the geriatric care industry and the containment of healthcare
costs for the elderly; expectations concerning the growth in the elderly
population; anticipated changes in healthcare delivery systems and payment
methodologies in order to fund growing demand; the ability of the Company to
utilize its expertise in geriatric pharmaceutical care and pharmaceutical cost
management and its database on drug utilization and outcomes in the elderly to
meet the
64
anticipated challenges of the healthcare environment; 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; the belief that new drug discovery will remain an important priority
for pharmaceutical manufacturers; and expectations concerning opportunities for
future growth and the continued need for pharmaceutical manufacturers to utilize
contract research businesses in optimizing research and development efforts.
These forward-looking statements, together with other statements that are not
historical, involve known and unknown risks, uncertainties, contingencies and
other factors that could cause actual results, performance or achievements to
differ materially from those stated. Such risks, uncertainties, contingencies
and other factors, many of which are beyond the control of the Company, include,
but are not limited to: overall economic, financial, political and business
conditions; trends in the long-term healthcare and contract research industries;
competition in the pharmaceutical, long-term care and contract research
industries; the impact of consolidation in 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 revenues, economies of scale, cost synergies and
profitability; the continued availability of suitable acquisition candidates;
pricing and other competitive factors in the industry; increases or decreases in
reimbursement rates and the impact of other cost control measures; the impact on
the Company's revenues, profits and margins resulting from market trends in the
use of newer branded drugs versus generic drugs; the number and usage of generic
drugs and price competition in the drug marketplace; the ability to attract and
retain needed management; competition for qualified staff in the healthcare
industry; the impact and pace of technological advances; the ability to obtain
or maintain rights to data, technology and other intellectual property; the
demand for the 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
65
interpretation and application of such policies; the impact of the MMA,
including the Medicare Part D prescription drug benefit effective January 1,
2006, as implemented pursuant to CMS regulations and subregulatory guidance;
legislation and regulations affecting payment and reimbursement rates for SNFs;
trends in federal and state budgets and their impact on Medicaid reimbursement
rates; government budgetary pressures and shifting priorities; the 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 Company's 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
which adversely affect the valuation of the Old Trust PIERS and the New Trust
PIERS; the outcome of audit, compliance, administrative or investigatory
reviews; volatility in the market for the Company's stock and in the financial
markets generally; access to adequate capital and financing; changes in
international economic and political conditions and currency fluctuations
between the U.S. dollar and other currencies; changes in tax laws and
regulations; changes in accounting rules and standards; and other risks and
uncertainties described in Company reports and filings with the Securities and
Exchange Commission.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from those expressed in, or
implied by, such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Except as otherwise required by law, the Company does not undertake
any obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required under this Item is set forth in the "Quantitative and
Qualitative Disclosures about Market Risk" caption at Part II, Item 7, of this
Filing.
66
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Page
----
Financial Statements:
Report of Independent Registered Public Accounting Firm 68
Consolidated Statements of Income 70
Consolidated Balance Sheets 71
Consolidated Statements of Cash Flows 72
Consolidated Statements of Stockholders' Equity 73
Notes to Consolidated Financial Statements 74
Financial Statement Schedule:
II - Valuation and Qualifying Accounts S-1
All other financial statement schedules are omitted because they are not
applicable or because the required information is shown in the Consolidated
Financial Statements or Notes thereto.
67
Report of Independent Registered Public Accounting Firm
To the Stockholders and
Board of Directors of Omnicare, Inc.
We have completed an integrated audit of Omnicare Inc.'s 2004 consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated Financial Statements and Financial Statement Schedule
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Omnicare, Inc. and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 11 to the consolidated financial statements,
effective December 31, 2004, the Company adopted the provisions of Emerging
Issues Task Force Issue Number 04-08, "The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share." Accordingly, 2003 diluted earnings
per share has been restated from the amount previously reported.
Internal Control Report of Independent Registered Public Accounting Firm
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects,
68
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the COSO. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management's assessment and on the effectiveness of
the Company's internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Chicago, Illinois
March 15, 2005
69
CONSOLIDATED STATEMENTS OF INCOME
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands, except per share data)
For the years ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Sales $4,101,224 $3,474,354 $2,606,450
Reimbursable out-of-pockets 18,667 24,820 26,304
---------- ---------- ----------
Total net sales 4,119,891 3,499,174 2,632,754
---------- ---------- ----------
Cost of sales 3,070,856 2,576,794 1,915,397
Reimbursed out-of-pocket expenses 18,667 24,820 26,304
---------- ---------- ----------
Total direct costs 3,089,523 2,601,614 1,941,701
---------- ---------- ----------
Gross profit 1,030,368 897,560 691,053
Selling, general and administrative expenses 587,932 509,977 411,272
Restructuring charges (Note 12) -- -- 23,195
---------- ---------- ----------
Operating income 442,436 387,583 256,586
Investment income 3,184 4,166 3,276
Interest expense (Note 7) (70,421) (81,300) (56,811)
---------- ---------- ----------
Income before income taxes 375,199 310,449 203,051
Income taxes 139,188 116,081 77,145
---------- ---------- ----------
Net income $ 236,011 $ 194,368 $ 125,906
========== ========== ==========
Earnings per share:
Basic $ 2.29 $ 1.97 $ 1.34
========== ========== ==========
Diluted (Note 11) $ 2.17 $ 1.89 $ 1.33
========== ========== ==========
Weighted average number of common shares outstanding:
Basic 103,238 98,800 94,168
========== ========== ==========
Diluted (Note 11) 112,819 107,896 94,905
========== ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
70
CONSOLIDATED BALANCE SHEETS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands, except share data)
December 31,
-----------------------
2004 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 84,169 $ 187,413
Restricted cash 262 714
Deposit with drug wholesaler 44,000 --
Accounts receivable, less allowances of $123,288
(2003-$108,813) 838,705 678,255
Unbilled receivables 14,007 15,281
Inventories 331,367 326,550
Deferred income tax benefits 94,567 53,224
Other current assets 142,702 121,651
---------- ----------
Total current assets 1,549,779 1,383,088
Properties and equipment, at cost less accumulated
depreciation of $222,524 (2003-$200,498) 142,421 148,307
Goodwill 2,003,223 1,690,558
Other noncurrent assets 203,758 173,068
---------- ----------
Total assets $3,899,181 $3,395,021
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 282,956 $ 296,089
Accrued employee compensation 19,820 30,611
Deferred revenue 24,245 22,454
Current debt 25,218 20,709
Income taxes payable 8,633 16,244
Other current liabilities 106,610 76,653
---------- ----------
Total current liabilities 467,482 462,760
Long-term debt 281,559 135,855
8.125% senior subordinated notes, due 2011 375,000 375,000
6.125% senior subordinated notes, net, due 2013 232,508 226,822
4.00% junior subordinated convertible
debentures, due 2033 345,000 345,000
Deferred income tax liabilities 137,593 50,913
Other noncurrent liabilities 132,931 122,647
---------- ----------
Total liabilities 1,972,073 1,718,997
---------- ----------
Commitments and contingencies (Note 14)
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, 106,579,800 shares issued
(2003-105,050,900 shares issued) 106,580 105,051
Paid-in capital 1,038,671 986,138
Retained earnings 910,973 684,348
Treasury stock, at cost-2,083,400 shares
(2003-1,863,000 shares) (54,931) (46,087)
Deferred compensation (65,591) (49,528)
Accumulated other comprehensive income (8,594) (3,898)
---------- ----------
Total stockholders' equity 1,927,108 1,676,024
---------- ----------
Total liabilities and stockholders' equity $3,899,181 $3,395,021
========== ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
71
CONSOLIDATED STATEMENTS OF CASH FLOWS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands)
For the years ended December 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net income $ 236,011 $ 194,368 $ 125,906
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 35,009 37,783 33,129
Amortization 21,287 15,237 12,134
Provision for doubtful accounts 45,112 44,680 31,163
Deferred tax provision 58,154 43,685 15,428
Write-off of debt issuance costs -- 3,755 --
Non-cash portion of restructuring charges -- -- 9,060
Changes in assets and liabilities, net of effects from
acquisition of businesses:
Accounts receivable and unbilled receivables (153,986) (96,971) (41,788)
Inventories 12,788 (87,278) (28,261)
Deposit with drug wholesaler (44,000) -- --
Current and noncurrent assets (28,833) 8,988 (37,046)
Accounts payable (16,099) 35,703 26,439
Accrued employee compensation (17,554) 705 517
Deferred revenue 1,791 (2,800) (14,084)
Current and noncurrent liabilities 19,178 (23,789) 18,122
--------- --------- ---------
Net cash flows from operating activities 168,858 174,066 150,719
--------- --------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash received (398,559) (663,411) (127,783)
Capital expenditures (17,926) (17,115) (24,648)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust 452 2,433 (225)
Other 60 44 273
--------- --------- ---------
Net cash flows from investing activities (415,973) (678,049) (152,383)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities and term A loan 835,000 749,000 90,000
Payments on line of credit facilities and term A loan (685,513) (593,103) (120,000)
Proceeds from long-term borrowings -- 595,000 --
Payments on long-term borrowings and obligations (541) (354,167) (214)
Fees paid for financing arrangements -- (24,541) --
Change in cash overdraft balance (4,922) (4,582) 8,390
Proceeds from stock offering, net of issuance costs -- 178,774 --
Proceeds from stock awards and exercise of stock options
and warrants, net of stock tendered in payment 9,804 12,275 667
Dividends paid (9,386) (8,876) (8,491)
Other -- 122 72
--------- --------- ---------
Net cash flows from financing activities 144,442 549,902 (29,576)
--------- --------- ---------
Effect of exchange rate changes on cash (571) 3,558 780
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (103,244) 49,477 (30,460)
Cash and cash equivalents at beginning of year 187,413 137,936 168,396
--------- --------- ---------
Cash and cash equivalents at end of year $ 84,169 $ 187,413 $ 137,936
========= ========= =========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
72
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(In thousands, except per share data)
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
-------- ---------- -------- --------
Balance at January 1, 2002 $ 94,672 $ 722,701 $381,441 $(19,824)
Dividends paid ($0.09 per share) -- -- (8,491) --
Stock acquired for benefit plans -- -- -- (112)
Exercise of stock options 229 4,055 -- (313)
Stock awards, net of amortization/forfeitures 540 10,807 -- (3,222)
Other -- (142) -- --
-------- ---------- -------- --------
Subtotal 95,441 737,421 372,950 (23,471)
-------- ---------- -------- --------
Net income -- -- 125,906 --
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- -- -- --
Unrealized appreciation in fair value of
investments -- -- -- --
Equity adjustment for minimum pension
liability -- -- -- --
-------- ---------- -------- --------
Comprehensive income -- -- 125,906 --
-------- ---------- -------- --------
Balance at December 31, 2002 95,441 737,421 498,856 (23,471)
Dividends paid ($0.09 per share) -- -- (8,876) --
Stock acquired for benefit plans -- -- -- (157)
Issuance of common stock 6,469 172,305 -- --
Stock issued in connection with acquisition 79 2,921 -- --
Exercise of stock options 2,208 46,793 -- (17,326)
Stock awards, net of amortization/forfeitures 854 26,612 -- (5,133)
Other -- 86 -- --
-------- ---------- -------- --------
Subtotal 105,051 986,138 489,980 (46,087)
-------- ---------- -------- --------
Net income -- -- 194,368 --
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- -- -- --
Unrealized appreciation in fair value of
investments -- -- -- --
Equity adjustment for minimum pension
liability -- -- -- --
-------- ---------- -------- --------
Comprehensive income -- -- 194,368 --
-------- ---------- -------- --------
Balance at December 31, 2003 105,051 986,138 684,348 (46,087)
Dividends paid ($0.09 per share) -- -- (9,386) --
Stock acquired for benefit plans -- -- -- (463)
Exercise of stock options and warrants 874 23,973 -- (746)
Stock awards, net of amortization/forfeitures 655 28,740 -- (7,635)
Other -- (180) -- --
-------- ---------- -------- --------
Subtotal 106,580 1,038,671 674,962 (54,931)
-------- ---------- -------- --------
Net income -- -- 236,011 --
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- -- -- --
Unrealized appreciation in fair value of
investments -- -- -- --
Equity adjustment for minimum pension
liability -- -- -- --
-------- ---------- -------- --------
Comprehensive income (loss) -- -- 236,011 --
-------- ---------- -------- --------
Balance at December 31, 2004 $106,580 $1,038,671 $910,973 $(54,931)
======== ========== ======== ========
Accumulated
Other Total
Deferred Comprehensive Stockholders'
Compensation Income Equity
------------ ------------- -------------
Balance at January 1, 2002 $(24,273) $(4,934) $1,149,783
Dividends paid ($0.09 per share) -- -- (8,491)
Stock acquired for benefit plans -- -- (112)
Exercise of stock options -- -- 3,971
Stock awards, net of amortization/forfeitures (4,745) -- 3,380
Other -- -- (142)
-------- ------- ----------
Subtotal (29,018) (4,934) 1,148,389
-------- ------- ----------
Net income -- -- 125,906
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- 781 781
Unrealized appreciation in fair value of
investments -- 1,274 1,274
Equity adjustment for minimum pension
liability -- (1,288) (1,288)
-------- ------- ----------
Comprehensive income -- 767 126,673
-------- ------- ----------
Balance at December 31, 2002 (29,018) (4,167) 1,275,062
Dividends paid ($0.09 per share) -- -- (8,876)
Stock acquired for benefit plans -- -- (157)
Issuance of common stock -- -- 178,774
Stock issued in connection with acquisition -- -- 3,000
Exercise of stock options -- -- 31,675
Stock awards, net of amortization/forfeitures (20,510) -- 1,823
Other -- -- 86
-------- ------- ----------
Subtotal (49,528) (4,167) 1,481,387
-------- ------- ----------
Net income -- -- 194,368
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- 3,882 3,882
Unrealized appreciation in fair value of
investments -- (895) (895)
Equity adjustment for minimum pension
liability -- (2,718) (2,718)
-------- ------- ----------
Comprehensive income -- 269 194,637
-------- ------- ----------
Balance at December 31, 2003 (49,528) (3,898) 1,676,024
Dividends paid ($0.09 per share) -- -- (9,386)
Stock acquired for benefit plans -- -- (463)
Exercise of stock options and warrants -- -- 24,101
Stock awards, net of amortization/forfeitures (16,063) -- 5,697
Other -- -- (180)
-------- ------- ----------
Subtotal (65,591) (3,898) 1,695,793
-------- ------- ----------
Net income -- -- 236,011
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment -- 941 941
Unrealized appreciation in fair value of
investments -- (473) (473)
Equity adjustment for minimum pension
liability -- (5,164) (5,164)
-------- ------- ----------
Comprehensive income (loss) -- (4,696) 231,315
-------- ------- ----------
Balance at December 31, 2004 $(65,591) $(8,594) $1,927,108
======== ======= ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
73
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
Description of Business
Omnicare, Inc. and its subsidiaries ("Omnicare" or the "Company") provide
geriatric pharmaceutical care and clinical research services. At December 31,
2004, Omnicare served residents in long-term care facilities comprising
approximately 1,086,000 beds in 47 states in the United States and in Canada,
making Omnicare 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. The Company also provided clinical research services for
the pharmaceutical and biotechnology industries in 30 countries worldwide at
December 31, 2004.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Translation of Foreign Financial Statements
Assets and liabilities of the Company's foreign operations are translated at the
year-end rate of exchange, and the income statements are translated at the
average rate of exchange for the year. Gains or losses from translating foreign
currency financial statements are accumulated in a separate component of
stockholders' equity.
Cash Equivalents
Cash equivalents include all investments in highly liquid instruments with
original maturities of three months or less.
Restricted Cash
Restricted cash represents cash transferred to separate irrevocable trusts for
settlement of employee health and severance costs.
Fair Value of Financial Instruments
For cash and cash equivalents, restricted cash, deposit with drug wholesaler,
accounts receivable and unbilled receivables, the carrying value of these items
approximates their fair value. The fair value of restricted funds held in trust
for settlement of the Company's employee benefit obligations is based on quoted
market prices of the investments held by the trustee. For accounts payable, the
carrying value approximates fair value. The fair value of the Company's $750.0
million credit facility approximates its carrying value, as the effective
interest rate fluctuates with changes in market rates. The fair value of the
8.125% senior subordinated notes, 6.125% senior
74
subordinated notes and 4.00% junior subordinated convertible debentures,
respectively, was $403.1 million, $251.3 million and $380.6 million at December
31, 2004, as determined by quoted market rates on that date. During 2003, the
Company entered into an interest rate swap agreement on all $250.0 million of
its aggregate principal amount of the 6.125% senior subordinated notes. The fair
value of the interest rate swap agreement of approximately $17.5 million at
December 31, 2004, reduced the carrying value of the 6.125% senior subordinated
notes.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist principally of interest-bearing cash and cash equivalents and accounts
receivable.
The Company is exposed to credit risk in the event of default by the financial
institutions or issuers of cash and cash equivalents to the extent recorded on
the balance sheet. At any given point in time, the Company has cash on deposit
with financial institutions, and cash invested in high quality short-term money
market funds and U.S. government-backed repurchase agreements, generally having
original maturities of three months or less, in order to minimize its credit
risk.
The Company establishes allowances for doubtful accounts based on historical
credit losses and specifically identified credit risks. Management reviews this
allowance on an ongoing basis for appropriateness, and such losses have been
within management's expectations. For the years ended December 31, 2004, 2003
and 2002, no single customer accounted for 10% or more of revenues. The Company
generally does not require collateral.
Approximately one-half of Omnicare's pharmacy services billings are directly
reimbursed by government-sponsored programs. These programs include state
Medicaid and, to a lesser extent, the federal Medicare programs. The remainder
of Omnicare's billings are paid or reimbursed by individual residents or their
responsible parties (private pay), long-term care facilities and other
third-party payors, including private insurers. A portion of these revenues also
is indirectly dependent on government programs. The table below represents the
Company's approximated payor mix for the last three years:
2004 2003 2002
---- ---- ----
State Medicaid programs 48% 47% 46%
Private pay and long-term care facilities(a) 45% 45% 44%
Federal Medicare programs(b) 2% 2% 2%
Other private sources(c) 5% 6% 8%
--- --- ---
Totals 100% 100% 100%
=== === ===
(a) Includes payments from skilled nursing facilities on behalf of their
federal Medicare program-eligible residents (Medicare Part A) and for other
services and supplies, as well as payments from third-party insurers and
private pay.
(b) Includes direct billing for medical supplies.
(c) Includes the Company's contract research organization revenues.
75
Inventories
Inventories consist primarily of purchased pharmaceuticals and medical supplies
held for sale to customers and are stated at the lower of cost or market. Cost
is determined using the first-in, first-out ("FIFO") method.
Omnicare uses a periodic inventory system. Physical inventories are typically
performed on a monthly basis at all pharmacy sites, and in all cases at least
once a quarter. Cost of goods sold is recorded based on the actual results of
the physical inventory counts, and is estimated when a physical inventory is not
performed in a particular month. The Company evaluates various criteria in
developing estimated cost of goods sold during non-inventory months, including
the historical cost of goods sold trends based on prior physical inventory
results; a review of cost of goods sold information reflecting current customer
contract terms; and consideration and analysis of changes in customer base,
product mix, payor mix, state Medicaid and third-party insurance reimbursement
levels or other issues that may impact cost of goods sold. Actual cost of goods
sold has not varied significantly from estimated amounts in non-physical
inventory months.
Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance, repairs, renewals and betterments that do not
materially prolong the useful lives of the assets are charged to expense as
incurred. Depreciation of properties and equipment is computed using the
straight-line method over the estimated useful lives of the assets, which range
from five to 10 years for computer equipment and software, machinery and
equipment, and furniture and fixtures. Buildings and building improvements are
depreciated over 40 years, and leasehold improvements are amortized over the
lesser of the initial lease terms or their useful lives. The Company capitalizes
certain costs that are directly associated with the development of internally
developed software, representing the historical cost of these assets. Once the
software is completed and placed into service, such costs are amortized over the
estimated useful lives, ranging from five to 10 years.
Leases
Leases that substantially transfer all of the benefits and risks of ownership of
property to Omnicare or otherwise meet the criteria for capitalization under
U.S. Generally Accepted Accounting Principles ("U.S. GAAP") are accounted for as
capital leases. An asset is recorded at the time a capital lease is entered into
together with its related long-term obligation to reflect its purchase and
financing. Property and equipment recorded under capital leases are depreciated
on the same basis as previously described. Rental payments under operating
leases are expensed as incurred.
Valuation of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived
assets such as
76
property and equipment, software (acquired and internally developed) and
investments are reviewed for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. An
impairment loss would be recognized when estimated future undiscounted cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount.
Goodwill, Intangibles and Other Assets
Intangible assets are comprised primarily of goodwill, customer relationship
assets, noncompete agreements and technology assets, all originating from
business combinations accounted for as purchase transactions. In accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), goodwill is
no longer amortized but is instead reviewed at the reporting unit level for
impairment at least annually and upon the occurrence of an event that indicates
impairment may have occurred. Intangible assets that will continue to be
amortized under SFAS 142 are amortized using the straight-line method over their
useful lives, ranging from four to 15 years.
Debt issuance costs are included in other assets and are amortized using the
effective interest method over the life of the related debt.
Insurance Accruals
The Company is self-insured for certain employee health, property and casualty
insurance claims, with a stop-loss umbrella policy to limit the maximum
potential liability for both individual and aggregate claims for a plan year.
Claims are paid as they are submitted to the respective plan administrators. The
Company records monthly expense for the self-insurance plans in its financial
statements for incurred claims, based on historical claims experience and input
from third-party insurance professionals in order to determine the appropriate
accrual level. The accrual gives consideration to claims that have been incurred
but not yet paid and/or reported to the plan administrator. The Company
establishes the accruals based on the historical claim lag periods and current
payment trends for similar insurance claims.
Revenue Recognition
Revenue is recognized by Omnicare when products or services are delivered or
provided to the customer.
Pharmacy Services Segment
A significant portion of the Company's Pharmacy Services Segment revenues from
sales of pharmaceutical and medical products is reimbursed by state Medicaid
and, to a lesser extent, federal Medicare programs. Payments for services
rendered to patients covered by these programs are generally less than billed
charges. The Company monitors its revenues and receivables from these
reimbursement sources, as well as other third-party insurance payors, and
records an estimated contractual allowance for certain sales and receivable
balances to properly account for anticipated differences between billed and
reimbursed amounts. Accordingly, the
77
total net sales and receivables reported in the Company's financial
statements are recorded at the amount ultimately expected to be received from
these payors. Since all billing functions of the Company are computerized,
enabling on-line adjudication (i.e., submitting charges to Medicaid or other
third-party payors electronically, with simultaneous feedback of the amount to
be paid) at the time of sale to record net revenues, exposure to estimating
contractual allowance adjustments is limited primarily to unbilled and/or
initially rejected Medicaid and third-party claims (oftentimes eventually
approved once additional information is provided to the payor). The Company
evaluates several criteria in developing the estimated contractual allowances
for unbilled and/or initially rejected claims on a monthly basis, including
historical trends based on actual claims paid, current contract and
reimbursement terms, and changes in customer base and payor/product mix.
Contractual allowances are adjusted to actual as cash is received and claims
are settled. Resulting adjustments were not significant to the Company's
operations for the periods presented. Further, Omnicare does not expect the
reasonably possible effects of a change in estimate related to unsettled
December 31, 2004 amounts from Medicaid and third-party payors to be
significant to future operating results and financial position.
Patient co-payments are associated with certain state Medicaid programs,
Medicare Part B and certain third party payors and are typically not collected
at the time products are delivered or services are rendered, but are billed to
the individual as part of the Company's normal billing procedures. These
co-payments are subject to the Company's normal accounts receivable collections
procedures.
A patient may be dispensed prescribed medications (typically no more than a 2-3
day supply) prior to insurance being verified in emergency situations, or for
new facility admissions after hours or on weekends. The following business day,
specific payor information is obtained to ensure that the proper payor is billed
for reimbursement.
Under certain circumstances, the Company accepts returns of medications and
issues a credit memo to the applicable payor. The Company estimates and accrues
for sales returns based on historical return experience, giving consideration to
the Company's return policies. Product returns are processed in the period
received, and are not significant when compared to the overall sales and gross
profit of the Company.
Contract Research Services Segment
A portion of the Company's overall revenues relate to the Contract Research
Services ("CRO") segment, and are earned by performing services under contracts
with various pharmaceutical, biotechnology, medical device and diagnostics
companies, based on contract terms. Most of the contracts provide for services
to be performed on a unit of service basis. These contracts specifically
identify the units of service and unit pricing. Under these contracts, revenue
is generally recognized upon completion of the units of service. For
time-and-materials contracts, revenue is recognized at contractual hourly rates,
and for fixed-price contracts, revenue is recognized using a method similar to
that used for units of service. The Company's contracts provide for additional
service fees for scope of work changes. The Company recognizes revenue related
to these scope changes when underlying services are performed and realization is
assured. In a number of cases, clients are required to make termination payments
in addition to payments for services already rendered. Any anticipated losses
resulting from contract performance are
78
charged to earnings in the period identified. Billings and payments are
specified in each contract. Revenue recognized in excess of billings is
classified as unbilled receivables, while billings in excess of revenue are
classified as deferred revenue.
Stock-Based Employee Compensation
At December 31, 2004, the Company had four stock-based employee compensation
plans, which are described more fully in the "Stock-Based Employee Compensation"
footnote (Note 8). As permitted under U.S. GAAP, the Company accounts for stock
incentive plans under the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related Interpretations. No stock-based employee
compensation cost for stock options is reflected in net income, as all options
granted under the plans had an exercise price equal to or greater than the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS
No. 148. "Accounting for Stock-Based Compensation-Transition and Disclosure - an
amendment of SFAS 123" ("SFAS 148"), for stock options (in thousands, except per
share data):
For the years ended December 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Net income, as reported $236,011 $194,368 $125,906
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 5,149 3,848 3,688
Deduct: Total stock-based employee
compensation expense (stock options and
awards) determined under fair value based
method, net of related tax effects (23,571) (12,850) (11,523)
-------- -------- --------
Pro forma net income $217,589 $185,366 $118,071
======== ======== ========
Earnings per share:
Basic - as reported $ 2.29 $ 1.97 $ 1.34
======== ======== ========
Basic - pro forma $ 2.11 $ 1.88 $ 1.25
======== ======== ========
Diluted - as reported $ 2.17 $ 1.89 $ 1.33
======== ======== ========
Diluted - pro forma $ 2.01 $ 1.81 $ 1.24
======== ======== ========
79
The fair value of each option at the grant date is estimated using the
Black-Scholes option-pricing model, with the following weighted average
assumptions used for grants in 2004, 2003 and 2002:
2004 2003 2002
------ ------ ------
Volatility 50% 59% 63%
Risk-free interest rate 3.5% 3.4% 3.1%
Dividend yield 0.3% 0.2% 0.4%
Expected term of options (in years) 5.1 5.1 5.5
Weighted average fair value per option $13.34 $17.97 $14.80
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.
Income Taxes
The Company accounts for income taxes using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates to differences between the
tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements.
Future tax benefits are recognized to the extent that realization of those
benefits is considered to be more likely than not. A valuation allowance is
established for deferred tax assets for which realization is not assured.
Comprehensive Income
The accumulated aftertax other comprehensive income (loss) adjustments at
December 31, 2004 and 2003, net of aggregate applicable tax benefits of $6.5
million and $3.2 million, respectively, by component and in the aggregate,
follow (in thousands):
December 31,
------------------
2004 2003
-------- -------
Cumulative foreign currency translation adjustments $ 2,252 $ 1,311
Unrealized appreciation in fair value of investments 607 1,080
Equity adjustment for minimum pension liability (11,453) (6,289)
-------- -------
Total accumulated other comprehensive loss adjustments, net $ (8,594) $(3,898)
======== =======
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's financial statements in accordance with U.S.
GAAP requires management to make estimates, assumptions and judgments that
affect the reported amounts of assets, liabilities and stockholders' equity at
the date of the financial statements, the reported amounts of revenues and
expenses during the reporting periods, and amounts reported in the
80
accompanying notes. Significant estimates underlying the accompanying
consolidated financial statements include the allowance for doubtful accounts;
the net carrying value of inventories; the goodwill impairment assessment;
accruals pursuant to the Company's restructuring initiatives; employee benefit
plan assumptions and reserves; current and deferred income tax assets,
liabilities and provisions; and various other operating allowances and accruals
(including employee health, property and casualty insurance accruals). Actual
results could differ from those estimates depending upon the resolution of
certain risks and uncertainties.
Potential risks and uncertainties, many of which are beyond the control of
Omnicare, include, but are not necessarily limited to, such factors as overall
economic, financial and business conditions; delays and reductions in
reimbursement by the government and other payors to Omnicare and/or its
customers; the overall financial condition of Omnicare's customers; the effect
of new government regulations, executive orders and/or legislative initiatives,
including those relating to reimbursement and drug pricing policies and changes
in the interpretation and application of such policies; efforts by payors to
control costs; the outcome of litigation; other contingent liabilities; loss or
delay of contracts pertaining to the Company's Contract Research Organization
("CRO" or "CRO Services") segment for regulatory or other reasons; currency
fluctuations between the U.S. dollar and other currencies; changes in
international economic and political conditions; changes in interest rates;
changes in the valuation of the Company's financial instruments, including the
swap agreement and other derivative instruments; changes in tax laws and
regulations; access to capital and financing; the demand for Omnicare's products
and services; pricing and other competitive factors in the industry; variations
in costs or expenses; and changes in accounting rules and standards.
Restatement of Diluted Earnings per Share
In October 2004, the Financial Accounting Standards Board ("FASB") ratified
Emerging Issues Task Force ("EITF") Issue No. 04-8, "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share" ("EITF No. 04-8"), which
requires the shares underlying contingently convertible debt instruments to be
included in diluted earnings per share computations using the "if-converted"
accounting method, regardless of whether the market price trigger has been met.
Under that method, the convertible debentures are assumed to be converted to
common shares (weighted for the number of days assumed to be outstanding during
the period), and interest expense, net of taxes, related to the convertible
debentures is added back to net income. Diluted earnings per common share
amounts have been retroactively restated for 2003 to give effect to the
application of EITF No. 04-8 as it relates to the Company's 4.00% junior
subordinated convertible debentures ("4.00% Convertible Debentures") issued in
the second quarter of 2003. The effect of Omnicare's fourth quarter 2004
adoption of EITF No. 04-8 was to decrease diluted earnings per share $0.04 for
the year ended December 31, 2003. For purposes of the "if-converted"
calculation, 4,653,000 shares were assumed to be converted for the year ended
December 31, 2003. Additionally, interest expense, net of taxes, of $5.0 million
for the year ended December 31, 2003, was added back to net income for purposes
of calculating diluted earnings per share using this method. See further
discussion in Note 11.
81
Recently Issued Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4." This Statement adopts the International Accounting
Standards Board (IASB) view related to inventories, that abnormal amounts of
idle capacity, freight, handling costs, and spoilage cost should be excluded
from inventory and expensed as incurred. This Statement is effective for the
Company beginning January 1, 2006. The adoption of the standard is not expected
to have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67,"
which is not applicable to the Company.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29." This Statement updates and clarifies
existing accounting pronouncements. This Statement is effective for the Company
beginning January 1, 2006. The adoption of the standard is not expected to have
a material impact on the Company's consolidated financial position, results of
operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). This Statement requires the Company to record
compensation costs relating to equity-based payments, in its financial
statements, over the requisite service period (usually the vesting period). This
Statement is effective for the Company in the interim period beginning July 1,
2005. The Company will elect the "modified prospective application" method of
implementing SFAS 123R, which applies to new awards and to awards modified,
repurchased, or cancelled after June 30, 2005. Additionally, compensation cost
for the portion of awards for which the requisite service has not been rendered
that are outstanding as of June 30, 2005 will be recognized as the requisite
service is rendered on or after June 30, 2005. Omnicare is currently
evaluating the impact of the adoption of SFAS 123R to the Company, but has not
yet quantified the effect of this new standard on its financial results
for 2005 and future years.
Reclassifications
Certain reclassifications of prior-year amounts, including the presentation of
movements in cash overdraft balances as net cash flows from financing
activities, have been made to conform with the current-year presentation.
Note 2 - Acquisitions
Since 1989, the Company has been involved in a program to acquire providers of
pharmaceutical products and related pharmacy management services and medical
supplies to long-term care facilities and their residents. The Company's
strategy has included the acquisition of freestanding institutional pharmacy
businesses as well as other assets, generally insignificant in size, which have
been combined with existing pharmacy operations to augment their internal
82
growth. From time to time the Company may acquire other businesses, such as
long-term care software companies, contract research organizations, pharmacy
consulting companies, specialty pharmacy companies and medical supply companies,
which complement the Company's core business. During 2004, Omnicare completed 20
acquisitions (19 and 1 in the Pharmacy Services and CRO Services segments,
respectively) of businesses and other assets, none of which were individually
significant to the Company. Acquisitions of businesses required cash payments of
$398.6 million (including amounts payable pursuant to acquisition agreements
relating to pre-2004 acquisitions) in 2004. The impact of these aggregate
acquisitions on the Company's overall goodwill balance has been reflected in the
disclosures at the "Goodwill and Other Intangible Assets" footnote. During the
years ended December 31, 2003 and 2002, the Company completed two and one
significant acquisitions, respectively, all of which were institutional pharmacy
businesses.
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
$1.6 billion, which includes the assumption of NeighborCare's net debt and any
related refinancing thereof. As of December 31, 2004, the Company has deferred
approximately $5.6 million of pre-acquisition costs relating to this
transaction. 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 April 1, 2005, unless extended.
In accordance with U.S. GAAP, all business combinations entered into after July
1, 2001 are accounted for using the purchase method, which requires that the
purchase price paid for each acquisition be allocated to the fair value of the
assets acquired and liabilities assumed. Purchase price allocations are subject
to final determination within one year after the acquisition date.
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 in 2005, 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
83
intended to divest 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, deferred tax assets and other intangible assets based on an appraisal
performed by an independent valuation firm.
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
========
In connection with the purchase of SunScript, the Company acquired amortizable
intangible assets comprised of customer relationship and non-compete agreement
assets totaling $7.4 million and $0.9 million, respectively. Amortization
periods for customer relationships and non-compete agreement assets are 14.0
years and 12.0 years, respectively, and 13.8 years on a weighted-average basis.
The Company has also recorded goodwill totaling approximately $65 million (all
of which is tax deductible) in connection with the acquisition. Further
discussion of goodwill and other intangible assets is included in "Goodwill and
Other Intangible Assets."
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 in "Long-Term Debt."
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 has 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. The Company has completed its
purchase price allocation, including the
84
identification of goodwill, deferred tax assets, and other intangible assets
based on an appraisal performed by an independent valuation firm.
The following table summarizes the fair values of the net assets acquired at the
date of the NCS acquisition (in thousands):
Current assets $ 95,845
Deferred tax assets 108,921
Property and equipment 18,275
Intangible assets 53,906
Goodwill 366,916
Other assets 9,650
Current liabilities (130,336)
Other liabilities (23,636)
---------
Total net assets acquired $ 499,541
=========
In connection with the purchase of NCS, the Company acquired amortizable
intangible assets comprised of customer relationship, developed technology and
non-compete agreement assets totaling $46.2 million, $6.0 million and $1.7
million, respectively. Amortization periods for customer relationship, developed
technology and non-compete agreement assets are 13.0 years, 8.0 years and 3.0
years, respectively, and 12.3 years on a weighted-average basis. The Company has
also recorded goodwill totaling approximately $367 million (of which
approximately $280 million is tax deductible) in connection with the
acquisition. Further discussion of goodwill and other intangible assets is
included in "Goodwill and Other Intangible Assets."
Unaudited pro forma combined results of operations of the Company and the
aggregated acquisitions completed during 2004, which individually were not
significant, are presented below for the years ended December 31, 2004 and 2003.
Such pro forma presentation has been prepared assuming that these 2004
acquisitions had been made as of January 1, 2003.
The unaudited pro forma combined financial information follows (in thousands,
except per share data):
For the years ended
December 31,
-----------------------
2004 2003
---------- ----------
Pro forma net sales $4,342,526 $3,962,030
Pro forma net income $ 236,874 $ 195,776
Pro forma earnings per share:
Basic $ 2.29 $ 1.98
========== ==========
Diluted $ 2.18 $ 1.91
========== ==========
85
Warrants outstanding as of December 31, 2004, issued in connection with
acquisitions, represent the right to purchase 1.8 million shares of Omnicare
common stock. These warrants can be exercised at any time through 2006 at prices
ranging from $29.70 to $48.00 per share. Warrants to purchase 60,000 shares of
common stock, issued in prior years, were exercised in 2004.
The purchase agreements for acquisitions generally include clauses whereby the
seller will or may be paid additional consideration at a future date depending
on the passage of time and/or whether certain future events occur. The
agreements also include provisions containing a number of representations and
covenants by the seller and provide that if those representations are found not
to have been true or if those covenants are violated, Omnicare may offset any
payments required to be made at a future date against any claims it may have
under indemnity provisions in the related agreement. There are no significant
anticipated future offsets against acquisition-related payables and/or
contingencies under indemnity provisions as of December 31, 2004 and 2003.
Amounts contingently payable through 2006, primarily representing payments
originating from earnout provisions, total approximately $45.8 million as of
December 31, 2004 and, if paid, will be recorded as additional purchase price,
serving to increase goodwill in the period in which the contingencies are
resolved and payment is made. The amount of cash paid for acquisitions of
businesses in the Consolidated Statements of Cash Flows represents
acquisition-related payments made in each of the years of acquisition, as well
as acquisition-related payments made during each of the years pursuant to
acquisition transactions entered into in prior years.
86
Note 3 - Cash and Cash Equivalents
A summary of cash and cash equivalents follows (in thousands):
December 31,
------------------
2004 2003
------- --------
Cash $49,937 $ 74,662
Money market funds 4,494 --
U.S. government-backed repurchase agreements 29,738 112,751
------- --------
$84,169 $187,413
======= ========
Repurchase agreements represent investments in U.S. government-backed securities
(treasury issues at December 31, 2004, and treasury issues and government agency
issues at December 31, 2003), under agreements to resell the securities to the
counterparty. The term of the agreement usually spans overnight, but in no case
is longer than 30 days. The Company has a collateralized interest in the
underlying securities of repurchase agreements, which are segregated in the
accounts of the bank counterparty.
Note 4 - Properties and Equipment
A summary of properties and equipment follows (in thousands):
December 31,
---------------------
2004 2003
--------- ---------
Land $ 1,624 $ 1,624
Buildings and building improvements 7,165 7,526
Computer equipment and software 199,858 189,367
Machinery and equipment 91,776 86,780
Furniture, fixtures and leasehold improvements 64,522 63,508
--------- ---------
364,945 348,805
Accumulated depreciation (222,524) (200,498)
--------- ---------
$ 142,421 $ 148,307
========= =========
Note 5 - Goodwill and Other Intangible Assets
During the third quarters of 2004 and 2003, the Company completed its annual
goodwill impairment assessment based on an evaluation of estimated future cash
flows at the reporting unit level and determined that goodwill was not impaired.
87
Changes in the carrying amount of goodwill for the years ended December 31, 2003
and 2004, by business segment, are as follows (in thousands):
Pharmacy CRO
Services Services Total
---------- -------- ----------
Balance as of January 1, 2003 $1,149,939 $38,968 $1,188,907
Goodwill acquired in the year
ended December 31, 2003 473,160 -- 473,160
Other 26,505 1,986 28,491
---------- ------- ----------
Balance as of December 31, 2003 1,649,604 40,954 1,690,558
Goodwill acquired in the year
ended December 31, 2004 278,288 40,846 319,134
Other (7,280) 811 (6,469)
---------- ------- ----------
Balance as of December 31, 2004 $1,920,612 $82,611 $2,003,223
========== ======= ==========
The "Other" captions above include the settlement of acquisition matters
relating to prior-year acquisitions (including payments pursuant to acquisition
agreements such as deferred payments and payments originating from earnout
provisions, as well as adjustments for the finalization of purchase price
allocation). "Other" also includes the effect of adjustments due to foreign
currency translations, which relate solely to CRO Services.
88
The table below presents the Company's other intangible assets (included in the
"Other noncurrent assets" caption on the Consolidated Balance Sheets) at
December 31, 2004 and 2003, all of which are subject to amortization (in
thousands):
December 31, 2004
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Customer relationship assets $69,154 $(11,864) $57,290
Non-compete agreements 15,044 (9,194) 5,850
Technology assets 5,990 (1,469) 4,521
Other 442 (217) 225
------- -------- -------
Total $90,630 $(22,744) $67,886
======= ======== =======
December 31, 2003
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Customer relationship assets $49,382 $ (4,711) $44,671
Non-compete agreements 11,357 (8,159) 3,198
Technology assets 5,990 (719) 5,271
Other 378 (247) 131
------- -------- -------
Total $67,107 $(13,836) $53,271
======= ======== =======
Pretax amortization expense related to intangible assets was $8.9 million, $6.4
million and $1.5 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
Estimated annual amortization expense for intangible assets subject to
amortization at December 31, 2004 for the next five fiscal years is as follows
(in thousands):
Year Ended Amortization
December 31, Expense
- ------------ ------------
2005 $8,025
2006 6,939
2007 6,491
2008 6,484
2009 6,482
Note 6 - Leasing Arrangements
The Company has operating leases that cover various operating and administrative
facilities and certain operating equipment. In most cases, the Company expects
that these leases will be renewed or replaced by other leases in the normal
course of business. There are no significant contingent rentals in the Company's
operating leases.
89
The following is a schedule of future minimum rental payments required under
operating leases that have initial or remaining noncancellable terms in excess
of one year as of December 31, 2004 (in thousands):
2005 $ 28,897
2006 24,357
2007 19,590
2008 13,752
2009 10,294
Later years 19,232
--------
Total minimum
payments required $116,122
========
Total rent expense under operating leases for the years ended December 31, 2004,
2003 and 2002 were $48.1 million, $37.5 million and $31.8 million, respectively.
Note 7 - Long-Term Debt
A summary of long-term debt follows (in thousands):
December 31,
-----------------------
2004 2003
---------- ----------
Term A loan, due in installments through 2007 $ 135,385 $ 155,897
Revolving credit facility, due 2007 170,000 --
8.125% senior subordinated notes, due 2011 375,000 375,000
6.125% senior subordinated notes, due 2013 250,000 250,000
4.00% junior subordinated convertible debentures, due 2033 345,000 345,000
Capitalized lease obligations 1,392 667
---------- ----------
1,276,777 1,126,564
Less interest rate swap agreement (17,492) (23,178)
Less current portion (25,218) (20,709)
---------- ----------
Total long-term debt $1,234,067 $1,082,677
========== ==========
The following is a schedule of required long-term debt payments due during each
of the next five years and thereafter, as of December 31, 2004 (in thousands):
2005 $ 25,218
2006 45,645
2007 235,716
2008 62
2009 62
Later years 970,074
----------
$1,276,777
==========
90
Total interest payments made for the years ended December 31, 2004, 2003 and
2002 were $64.4 million, $71.4 million (which includes the $8.9 million call
premium related to the early redemption of the Company's 5.0% convertible
subordinated debentures, as discussed below) and $51.8 million, respectively. As
of December 31, 2004, the Company had approximately $13.1 million outstanding
relating to standby letters of credit, substantially all of which are subject to
automatic annual renewals.
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 "Old Trust"), of $345.0 million aggregate liquidation
amount of 4.00% Trust Preferred Income Equity Redeemable Securities due 2033
(the "Old Trust PIERS").
Revolving Credit Facilities and Term A Loan
In early 2001, the Company entered into a three-year syndicated $500.0 million
revolving line of credit facility (the "Revolving Credit Facility"). In January
2003, the Company borrowed $499.0 million under the Revolving Credit Facility to
finance its acquisition of NCS (see "Acquisitions" footnote). The Revolving
Credit Facility was retired in connection with the mid-2003 refinancing
transactions.
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 December 31, 2004, the
weighted-average interest rate on funds drawn was 4.06%, the LIBOR interest rate
margin was 1.375% and the commitment fee was 0.375%. There is no utilization fee
associated with the Credit Facility. The Credit Facility agreement contains
financial covenants, which include a fixed charge coverage ratio and minimum
consolidated net worth levels as well as certain representations and warranties,
affirmative and negative covenants, and events of default customary for such a
facility. The Company was in compliance with these covenants as of December 31,
2004.
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 $20.5 million and $94.1 million on the
term A loan during 2004 and 2003, respectively. The $135.4 million outstanding
at December 31, 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 $170.0 million outstanding as of December 31, 2004 under the
revolving credit commitment of the Credit
91
Facility. The revolving credit commitment of the Credit Facility had no
outstanding loans as of December 31, 2003.
Upon the issuance of the Credit Facility, the Company had deferred debt issuance
costs of $9.6 million. During 2004, 2003 and 2002, respectively, the Company
amortized approximately $2.4 million, $2.1 million and $2.0 million of deferred
debt issuance costs related to its revolving credit facilities.
5.0% Convertible Subordinated Debentures
In December 1997, the Company issued $345.0 million of 5.0% convertible
subordinated debentures due 2007 ("5.0% Convertible Debentures"). In connection
with the issuance of the 5.0% Convertible Debentures, the Company deferred $8.5
million in debt issuance costs, of which approximately $0.4 million and $0.9
million was amortized in the years ended December 31, 2003 and 2002,
respectively.
The Company used a portion of the net proceeds from the common stock offering
and the net proceeds from the Old Trust PIERS offering to redeem the entire
outstanding $345.0 million aggregate principal amount of the Company's 5%
Convertible Debentures, with remaining proceeds being used for general corporate
purposes. The total redemption price, including the call premium, was
approximately $353.9 million. Accordingly, a $12.7 million pretax charge ($7.9
million aftertax, or $0.07 per diluted share) was recognized in interest expense
during the year ended December 31, 2003 for the call premium and the write-off
of remaining unamortized debt issuance costs associated with the redemption of
the 5.0% Convertible Debentures.
8.125% Senior Subordinated Notes
Concurrent with the issuance of the 2001 Revolving Credit Facility, the Company
completed the issuance, at par value, of $375.0 million of 8.125% senior
subordinated notes due 2011 ("8.125% Senior Notes"). In connection with the
issuance of the 8.125% Senior Notes, the Company deferred $11.1 million in debt
issuance costs, of which approximately $1.1 million was amortized in each of the
three years ended December 31, 2004. The 8.125% Senior Notes contain certain
affirmative and negative covenants and events of default customary for such
instruments. The 8.125% Senior Notes were subsequently exchanged for replacement
notes with identical terms, which were registered with the Securities and
Exchange Commission.
6.125% Senior Subordinated Notes
As described above, the Company completed, during the second quarter of 2003,
its offering of $250.0 million of 6.125% Senior Notes due 2013. In connection
with the issuance of the 6.125% Senior Notes, the Company deferred $6.6 million
in debt issuance costs, of which approximately $0.7 million was amortized during
2004, and approximately $0.4 million was amortized during 2003. The 6.125%
Senior Notes contain certain affirmative and negative covenants and events of
default customary for such instruments.
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
92
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 5.105% at December 31, 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 approximately $17.5 million at
December 31, 2004 is recorded as a noncurrent liability and a reduction to the
carrying value of the related 6.125% Senior Notes.
4.00% Junior Subordinated Convertible Debentures
In connection with the offering of the Old Trust PIERS in the second quarter of
2003, the Company issued a corresponding amount of 4.00% Junior Subordinated
Convertible Debentures ("4.00% Convertible Debentures") due 2033 to the Old
Trust. The Old Trust is a 100%-owned finance subsidiary of the Company. The
Company has fully and unconditionally guaranteed the securities of the Old
Trust. The Old Trust PIERS offer fixed cash distributions at a rate of 4.00%
per annum payable quarterly, and a fixed conversion price of $40.82 under a
contingent conversion feature whereby the holders may convert their Old Trust
PIERS if the closing sales price of Omnicare common stock for a predetermined
period, beginning with the quarter ending September 30, 2003, is more than
130% of the then-applicable conversion price or, during a predetermined period,
if the daily average of the trading prices for the Old Trust PIERS is less
than 105% of the average of the conversion values for the Old Trust PIERS
through 2028 (98% for any period thereafter through maturity). The Old Trust
PIERS also will pay contingent distributions, commencing with the quarterly
distribution period beginning June 15, 2009, if the average trading prices of
the Old Trust PIERS for a predetermined period equals 115% or more of the
stated liquidation amount of the Old Trust PIERS. Embedded in the Old Trust
PIERS are two derivative instruments, specifically, a contingent interest
provision and a contingent conversion parity provision. The embedded derivatives
are periodically valued by a third-party advisor, and at December 31, 2004, the
values of both derivatives embedded in the Old Trust PIERS were not material.
However, the values are subject to change, based on market conditions, which
could affect the 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 Old Trust in connection
with the Old Trust PIERS. In connection with the issuance of the 4.00% junior
subordinated convertible debentures, the Company deferred $10.8 million in debt
issuance costs, of which approximately $0.4 million and $0.2 million was
amortized in the years ended December 31, 2004 and 2003, respectively.
Note 8 - Stock-Based Employee Compensation
At December 31, 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. Beginning May 18, 2004, stock-based incentive
awards are made only from the 2004 Stock and Incentive Plan. Omnicare believes
that the incentive awards issued under these plans serve to
93
better align the interests of its employees with those of its stockholders.
Under these plans, stock options generally vest and become exercisable at
varying points in time, ranging up to four years in length. Further, the life
of the stock options typically spans ten years from the grant date. Omnicare's
policy is to issue new shares upon stock option exercise. Certain option and
share awards provide for accelerated vesting if there is a change in control,
as defined in the plans.
Under the 1992 Long-Term Stock Incentive Plan, the Company granted stock awards
and stock options at not less than the fair market value of the Company's common
stock on the date of grant.
During 1995, the Company's Board of Directors and stockholders approved the 1995
Premium-Priced Stock Option Plan, providing options to purchase 2.5 million
shares of Company common stock available for grant at an exercise price of 125%
of the stock's fair market value at the date of grant.
During 1998, the Company's Board of Directors approved the 1998 Long-Term
Employee Incentive Plan (the "1998 Plan"), under which the Company was
authorized to grant stock-based incentives to a broad base of employees
(excluding executive officers and directors of the Company) in an amount
initially aggregating up to 1.0 million shares of Company common stock for
non-qualified options, stock awards and stock appreciation rights. In March 2000
and November 2002, the Company's Board of Directors amended the 1998 Plan to
increase the shares available for granting to 3.5 million and 6.3 million,
respectively.
During 2004, stockholders of the Company approved the 2004 Stock and Incentive
Plan, under which the Company is authorized to grant equity-based and other
incentive compensation to employees, officers, directors, consultants and
advisors of the Company in an amount aggregating up to 10.0 million shares of
Company common stock.
The Company also had a Director Stock Plan, which allowed for stock options and
stock awards to be granted to certain non-employee directors. As of May 18,
2004, this plan was terminated. Consequently, awards are no longer being made
from this plan.
94
Summary information for stock options is presented below (in thousands, except
exercise price data):
2004 2003 2002
- --------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 7,998 $24.03 9,508 $20.78 7,913 $19.31
Options granted 1,351 28.01 816 39.78 2,074 26.38
Options exercised (815) 20.49 (2,208) 15.85 (230) 15.30
Options forfeited (121) 26.73 (118) 23.37 (249) 25.47
----- ------ -----
Options outstanding, end of year 8,413 $24.99 7,998 $24.03 9,508 $20.78
----- ------ -----
Options exercisable, end of year 4,991 $22.55 4,379 $21.85 4,518 $20.45
- --------------------------------------------------------------------------------------------------
The following summarizes information about stock options outstanding and
exercisable as of December 31, 2004 (in thousands, except exercise price and
remaining life data):
- -------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2004 Life (in years) Price 2004 Price
- -------------------------------------------------------------------------------------------
$7.72 - $15.45 1,635 4.5 $14.92 1,635 $14.92
15.46 - 23.17 1,930 6.4 18.95 1,361 18.40
23.18 - 30.90 3,441 7.6 27.34 1,195 27.43
30.91 - 38.61 644 4.1 36.40 585 36.65
38.62 - 61.79 763 8.6 41.56 215 41.47
----- -----
$7.72 - $61.79 8,413 6.5 $24.99 4,991 $22.55
- -------------------------------------------------------------------------------------------
Nonvested stock awards that are granted to key employees at the discretion of
the Compensation and Incentive Committee of the Board of Directors are
restricted as to the transfer of ownership and generally vest over a seven-year
period, with a greater proportion vesting in the latter years. Unrestricted
stock awards are granted annually to all members of the Board of Directors, and
non-employee directors also receive nonvested stock awards that generally vest
on the third anniversary of the date of grant. The fair value of a stock award
is equal to the fair market value of a share of Company stock at the grant date.
95
Summary information relating to stock award grants is presented below:
For the years ended December 31,
2004 2003 2002
--------------------------------
Nonvested shares 653,946 861,183 538,529
Unrestricted shares 3,600 4,000 4,800
Weighted average grant date fair value $ 38.94 $ 30.97 $ 21.32
When granted, the cost of nonvested stock awards is deferred and amortized over
the vesting period. Unrestricted stock awards are expensed during the year
granted. During 2004, 2003 and 2002, the amount of pretax compensation expense
related to stock awards was $8.2 million, $6.1 million and $5.9 million,
respectively.
Note 9 - Employee Benefit Plans
The Company has various defined contribution savings plans under which eligible
employees can participate by contributing a portion of their salary for
investment, at the direction of each employee, in one or more investment funds.
Several of the plans were adopted in connection with certain of the Company's
acquisitions. The plans are primarily tax-deferred arrangements pursuant to
Internal Revenue Code ("IRC") Section 401(k) and are subject to the provisions
of the Employee Retirement Income Security Act ("ERISA"). The Company matches
employee contributions in varying degrees (either in shares of the Company's
common stock or cash, in accordance with the applicable plan provisions) based
on the contribution levels of the employees, as specified in the respective
plan documents. Expense relating primarily to the Company's matching
contributions for these defined contribution plans for the years ended
December 31, 2004, 2003 and 2002 was $4.8 million, $3.9 million and $3.8
million, respectively.
The Company has a non-contributory, defined benefit pension plan covering
certain corporate headquarters employees and the employees of several companies
sold by the Company in 1992, for which benefits ceased accruing upon the sale
(the "Qualified Plan"). Benefits accruing under this plan to corporate
headquarters employees were fully vested and frozen as of January 1, 1994.
Obligations under the plan of $3.3 million were fully funded at December 31,
2004.
The Company also has an excess benefit plan which provides retirement payments
to certain headquarters employees in amounts generally consistent with what they
would have received under 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 IRC. 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 ERISA.
96
The following table presents the components of pension cost (in thousands):
For the years ended
December 31,
------------------------
2004 2003 2002
------ ------ ------
Service cost $1,547 $1,432 $2,192
Interest cost 2,290 1,831 1,513
Amortization of deferred amounts
(primarily prior actuarial losses) 1,913 969 479
Expected return on assets (229) (216) (206)
------ ------ ------
Net periodic pension cost $5,521 $4,016 $3,978
====== ====== ======
The Company uses a December 31 measurement date for the Qualified Plan and the
excess benefit plan.
Actuarial assumptions used to calculate the benefit obligations and expenses
include the following:
2004 2003 2002
----- ---- ----
Discount rate used for benefit obligations 5.75% 6.00% 6.75%
Discount rate used for benefit expenses 6.00% 6.75% 7.25%
Expected long-term rate of return on assets 7.00% 8.00% 8.00%
Rate of increase in compensation levels 10.00% 6.00% 6.00%
The expected long-term rate of return on assets was estimated based on the
historical long-term rate of return on intermediate-term U.S. Government
securities.
The aggregate assets invested for settlement of the Company's pension
obligations, including rabbi trust assets, ("plan assets") as of December 31,
2004 and 2003 are greater than the aggregate Accumulated Benefit Obligation
("ABO") by $2.4 million and $2.9 million, respectively. Since rabbi trust assets
do not serve to offset the Company's pension obligation in accordance with U.S.
GAAP, an additional minimum pension liability has been recorded, as a component
of other comprehensive income, for the difference between the ABO and the
recorded liability for the excess benefit plan. The plan assets as of December
31, 2004 and 2003 are less than the aggregate Projected Benefit Obligation
("PBO") by $11.2 million and $5.4 million, respectively (collectively referred
to as "net PBO"). The increase in the net PBO from the prior year of $5.8
million primarily relates to an increase in plan assets of $12.8 million, more
than offset by an actuarial loss of $9.8 million, interest expense (including
the change in the discount rate) of $7.7 million and service costs of $1.1
million.
Plan assets amounted to $45.9 million and $33.1 million at December 31, 2004 and
2003, respectively, and are held in Vanguard Intermediate Term Treasury Fund
Admiral Shares.
97
The Company's investment strategy generally targets investing in intermediate
U.S. Government securities, seeking a high level of interest income while
investing in intermediate-term U.S. Treasury bonds and other securities with an
average maturity of between five and 10 years.
The estimated aggregate contributions expected to be paid to the excess benefit
plan during the year ended December 31, 2005 total approximately $15.4 million.
No payment is anticipated to be made to the qualified plan. Projected benefit
payments, which reflect expected future service, as appropriate, for each of the
next five fiscal years and in the aggregate for the five fiscal years thereafter
from the excess benefit plan as of December 31, 2004 are estimated as follows
(in thousands):
2005 $ 3,172
2006 3,260
2007 3,399
2008 3,571
2009 3,737
Years 2010 - 2014 23,355
In addition, the Company has a supplemental pension plan ("SPP") in which
certain of its officers participate. Retirement benefits under the SPP are
calculated on the basis of a specified percentage of the officers' covered
compensation, years of credited service and a vesting schedule, as specified in
the plan documents. Expense relating to the SPP was $0.8 million in each of the
years ended December 31, 2004, 2003 and 2002. Obligations of the SPP of $3.8
million were fully funded at December 31, 2004.
In November 1999, the Company's Board of Directors adopted the Omnicare
StockPlus Program, a non-compensatory employee stock purchase plan (the "ESPP").
Under the ESPP, employees and non-employee directors of the Company who elect to
participate may contribute up to 6% of eligible compensation (or an amount not
to exceed $20,000 for non-employee directors) to purchase shares of the
Company's common stock. For each share of stock purchased, the participant also
receives two options to purchase additional shares of the Company's stock. The
options are subject to a four-year vesting period and are generally subject to
forfeiture in the event the related shares are not held by the participant for a
minimum of two years. The options have a ten-year life from the date of
issuance. Amounts contributed to the ESPP are used by the plan administrator to
purchase the Company's stock on the open market. Prior to May 18, 2004, options
awarded under the ESPP were issued out of the 1992 Long-Term Stock Incentive
Plan and the 1998 Long-Term Employee Incentive Plan. Beginning May 18, 2004,
stock-based incentive awards are made only from the 2004 Stock and Incentive
Plan. All options awarded are included in the option activity presented in Note
8 of the Notes to Consolidated Financial Statements.
98
Note 10 - Income Taxes
The provision for income taxes is comprised of the following (in thousands):
For the years ended December 31,
--------------------------------
2004 2003 2002
-------- -------- -------
Current provision:
Federal $ 77,753 $ 66,224 $55,898
State, local and foreign 3,281 6,172 5,819
-------- -------- -------
81,034 72,396 61,717
-------- -------- -------
Deferred provision:
Federal 52,697 36,888 12,881
State and foreign 5,457 6,797 2,547
-------- -------- -------
58,154 43,685 15,428
-------- -------- -------
Total income tax provision $139,188 $116,081 $77,145
======== ======== =======
Tax benefits related to the exercise of stock options and stock awards have been
credited to paid-in capital in amounts of $10.4 million, $14.7 million and $0.6
million for 2004, 2003 and 2002, respectively.
The difference between the Company's reported income tax expense and the federal
income tax expense computed at the statutory rate of 35% is explained in the
following table (in thousands):
For the years ended December 31,
--------------------------------------------------
2004 2003 2002
--------------- --------------- --------------
Federal income tax at the statutory rate $131,320 35.0% $108,657 35.0% $71,068 35.0%
State and local income taxes, net of federal
income tax benefit 4,972 1.3 7,871 2.5 4,999 2.5
Other, net (including tax accrual adjustments) 2,896 0.8 (447) (0.1) 1,078 0.5
-------- ---- -------- ---- ------- ----
Total income tax provision $139,188 37.1% $116,081 37.4% $77,145 38.0%
======== ==== ======== ==== ======= ====
Income tax payments, net, amounted to $73.5 million, $43.3 million and $64.2
million in 2004, 2003 and 2002, respectively.
99
A summary of deferred tax assets and liabilities follows (in thousands):
December 31,
-------------------
2004 2003
-------- --------
Accrued liabilities $ 80,662 $ 77,417
Net operating loss carryforwards 62,095 72,464
Accounts receivable reserves 33,934 35,376
Other 9,527 11,457
-------- --------
Gross deferred tax assets $186,218 $196,714
======== ========
Amortization of intangibles $208,771 $173,079
Fixed assets and depreciation methods 1,339 10,015
Current and noncurrent assets 9,568 6,993
Other 9,566 4,316
-------- --------
Gross deferred tax liabilities $229,244 $194,403
======== ========
In 2003, the Company, as a result of its acquisition of NCS, acquired federal
net operating loss carryforwards totaling, as of December 31, 2003, $204.5
million pretax and $71.5 million tax-effected. The remaining federal net
operating loss carryforward is $177.8 million pretax, and $62.2 million
tax-effected as of December 31, 2004. In addition, the Company acquired NCS
state net operating loss carryforwards totaling $13.9 million tax-effected and
net of the federal tax benefit as of December 31, 2004. Both the federal and
state net operating losses will expire, in varying amounts, from 2010 through
2022. The acquired net operating loss carryforwards are subject to an annual
limitation under IRC Section 382 and other statutory regulations. The Company
has recorded a $14.0 million valuation allowance for those carryforwards
expected to expire unutilized as a result of federal and state regulations, any
portion of which, if subsequently realized, would serve to reduce goodwill.
100
Note 11 - 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 year ended December 31, 2004
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Basic EPS
Net income $236,011 103,238 $2.29
=====
Effect of Dilutive Securities
4.00% Convertible Debentures 9,062 8,451
Stock options, warrants and awards -- 1,130
-------- -------
Diluted EPS
Net income plus assumed conversions $245,073 112,819 $2.17
======== ======= =====
For the year ended December 31, 2003
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Basic EPS
Net income $194,368 98,800 $1.97
=====
Effect of Dilutive Securities
4.00% Convertible Debentures 4,959 4,653
5.0% Convertible Debentures 4,870 3,630
Stock options, warrants and awards -- 813
-------- -------
Diluted EPS
Net income plus assumed conversions $204,197 107,896 $1.89
======== ======= =====
For the year ended December 31, 2002
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Basic EPS
Net income $125,906 94,168 $1.34
=====
Effect of Dilutive Securities
Stock options, warrants and awards -- 737
-------- ------
Diluted EPS
Net income plus assumed conversions $125,906 94,905 $1.33
======== ====== =====
101
During the years ended December 31, 2004, 2003 and 2002, the anti-dilutive
effect associated with certain 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 those years totaled 2.8 million, 3.4 million and 4.5 million,
respectively.
In connection with the Company's adoption of EITF No. 04-8, the years ended
December 31, 2004 and 2003 include the dilutive effect of the $345.0 million of
4.00% Convertible Debentures due 2033, which assumes conversion using the "if
converted" method. Under that method, the 4.00% 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 4.00% Convertible Debentures is added back to net income.
See further discussion in "Description of Business and Summary of Significant
Accounting Policies" footnote.
The year ended December 31, 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.
In July 2003, the Company completed the early redemption of the entire $345.0
million aggregate principal amount of the outstanding 5.0% Convertible
Debentures. The 5.0% Convertible Debentures, which were convertible at $39.60
per share, were outstanding during the year ended December 31, 2002, but were
not included in the computation of diluted EPS because the impact was
anti-dilutive.
Note 12 - Restructuring Charges
Phase II Program
In 2002, the Company completed its previously disclosed second phase of the
productivity and consolidation initiative (the "Phase II Program").
In connection with the Phase II Program, the Company expensed approximately
$23.2 million pretax ($14.4 million aftertax, or $0.15 per diluted share) during
the year ended December 31, 2002, when the amounts were required to be
recognized in accordance with U.S. GAAP. The restructuring charges included
severance pay, the buy-out of employment agreements, the buy-out of lease
obligations, the write-off of leasehold improvements and other assets, and
related fees and facility exit costs.
102
Details of the pretax restructuring charges relating to the Phase II Program
follow (in thousands):
Balance at 2002 Utilized Balance at Utilized
January 1, Provision/ during December 31, during
2002 Accrual 2002 2002 2003
---------- ---------- -------- ------------ --------
Restructuring charges:
Employee severance $1,642 $ 2,177 $ (2,655) $1,164 $(1,164)
Employment agreement buy-outs 508 -- (214) 294 (294)
Lease terminations 606 5,862 (1,846) 4,622 (1,155)
Other assets, fees and facility exit costs 3,027 15,156 (14,690) 3,493 (2,878)
------ ------- -------- ------ -------
Total restructuring charges $5,783 $23,195 $(19,405) $9,573 $(5,491)
====== ======== ======== ====== =======
Balance at Utilized Balance at
December 31, during December 31,
2003 2004 2004
------------ -------- ------------
Restructuring charges:
Employee severance $ -- $ -- $ --
Employment agreement buy-outs -- -- --
Lease terminations 3,467 (530) 2,937
Other assets, fees and facility exit costs 615 (220) 395
------ ----- ------
Total restructuring charges $4,082 $(750) $3,332
====== ===== ======
As of December 31, 2004, the Company had paid approximately $8.5 million of
severance and other employee-related costs relating to the reduction of
approximately 460 employees. The remaining liabilities recorded at December 31,
2004 represent amounts not yet paid or settled relating to actions taken
(primarily consisting of remaining lease payments), and will be adjusted in
future periods as these matters are finalized.
Note 13 - Shareholders' Rights Plan
In May 1999, the Company's Board of Directors declared a dividend, payable on
June 2, 1999, of one preferred share purchase right (a "Right") for each
outstanding share of the Company's $1.00 per share par value common stock, that,
when exercisable, entitles the registered holder to purchase from the Company
one ten-thousandth of a share of Series A Junior Participating Preferred Stock
of the Company, without par value, at a price of $135 per one ten-thousandth of
a share, subject to adjustment. Upon certain events relating to the acquisition
of, commencement or announcement of, or announcement of an intention to make a
tender offer or exchange offer that would result in the beneficial ownership of
15% or more of the Company's outstanding common stock by an individual or group
of individuals (the "Distribution Date"), the Rights not owned by the 15%
stockholder will entitle its holder to purchase, at the Right's then current
exercise price, common shares having a market value of twice such exercise
price. Additionally, if after any person has become a 15% stockholder, the
Company is involved in a merger or other business combination with any other
person, each Right will entitle its holder (other than the 15% stockholder) to
purchase, at the Right's then current exercise price, common shares of the
acquiring company having a value of twice the Right's then current exercise
price. The Rights
103
will expire on May 17, 2009, unless redeemed earlier by the Company at $0.01 per
Right until the Distribution Date.
Note 14 - Commitments and Contingencies
Omnicare continuously evaluates contingencies based upon the best available
information. The Company believes that liabilities have been provided to the
extent necessary in cases where the outcome is considered probable and
reasonably estimable, and that its assessment of contingencies is reasonable. To
the extent that resolution of contingencies results in amounts that vary from
management's estimates, future earnings will be charged or credited accordingly.
As part of its ongoing operations, the Company is subject to various
inspections, audits, inquiries and similar actions by 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 affect on
the Company's consolidated financial position.
Note 15 - Segment Information
Based on the "management approach" as defined by SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," Omnicare has two
operating segments. The Company's larger segment is Pharmacy Services. Pharmacy
Services primarily provides distribution of pharmaceuticals, related pharmacy
consulting and other ancillary services, data management services and medical
supplies to skilled nursing, assisted living and other providers of healthcare
services in 47 states in the United States of America ("USA") and in Canada at
December 31, 2004. The Company's other segment is CRO Services, which provides
comprehensive product development services to client companies in
pharmaceutical, biotechnology, medical devices and diagnostics industries in 30
countries around the world at December 31, 2004, including the USA.
104
The table below presents information about the segments as of and for the years
ended December 31, 2004, 2003 and 2002, and should be read in connection with
the paragraphs that follow (in thousands):
For the years ended December 31,
----------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2004: Services Services Consolidating Totals
- ------------------------------------------------------------------------------------
Net sales $3,983,641 $136,250 $ -- $4,119,891
Depreciation and amortization 52,247 1,504 2,545 56,296
Operating income (expense) 478,232 13,005 (48,801) 442,436
Total assets 3,424,980 143,482 330,719 3,899,181
Capital expenditures 15,162 575 2,189 17,926
2003:
- ------------------------------------------------------------------------------------
Net sales $3,345,301 $153,873 $ -- $3,499,174
Depreciation and amortization 48,915 1,770 2,335 53,020
Operating income (expense) 412,986 12,562 (37,965) 387,583
Total assets 3,007,405 99,693 287,923 3,395,021
Capital expenditures 15,325 990 800 17,115
2002:
- ------------------------------------------------------------------------------------
Net sales $2,467,237 $165,517 $ -- $2,632,754
Depreciation and amortization 40,389 2,237 2,637 45,263
Restructuring charges (6,769) (16,426) -- (23,195)
Operating income (expense) 288,196 4,610 (36,220) 256,586
Total assets 2,126,718 120,155 180,712 2,427,585
Capital expenditures 22,900 776 972 24,648
The following summarizes sales and long-lived assets by geographic area as of
and for the years ended December 31, 2004, 2003 and 2002 (in thousands):
Net Sales Long-Lived Assets
------------------------------------ ------------------------------
2004 2003 2002 2004 2003 2002
---------- ---------- ---------- -------- -------- --------
United States $4,075,012 $3,456,806 $2,596,605 $139,173 $146,858 $138,516
Foreign 44,879 42,368 36,149 3,248 1,449 1,392
---------- ---------- ---------- -------- -------- --------
Total $4,119,891 $3,499,174 $2,632,754 $142,421 $148,307 $139,908
========== ========== ========== ======== ======== ========
The determination of foreign sales is based on the country in which the sales
originate. No individual foreign country's sales were material to the
consolidated sales of Omnicare. In accordance with EITF No. 01-14, Omnicare
included in its net sales, during the years ended
105
December 31, 2004, 2003 and 2002, reimbursable out-of-pockets totaling $10.2
million, $15.2 million and $18.6 million, respectively, for the United States
geographic area; $8.5 million, $9.6 million and $7.7 million, respectively, for
the foreign geographic area; and $18.7 million, $24.8 million and $26.3 million,
respectively, for the total net sales.
Note 16 - Summary of Quarterly Results (Unaudited)
The following table presents the Company's quarterly financial information for
2004 and 2003 (in thousands, except per share data):
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
-------- ---------- ---------- ---------- ----------
2004
Total net sales(a) $982,279 $1,010,597 $1,053,933 $1,073,082 $4,119,891
Total direct costs(a) 727,611 754,977 795,363 811,572 3,089,523
-------- ---------- ---------- ---------- ----------
Gross profit 254,668 255,620 258,570 261,510 1,030,368
Selling, general and
administrative expenses 138,662 143,327 152,249 153,694 587,932
-------- ---------- ---------- ---------- ----------
Operating income 116,006 112,293 106,321 107,816 442,436
Investment income 634 905 691 954 3,184
Interest expense (16,712) (17,243) (17,582) (18,884) (70,421)
-------- ---------- ---------- ---------- ----------
Income before income taxes 99,928 95,955 89,430 89,886 375,199
Income taxes 36,437 35,501 33,544 33,706 139,188
-------- ---------- ---------- ---------- ----------
Net income $ 63,491 $ 60,454 $ 55,886 $ 56,180 $ 236,011
======== ========== ========== ========== ==========
Earnings per share:(b)
Basic $ 0.61 $ 0.58 $ 0.54 $ 0.55 $ 2.29
======== ========== ========== ========== ==========
Diluted (c)(d) $ 0.58 $ 0.55 $ 0.52 $ 0.52 $ 2.17
======== ========== ========== ========== ==========
Weighted average number of
common shares outstanding:
Basic 103,458 103,996 104,171 101,321 103,238
======== ========== ========== ========== ==========
Diluted (c)(d) 113,220 113,453 112,808 111,498 112,819
======== ========== ========== ========== ==========
See Notes to Summary of Quarterly Results on the following page.
106
Note 16 - Summary of Quarterly Results (Unaudited) - Continued
First Second Third Fourth Full
2003 Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- ----------
Total net sales(a) $805,861 $844,033 $901,654 $947,626 $3,499,174
Total direct costs(a) 597,900 623,056 674,399 706,259 2,601,614
-------- -------- -------- -------- ----------
Gross profit 207,961 220,977 227,255 241,367 897,560
Selling, general and
administrative expenses 126,928 130,090 123,592 129,367 509,977
-------- -------- -------- --------- -----------
Operating income 81,033 90,887 103,663 112,000 387,583
Investment income 588 1,166 880 1,532 4,166
Interest expense (Note 7) (16,456) (21,875) (26,316) (16,653) (81,300)
-------- -------- -------- -------- ----------
Income before income taxes 65,165 70,178 78,227 96,879 310,449
Income taxes 24,742 26,677 29,397 35,265 116,081
-------- -------- -------- -------- ----------
Net income $ 40,423 $ 43,501 $ 48,830 $ 61,614 $ 194,368
======== ======== ======== ======== ==========
Earnings per share:(b)
Basic $ 0.43 $ 0.45 $ 0.48 $ 0.60 $ 1.97
======== ======== ======== ======== ==========
Diluted(c) $ 0.42 $ 0.44 $ 0.46 $ 0.57 $ 1.89
======== ======== ======== ======== ==========
Weighted average number of
common shares outstanding:
Basic 94,386 96,034 101,965 102,688 98,800
======== ======== ======== ======== ==========
Diluted(c) 104,029 104,503 111,395 112,195 107,896
======== ======== ======== ======== ==========
Notes to Summary of Quarterly Results:
(a) In accordance with EITF No. 01-14, Omnicare has recorded reimbursements
received for "out-of-pocket" expenses on a grossed-up basis in total net
sales and total direct costs for both the 2004 and 2003 periods. EITF No.
01-14 relates solely to the Company's CRO Services business.
(b) Earnings per share is calculated independently for each separately reported
quarterly and full year period. Accordingly, the sum of the separately
reported quarters may not necessarily be equal to the per share amount for
the corresponding full year period, as independently calculated.
(c) In connection with the adoption of EITF No. 04-8 in the fourth quarter of
2004, the Company restated previously reported diluted earnings per share
and the diluted weighted average number of common shares outstanding. See
further discussion at the "Description of Business and Summary of
Significant Accounting Policies" and "Earnings Per Share Data" footnotes.
(d) The first quarter, second quarter and full year of 2003 periods, include
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.
107
Note 17 - Guarantor Subsidiaries
The Company's 8.125% Senior Notes due 2011 and the 6.125% Senior Notes due 2013
are fully and unconditionally guaranteed on an unsecured, joint and several
basis by certain wholly-owned subsidiaries of the Company (the "Guarantor
Subsidiaries"). The following condensed consolidating financial data illustrates
the composition of Omnicare, Inc. ("Parent"), the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries as of December 31, 2004 and 2003 for the balance
sheets, as well as the statements of income and the statements of cash flows for
each of the three years ended December 31, 2004, 2003 and 2002. Separate
complete financial statements of the respective Guarantor Subsidiaries would not
provide additional information that would be useful in assessing the financial
condition of the Guarantor Subsidiaries and thus are not presented. No
eliminations column is presented for the condensed consolidating statements of
cash flows since there were no significant eliminating amounts during the
periods presented.
108
Note 17 - Guarantor Subsidiaries - Continued
Summary Consolidating Statements of Income
(In thousands) For the years ended December 31,
----------------------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc. and
2004: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $4,002,582 $117,309 $ -- $4,119,891
Total direct costs -- 2,998,265 91,258 -- 3,089,523
-------- ----------- -------- --------- ----------
Gross profit -- 1,004,317 26,051 -- 1,030,368
Selling, general and administrative expenses 5,723 562,056 20,153 -- 587,932
-------- ----------- -------- --------- ----------
Operating income (loss) (5,723) 442,261 5,898 -- 442,436
Investment income 605 2,579 -- -- 3,184
Interest expense (63,021) (5,839) (1,561) -- (70,421)
-------- ----------- -------- --------- ----------
Income (loss) before income taxes (68,139) 439,001 4,337 -- 375,199
Income tax (benefit) expense (25,893) 163,433 1,648 -- 139,188
Equity in net income of subsidiaries 278,257 -- -- (278,257) --
-------- ----------- -------- --------- ----------
Net income (loss) $236,011 $ 275,568 $ 2,689 $(278,257) $ 236,011
======== =========== ======== ========= ==========
2003:
- --------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $3,372,657 $126,517 $ -- $3,499,174
Total direct costs -- 2,498,805 102,809 -- 2,601,614
-------- ----------- -------- --------- ----------
Gross profit -- 873,852 23,708 -- 897,560
Selling, general and administrative expenses 7,086 481,185 21,706 -- 509,977
-------- ----------- -------- --------- ----------
Operating income (loss) (7,086) 392,667 2,002 -- 387,583
Investment income 2,832 1,216 118 -- 4,166
Interest expense (79,133) (1,671) (496) -- (81,300)
-------- ----------- -------- --------- ----------
Income (loss) before income taxes (83,387) 392,212 1,624 -- 310,449
Income tax (benefit) expense (31,687) 147,151 617 -- 116,081
Equity in net income of subsidiaries 246,068 -- -- (246,068) --
-------- ----------- -------- --------- ----------
Net income (loss) $194,368 $ 245,061 $ 1,007 $(246,068) $ 194,368
======== =========== ======== ========= ==========
2002:
- --------------------------------------------------------------------------------------------------------------------------
Total net sales $ -- $2,521,682 $111,072 $ -- $2,632,754
Total direct costs -- 1,850,455 91,246 -- 1,941,701
-------- ----------- -------- --------- ----------
Gross profit -- 671,227 19,826 -- 691,053
Selling, general and administrative expenses 29,585 360,245 21,442 -- 411,272
Restructuring charges -- 22,397 798 -- 23,195
-------- ----------- -------- --------- ----------
Operating income (loss) (29,585) 288,585 (2,414) -- 256,586
Investment income 1,755 1,288 233 -- 3,276
Interest expense (56,082) (547) (182) -- (56,811)
-------- ----------- -------- --------- ----------
Income (loss) before income taxes (83,912) 289,326 (2,363) -- 203,051
Income tax (benefit) expense (31,887) 109,930 (898) -- 77,145
Equity in net income of subsidiaries 177,931 -- -- (177,931) --
-------- ----------- -------- --------- ----------
Net income (loss) $125,906 $ 179,396 $ (1,465) $(177,931) $ 125,906
======== =========== ======== ========= ==========
109
Note 17 - Guarantor Subsidiaries - Continued
Condensed Consolidating Balance Sheets
(In thousands)
Guarantor Non-Guarantor Omnicare, Inc. and
As of December 31, 2004: Parent Subsidiaries Subsidiaries Eliminations Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 46,569 $ 32,453 $ 5,147 $ -- $ 84,169
Restricted cash -- 262 -- -- 262
Deposit with drug wholesaler -- 44,000 -- -- 44,000
Accounts receivable, net (including
intercompany) 41,448 781,084 17,923 (1,750) 838,705
Inventories -- 326,091 5,276 -- 331,367
Deferred income tax benefits
(liabilities), net-current (6) 94,074 499 -- 94,567
Other current assets 572 155,160 977 -- 156,709
---------- ---------- -------- ----------- ----------
Total current assets 88,583 1,433,124 29,822 (1,750) 1,549,779
---------- ---------- -------- ----------- ----------
Properties and equipment, net -- 134,601 7,820 -- 142,421
Goodwill -- 1,948,633 54,590 -- 2,003,223
Other noncurrent assets 125,636 77,911 211 -- 203,758
Investment in subsidiaries 2,985,941 -- -- (2,985,941) --
---------- ---------- -------- ----------- ----------
Total assets $3,200,160 $3,594,269 $ 92,443 $(2,987,691) $3,899,181
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (including
intercompany) $ 24,757 $ 417,721 $ 26,754 $ (1,750) $ 467,482
Long-term debt 280,769 790 -- -- 281,559
8.125% senior subordinated notes, due
2011 375,000 -- -- -- 375,000
6.125% senior subordinated notes, net,
due 2013 232,508 -- -- -- 232,508
4.00% junior subordinated convertible
debentures, due 2033 345,000 -- -- -- 345,000
Deferred income tax liabilities,
net-noncurrent (2,204) 145,484 (5,687) -- 137,593
Other noncurrent liabilities 17,222 114,940 769 -- 132,931
Stockholders' equity 1,927,108 2,915,334 70,607 (2,985,941) 1,927,108
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders'
equity $3,200,160 $3,594,269 $ 92,443 $(2,987,691) $3,899,181
========== ========== ======== =========== ==========
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
4.00% junior subordinated convertible
debentures, 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
========== ========== ======== =========== ==========
110
Note 17 - Guarantor Subsidiaries - Continued
Condensed Consolidating Statements of Cash Flows
(In thousands) For the year ended December 31,
-------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc. and
2004: Parent Subsidiaries Subsidiaries Subsidiaries
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 44,143 $ 969 $ 45,112
Other (44,300) 165,622 2,424 123,746
--------- --------- ------- ---------
Net cash flows from operating
activities (44,300) 209,765 3,393 168,858
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash
received -- (397,329) (1,230) (398,559)
Capital expenditures -- (17,521) (405) (17,926)
Transfer of cash to trusts for employee
health and severance costs, net of
payments out of the trust -- 452 -- 452
Other -- 60 -- 60
--------- --------- ------- ---------
Net cash flows from investing
activities -- (414,338) (1,635) (415,973)
--------- --------- ------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 835,000 -- -- 835,000
Payments on line of credit facilities
and term A loan (685,513) -- -- (685,513)
Payments on long-term borrowings and
obligations (541) -- -- (541)
Proceeds from stock awards and exercise
of stock options and warrants, net of
stock tendered in payment 9,804 -- -- 9,804
Dividends paid (9,386) -- -- (9,386)
Other (193,008) 188,086 -- (4,922)
--------- --------- ------- ---------
Net cash flows from financing
activities (43,644) 188,086 -- 144,442
--------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- (571) (571)
--------- --------- ------- ---------
Net (decrease) increase in cash and cash
equivalents (87,944) (16,487) 1,187 (103,244)
Cash and cash equivalents at beginning
of year 134,513 48,940 3,960 187,413
--------- --------- ------- ---------
Cash and cash equivalents at end of year $ 46,569 $ 32,453 $ 5,147 $ 84,169
========= ========= ======= =========
111
Note 17 - Guarantor Subsidiaries - Continued
Condensed Consolidating Statements of Cash Flows - Continued
(In thousands) For the year ended December 31,
-------------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc. and
2003: Parent Subsidiaries Subsidiaries Subsidiaries
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 43,795 $ 885 $ 44,680
Other (43,028) 171,578 836 129,386
--------- --------- ------- ---------
Net cash flows from operating
activities (43,028) 215,373 1,721 174,066
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash
received -- (656,435) (6,976) (663,411)
Capital expenditures -- (16,978) (137) (17,115)
Transfer of cash to trusts for employee
health and severance costs, net of
payments out of the trust -- 2,433 -- 2,433
Other -- 29 15 44
--------- --------- ------- ---------
Net cash flows from investing
activities -- (670,951) (7,098) (678,049)
--------- --------- ------- ---------
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 (593,103) -- -- (593,103)
Proceeds from long-term borrowings 595,000 -- -- 595,000
Payments on long-term borrowings and
obligations (354,167) -- -- (354,167)
Fees paid for financing arrangements (24,541) -- -- (24,541)
Proceeds from stock offering, net of
issuance costs 178,774 -- -- 178,774
Proceeds from stock awards and exercise
of stock options, net of stock
tendered in payment 12,275 -- -- 12,275
Dividends paid (8,876) -- -- (8,876)
Other (472,514) 468,327 (273) (4,460)
--------- --------- ------- ---------
Net cash flows from financing
activities 81,848 468,327 (273) 549,902
--------- --------- ------- ---------
Effect of exchange rate changes on cash -- -- 3,558 3,558
--------- --------- ------- ---------
Net increase (decrease) in cash and cash
equivalents 38,820 12,749 (2,092) 49,477
Cash and cash equivalents at beginning
of year 95,693 36,191 6,052 137,936
--------- --------- ------- ---------
Cash and cash equivalents at end of year $ 134,513 $ 48,940 $ 3,960 $ 187,413
========= ========= ======= =========
112
Note 17 - Guarantor Subsidiaries - Continued
Condensed Consolidating Statements of Cash Flows - Continued
(In thousands) For the year ended December 31,
-----------------------------------------------------------
Guarantor Non-Guarantor Omnicare, Inc.
2002: Parent Subsidiaries Subsidiaries and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Provision for doubtful accounts $ -- $ 30,269 $ 894 $ 31,163
Other (37,903) 155,544 1,915 119,556
--------- --------- ------- ---------
Net cash flows from operating activities (37,903) 185,813 2,809 150,719
--------- -------- ------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash received -- (126,533) (1,250) (127,783)
Capital expenditures -- (24,378) (270) (24,648)
Transfer of cash to trusts for employee health and
severance costs, net of payments out of the trust -- (225) -- (225)
Other -- 272 1 273
--------- -------- ------- ---------
Net cash flows from investing activities -- (150,864) (1,519) (152,383)
--------- -------- ------- ---------
Cash flows from financing activities:
Borrowings on line of credit facilities 90,000 -- -- 90,000
Payments on line of credit facilities (120,000) -- -- (120,000)
Payments on long-term borrowings and obligations -- (214) -- (214)
Proceeds from stock awards and exercise of stock
options, net of stock tendered in payment 667 -- -- 667
Dividends paid (8,491) -- -- (8,491)
Other 44,310 (35,848) -- 8,462
--------- -------- ------- ---------
Net cash flows from financing activities 6,486 (36,062) -- (29,576)
--------- -------- ------- ---------
Effect of exchange rate changes on cash -- -- 780 780
--------- -------- ------- ---------
Net increase (decrease) in cash and cash equivalents (31,417) (1,113) 2,070 (30,460)
Cash and cash equivalents at beginning of year 127,110 37,304 3,982 168,396
--------- -------- ------- ---------
Cash and cash equivalents at end of year $ 95,693 $ 36,191 $ 6,052 $ 137,936
========= ======== ======= =========
113
Note 18 - Subsequent Event
On March 8, 2005, the Company completed the exchange of $333,766,950 aggregate
liquidation amount of the Old Trust PIERS (representing approximately 96.7% of
the total liquidation amount of the Old Trust PIERS outstanding) for an equal
amount of newly issued Series B 4.00% Trust Preferred Income Equity Redeemable
Securities (the "New Trust PIERS") of Omnicare Capital Trust II (the "New
Trust"), plus an exchange fee of $0.125 per $50 stated liquidation amount of Old
Trust PIERS. Each New Trust PIERS represents an undivided beneficial interest in
the assets of the New Trust, which assets consist solely of a corresponding
amount of Series B 4.00% junior subordinated convertible debentures issued by
Omnicare, Inc. with a stated maturity of June 15, 2033. Following the
consummation of the exchange, approximately $11,233,050 aggregate liquidation
amount of Old Trust PIERS remain outstanding.
The terms of the New Trust PIERS are substantially identical to the terms of the
Old Trust PIERS, except that the New Trust PIERS are convertible into cash and,
if applicable, shares of Omnicare common stock, whereas the outstanding Old
Trust PIERS are convertible only into Omnicare common stock (except for cash in
lieu of fractional shares).
The purpose of the exchange offer was to change the conversion settlement
provisions of the Old Trust PIERS. As previously disclosed in Note 1, the
Company made this change in response to the adoption by the EITF of the FASB of
EITF Issue No. 04-8, which, effective December 15, 2004, changed the accounting
rules applicable to the Old Trust PIERS and requires Omnicare to include the
common stock issuable upon conversion of the Old Trust PIERS in Omnicare's
diluted shares outstanding, regardless of whether the market trigger has been
met. By committing to pay up to the stated liquidation amount of the New Trust
PIERS to be converted in cash upon conversion, Omnicare will be able to account
for the New Trust PIERS under the treasury stock method, which is expected to be
less dilutive to earnings per share than the "if converted" method proscribed by
EITF 04-8.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Based on an evaluation, as of
the end of the period covered by this Annual Report on Form 10-K, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) are
effective to ensure that information required to be disclosed in the reports
that the Company files under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms and are also effective to ensure that information required
to be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
114
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). The Company's internal control over financial reporting is a process
that is designed under the supervision of the Chief Executive Officer and the
Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States. Our management conducted an assessment of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our assessment
under the framework in Internal Control - Integrated Framework, our management
concluded that, as of December 31, 2004, our internal control over financial
reporting was effective.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
Our management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their attestation report which appears herein under Item 8.
ITEM 9B - OTHER INFORMATION
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 regarding our directors and executive
officers, our audit committee and Section 16(a) compliance is included under the
captions "Election of Directors," "Governance of the Company and Board Matters"
and "Section 16(A) Beneficial Ownership Reporting Compliance" in our proxy
statement for our 2005 annual meeting of stockholders and is incorporated herein
by reference. Information concerning our executive officers is also included
under the caption "Executive Officers of the Company" in Part I of this Report.
Audit Committee Financial Expert. The information required by this Item 10
disclosure requirement is included in our proxy statement for our 2005 annual
meeting of stockholders and is incorporated herein by reference.
115
Codes of Ethics. We expect all of our employees to act in accordance with and to
abide by the Omnicare "Corporate Compliance Program - Its About Integrity" (the
"Omnicare Integrity Code"). The Omnicare Integrity Code is a set of business
values and procedures that provides guidance to Omnicare employees with respect
to compliance with the law in all of their business dealings and decisions on
behalf of Omnicare and with respect to the maintenance of ethical standards,
which are a vital and integral part of Omnicare's business.
The Omnicare Integrity Code applies to all employees including the Chief
Executive Officer, the Chief Financial Officer, the Principal Accounting Officer
and other senior financial officers (the "Covered Officers"). In addition to
being bound by the Omnicare Integrity Code's provisions about ethical conduct,
conflicts of interest and compliance with law, Omnicare has adopted a Code of
Ethics for the Covered Officers. The Company will furnish any person, without
charge, a copy of the Code of Ethics for the Covered Officers upon written
request addressed to Omnicare, Inc., 1600 RiverCenter II, 100 East RiverCenter
Boulevard, Covington, KY 41011, Attn.: Corporate Secretary. A copy of the Code
of Ethics for the Covered Officers can also be found on our web site at
www.omnicare.com. Any waiver of any provision of the Code granted to a Covered
Officer may only be granted by our Board of Directors or its Audit Committee. If
a waiver is granted, information concerning the waiver will be posted on our web
site at www.omnicare.com for a period of 12 months.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item 11 is included in our proxy statement for
our 2005 annual meeting of stockholders and is incorporated herein by reference.
116
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2004 (in thousands, except exercise price
data):
Number of Securities
Number of Securities to Weighted Average Remaining Available for
be issued Upon Exercise Price of Future Issuance Under
Exercise of Outstanding Outstanding Options Equity Compensation
Plan Category Options and Warrants and Warrants Plans (c)
- ----------------------------------- ----------------------- ------------------- -----------------------
Equity compensation plans
approved by stockholders (a) 6,704 $24.85 8,447
Equity compensation plans
not approved by stockholders (b) 1,912 26.07 --
----- -----
8,616 $25.02 8,447
===== ====== =====
(a) Includes the 1992 Long-Term Stock Incentive Plan, the 1995 Premium-Priced
Stock Option Plan and the 2004 Stock and Incentive Plan.
(b) Includes the 1998 Long-Term Employee Incentive Plan and Director Stock Plan,
as further discussed in the "Stock-Based Employee Compensation" note of the
Notes to Consolidated Financial Statements included at Item 8 of this Filing.
Additionally, at December 31, 2004, the outstanding amount includes 92 stock
options transferred from or issued in connection with companies previously
acquired by the Company at a weighted average exercise price of $37.29, 160
compensation-related warrants issued in 1997 at an exercise price of $29.275 per
share and 10 compensation related warrants issued in 2003 at an exercise price
of $33.08 per share.
(c) Excludes securities listed in the first column of the table.
The remaining information required by this Item 12 is included in our proxy
statement for our 2005 annual meeting of stockholders and is incorporated herein
by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included in our proxy statement for
our 2005 annual meeting of stockholders and is incorporated herein by reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is included in our proxy statement for
our 2005 annual meeting of stockholders and is incorporated herein by reference.
117
PART IV
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Our 2004 Consolidated Financial Statements are included in Part II,
Item 8, of this Filing.
(a)(2) Financial Statement Schedule
See Index to Financial Statements and Financial Statement Schedule at
Part II, Item 8, of this Filing.
(a)(3) Exhibits
See Index of Exhibits.
118
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, on this 16th day of March 2005.
OMNICARE, INC.
/s/ David W. Froesel, Jr.
----------------------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of l934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Joel F. Gemunder President, Chief Executive Officer and
- ------------------------------ Director (Principal Executive Officer)
Joel F. Gemunder
/s/ David W. Froesel, Jr. Senior Vice President and
- ------------------------------ Chief Financial Officer and Director
David W. Froesel, Jr. (Principal Financial and Accounting
Officer)
Edward L. Hutton, Chairman of the Board
and Director*
Charles H. Erhart, Jr., Director*
Sandra E. Laney, Director* March 16, 2005
Andrea R. Lindell, DNSc, RN, Director*
John H. Timoney, Director*
Amy Wallman, Director*
John T. Crotty, Director*
* Cheryl D. Hodges, by signing her name hereto, signs this document on behalf of
herself and on behalf of each person indicated above pursuant to a power of
attorney duly executed by such person and filed with the Securities and Exchange
Commission.
/s/ Cheryl D. Hodges
----------------------------------------
Cheryl D. Hodges
(Attorney-in-Fact)
119
Schedule II
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
(in thousands)
Additions
Balance at charged Write-offs, Balance
Year ended beginning of to cost net of at end
December 31, period and expenses Acquisitions recoveries of period
- ------------ ------------ ------------ ------------ ----------- ---------
Allowance for uncollectible accounts receivable:
2004 $108,813 $45,112 $13,197 $(43,834) $123,288
2003 68,593 44,680 28,651 (33,111) 108,813
2002 45,573 31,163 20,182 (28,325) 68,593
S-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
- ---------------------------------------------------- ---------------------------------------------
(2) Agreement and Plan of Merger, by and among Exhibit (d) (2) to NCS Acquisition Corp.'s
Omnicare, Inc., NCS Acquisition Corp. and Schedule TO-T, as amended and filed with the
NCS HealthCare, Inc., dated as of December Securities and Exchange Commission on
17, 2002 December 18, 2002
(3.1) Restated Certificate of Incorporation of Form 10-K
Omnicare, Inc. (as amended) March 27, 2003
(3.2) Certificate of Designations of Series A Form 10-K
Junior Participating Preferred Stock of March 27, 2003
Omnicare, Inc., dated as of May 18, 1999
(3.3) Second Amended and Restated By-Laws of Form 10-Q
Omnicare, Inc. November 14, 2003
(4.1) Indenture dated as of March 20, 2001, by Form 8-K
and among Omnicare, Inc., the Guarantors March 23, 2001
named therein and SunTrust Bank, as
trustee, relating to the Company's $375.0
million 8.125% Senior Subordinated Notes
due 2011
(4.2) Rights Agreement, and related Exhibits, Form 8-K
dated as of May 17, 1999 between Omnicare, May 18, 1999
Inc. and First Chicago Trust Company of
New York, as Rights Agent
(4.3) $750.0 million Credit Agreement, dated as Form 10-Q
of June 13, 2003, by and among Omnicare, August 14, 2003
Inc., as Borrower, the lenders from time
to time parties thereto, as Lenders, JP
Morgan Chase Bank, as a Joint Syndication
Agent, Wachovia Bank, National
Association, as a Joint Documentation
Agent, Lehman Commercial Paper Inc., as
Joint Syndication Agent, UBS Securities
LLC, as a Joint Documentation Agent, and
SunTrust Bank as the Administrative Agent
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
- ---------------------------------------------------- ---------------------------------------------
(4.4) Subordinated Debt Securities Indenture, Form 8-K
dated as of June 13, 2003 between Filed June 16, 2003
Omnicare, Inc. and SunTrust Bank, as
Trustee
(4.5) First Supplemental Indenture, dated as of Form 8-K
June 13, 2003, between Omnicare, Inc. and Filed June 16, 2003
SunTrust Bank, as Trustee
(4.6) Second Supplemental Indenture, dated as of Form 8-K
June 13, 2003, between Omnicare, Inc. and Filed June 16, 2003
SunTrust Bank, as Trustee
(4.7) Third Supplemental Indenture dated as of Form 8-K
March 8, 2005, between Omnicare, Inc. & Filed March 9, 2005
SunTrust Bank, as Trustee
(4.8) Amended and Restated Trust Agreement of Form 8-K
Omnicare Capital Trust I, dated as of June Filed June 16, 2003
13, 2003
(4.9) Guarantee Agreement of Omnicare, Inc. Form 8-K
relating to the Trust Preferred Filed June 16, 2003
Income Equity Redeemable Securities of
Omnicare Capital Trust I, dated as of June
13, 2003
(4.10) Amended and Restated Trust Agreement of Form 8-K
Omnicare Capital Trust II, dated as of Filed March 9, 2005
March 8, 2005
(4.11) Guarantee Agreement of Omnicare, Inc. Form 8-K
relating to the Series B 4.00% Trust Filed March 9, 2005
Preferred Income Equity Redeemable
Securities of Omnicare Capital Trust II,
dated as of March 8, 2005
E-2
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) Executive Salary Protection Plan, as Form 10-K
amended, May 22, 1981* March 25, 1996
(10.2) Annual Incentive Plan for Senior Executive Proxy Statement for 2001 Annual Meeting of
Officers* Shareholders dated April 10, 2001
(10.3) 1992 Long-Term Stock Incentive Plan* Proxy Statement for 2002 Annual Meeting of
Stockholders dated April 10, 2002
(10.4) 1995 Premium-Priced Stock Option Plan* Proxy Statement for 1995 Annual Meeting of
Stockholders dated April 10, 1995
(10.5) 1998 Long-Term Employee Incentive Plan* Form 10-K
March 30, 1999
(10.6) Amendment to 1998 Long-Term Employee Form 10-K
Incentive Plan effective November 26, March 27, 2003
2002*
(10.7) Director Stock Plan for Members of the Form S-8
Compensation and Incentive Committee* December 14, 2001
(10.8) 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
(10.9) Form of Indemnification Agreement with Form 10-K
Directors and Officers* March 30, 1999
(10.10) Employment Agreement with J.F. Gemunder Form 10-K
dated August 4, 1988* March 27, 2003
(10.11) Employment Agreement with C.D. Hodges Form 10-K
dated August 4, 1988* March 27, 2003
E-3
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
- ---------------------------------------------------- ---------------------------------------------
(10.12) Employment Agreement with Form 10-K
P.E. Keefe dated March 4, 1993* March 25, 1994
(10.13) Split Dollar Agreement with Form 10-K
E.L. Hutton dated June 1, 1995 March 25, 1996
(Agreement in the same form exists with
J.F. Gemunder)*
(10.14) Split Dollar Agreement dated Form 10-K
June 1, 1995 (Agreements in the same form March 25, 1996
exist with the following Executive
Officers: T.E. Bien,
C.D. Hodges and P.E. Keefe)*
(10.15) Retirement Plan for E.L. Hutton* Form 10-K
March 30, 2001
(10.16) Omnicare, Inc. Excess Benefit Plan* Form 10-K
March 15, 2004
(10.17) Description of 2002 Supplemental Benefit Form 10-K
Plan* March 15, 2004
(10.18) Employment Agreement with T.E. Bien dated Form 10-K
January 1, 1994* March 31, 1997
(10.19) Employment Agreement with D.W. Froesel, Form 10-K
Jr. dated February 17, 1996* March 31, 1997
(10.20) Form of Amendment to Employment Agreements Form 10-K
with J.F. Gemunder, P.E. Keefe and March 30, 2000
C.D. Hodges dated as of February 25, 2000*
E-4
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
- ---------------------------------------------------- ---------------------------------------------
(10.21) Amendment to Employment Agreement Form 10-K
with J.F. Gemunder dated as of March 27, 2003
September 25, 2002*
(10.22) Amendment to Employment Agreement Form 10-K
with J.F. Gemunder dated as of March 15, 2004
March 11, 2004*
(10.23) Amendment to Employment Agreement Form 10-K
with P.E. Keefe dated as of March 15, 2004
March 11, 2004*
(10.24) Amendment to Employment Agreement Form 10-K
with C.D. Hodges dated as of March 15, 2004
March 11, 2004*
(10.25) Form of Amendment to Employment Agreements Form 10-K
with T.E. Bien and D.W. Froesel, Jr., March 30, 2000
dated as of February 25, 2000*
(10.26) Summary of Compensation of Kirk M. Pompeo, Filed Herewith
Senior Vice President, Sales & Marketing*
(10.27) Form of Stock Option Award Letter* Form 8-K
December 1, 2004
(10.28) Form of Restricted Stock Award Letter Form 8-K
(Executive Officers)* December 1, 2004
(10.29) Form of Restricted Stock Award Letter Form 8-K
(Employees Other Than Executive Officers)* December 1, 2004
E-5
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
- ---------------------------------------------------- ---------------------------------------------
(10.30) Prime Vendor Agreement for Pharmaceuticals Form 10-K
dated as of December 23, 2003** March 15, 2004
(10.31) Summary of Non-Employee Director Filed Herewith
Compensation*
(12) Statement of Computation of Ratio of Filed Herewith
Earnings to Fixed Charges
(21) Subsidiaries of Omnicare, Inc. Filed Herewith
(23) Consent of Independent Registered Public Filed Herewith
Accounting Firm
(PricewaterhouseCoopers LLP)
(24) Powers of Attorney Filed Herewith
(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
E-6
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
- ---------------------------------------------------- ---------------------------------------------
(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***
(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.
* Indicates management contract or compensatory arrangement.
** Confidential treatment requested as to certain portions, which portions have
been filed separately with the Securities and Exchange Commission.
*** 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-7