<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended September 30, 2000
Commission File Number 1-8269
OMNICARE, INC.
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Incorporated under the laws of the I.R.S. Employer Identification
State of Delaware No. 31-1001351
100 East RiverCenter Boulevard, Covington, Kentucky 41011
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (859) 392-3300
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Indicate by check mark whether the registrant:
1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports) and
2) has been subject to such filing requirement for the past 90 days.
Yes x No
---- ----
COMMON STOCK OUTSTANDING
------------------------
<TABLE>
<CAPTION>
Number of
Shares Date
------ ----
<S> <C> <C>
Common Stock, $1 par value 92,136,863 September 30, 2000
</TABLE>
<PAGE>
OMNICARE, INC. AND
SUBSIDIARY COMPANIES
INDEX
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2000 and December 31, 1999 3
Consolidated Statement of Income -
Three and nine months ended -
September 30, 2000 and 1999 4
Consolidated Statement of Cash Flows -
Nine months ended -
September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet
UNAUDITED
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 124,368 $ 97,267
Restricted cash 5,117 -
Accounts receivable, less allowances of
$36,455 (1999-$36,883) 422,220 422,283
Unbilled receivables 16,525 18,450
Inventories 125,981 120,280
Deferred income tax benefits 13,059 17,336
Other current assets 84,929 76,729
---------- ----------
Total current assets 792,199 752,345
Properties and equipment, at cost less accumulated
depreciation of $126,170 (1999-$106,022) 159,898 162,133
Goodwill, less accumulated amortization
of $108,222 (1999-$83,243) 1,171,148 1,188,941
Other noncurrent assets 73,065 64,554
---------- ----------
Total assets $2,196,310 $2,167,973
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 111,882 $ 108,189
Amounts payable pursuant to acquisition agreements 4,774 9,053
Current bank debt 56,749 77,413
Accrued employee compensation 26,120 50,498
Deferred revenue 27,573 24,321
Other current liabilities 93,385 52,769
---------- ----------
Total current liabilities 320,483 322,243
Long-term bank debt 390,628 391,944
5% convertible subordinated notes, due 2007 345,000 345,000
Deferred income taxes 38,277 37,360
Amounts payable pursuant to acquisition agreements 11,996 13,878
Other noncurrent liabilities 30,778 29,168
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Total liabilities 1,137,162 1,139,593
Stockholders' equity:
Preferred stock-authorized 1,000,000 shares without par value; none issued
Common stock-authorized 200,000,000 shares $1 par; 92,579,700 shares
issued (1999-91,611,800 shares issued) 92,580 91,612
Paid-in capital 691,410 684,419
Retained earnings 307,471 275,114
---------- ----------
1,091,461 1,051,145
Treasury stock, at cost - 442,800 shares (1999-325,500 shares) (8,780) (6,950)
Deferred compensation (19,953) (14,098)
Accumulated other comprehensive income (3,580) (1,717)
---------- ----------
Total stockholders' equity 1,059,148 1,028,380
---------- ----------
Total liabilities and stockholders' equity $2,196,310 $2,167,973
========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
3
<PAGE>
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Statement of Income
UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $491,262 $474,007 $1,464,798 $1,374,340
Cost of sales 361,141 348,007 1,075,266 980,507
-------- -------- ---------- ----------
Gross profit 130,121 126,000 389,532 393,833
Selling, general and administrative expenses 90,687 90,888 273,879 258,417
Acquisition expenses, pooling-of-interests - (877) - (55)
Restructuring and other related charges 4,263 2,144 14,691 28,857
-------- -------- ---------- ----------
Operating income 35,171 33,845 100,962 106,614
Investment income 472 266 1,288 915
Interest expense (14,204) (12,629) (41,003) (33,458)
-------- -------- ---------- ----------
Income before income taxes 21,439 21,482 61,247 74,071
Income taxes 7,930 7,538 22,669 27,442
-------- -------- ---------- ----------
Net income $ 13,509 $ 13,944 $ 38,578 $ 46,629
======== ======== ========== ==========
Earnings per share:
Basic $ 0.15 $ 0.15 $ 0.42 $ 0.51
======== ======== ========== ==========
Diluted $ 0.15 $ 0.15 $ 0.42 $ 0.51
======== ======== ========== ==========
Weighted average number of common shares outstanding:
Basic 92,160 91,276 91,972 90,900
======== ======== ========== ==========
Diluted 92,160 91,276 91,972 91,175
======== ======== ========== ==========
Comprehensive income $ 13,040 $ 14,083 $ 37,404 $ 45,910
======== ======== ========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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<PAGE>
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Statement of Cash Flows
UNAUDITED
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended
September 30,
--------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 38,578 $ 46,629
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 24,538 23,396
Amortization 31,416 27,594
Provision for doubtful accounts 19,591 15,581
Deferred tax provision 6,508 14,598
Non-cash portion of restructuring charges 1,860 3,489
Changes in assets and liabilities, net of effects from acquisition of
businesses:
Accounts receivable and unbilled receivables (16,607) (57,593)
Inventories (5,772) (13,076)
Current and noncurrent assets (14,537) (36,557)
Payables and accrued liabilities 23,734 17,134
Accrued employee compensation (18,762) 18,603
Deferred revenue 3,252 396
Current and noncurrent liabilities 24,290 3,530
--------- --------
Net cash flows from operating activities 118,089 63,724
--------- --------
Cash flows from investing activities:
Acquisition of businesses (31,973) (135,652)
Capital expenditures (24,772) (48,369)
Transfer of cash to trusts for employee health and severance
costs, net of payments out of the trust (5,117) --
Other 320 (749)
--------- --------
Net cash flows from investing activities (61,542) (184,770)
--------- --------
Cash flows from financing activities:
Borrowings on line of credit facilities -- 170,000
Payments on line of credit facilities (20,000) --
Principal payments on long-term obligations (1,717) (2,209)
Fees paid for financing arrangements (629) (580)
(Payments) for and proceeds from exercise of stock options
and warrants, net of stock tendered in payment (722) (2,148)
Dividends paid (6,221) (6,148)
--------- --------
Net cash flows from financing activities (29,289) 158,915
--------- --------
Effect of exchange rate changes on cash (157) 1,451
--------- --------
Net increase in cash and cash equivalents 27,101 39,320
Cash and cash equivalents at beginning of period 97,267 54,312
--------- --------
Cash and cash equivalents at end of period $ 124,368 $ 93,632
========= ========
Supplemental disclosures of cash flow information:
Income taxes (refunded) paid, net $ (7,512) $ 17,408
Interest paid 35,822 27,933
The Notes to Consolidated Financial Statements are an integral part of this statement.
</TABLE>
5
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OMNICARE, INC. AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements
1. The interim financial data are unaudited; however, in the opinion of the
management of Omnicare, Inc., the interim data include all adjustments (which
include only normal adjustments) considered necessary for a fair presentation of
the consolidated financial position, results of operations and cash flows of
Omnicare, Inc. and its consolidated subsidiaries ("Omnicare" or the "Company").
These financial statements should be read in conjunction with the Consolidated
Financial Statements and related notes included in Omnicare's Annual Report on
Form 10-K for the year ended December 31, 1999. Certain reclassifications of
prior year amounts have been made to conform with the current year presentation.
2. Based on the "management approach," as defined by Statement of Financial
Accounting Standards (SFAS) No. 131, Omnicare has two business segments. The
Company's largest segment is Pharmacy Services. Pharmacy Services provides
distribution of pharmaceuticals, related pharmacy consulting, data management
services and medical supplies to long-term care facilities. The Company's other
reportable segment is Contract Research Organization ("CRO") Services, which
provides comprehensive product development services to client companies in
pharmaceutical, biotechnology, medical devices and diagnostics industries.
The table below presents information about the reportable segments as
of and for the three and nine months ended September 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2000: Services Services Consolidating Totals
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 464,944 $ 26,318 $ -- $ 491,262
Depreciation and amortization 16,006 802 306 17,114
Operating income (expense), excluding restructuring and
other related charges 45,026 1,246 (6,838) 39,434
Restructuring and other related charges (2,326) (1,937) -- (4,263)
Operating income (expense) 42,700 (691) (6,838) 35,171
Total assets 1,928,731 122,653 144,926 2,196,310
Expenditures for additions to long-lived assets 6,557 813 1,178 8,548
----------------------------------------------------------------------------------------------------------------------------
1999:
----------------------------------------------------------------------------------------------------------------------------
Sales $ 440,608 $ 33,399 $ -- $ 474,007
Depreciation and amortization 16,552 1,412 292 18,256
Operating income (expense), excluding acquisition expenses
and restructuring and other related charges 37,695 3,663 (6,246) 35,112
Acquisition (expenses) income 1,174 (297) -- 877
Restructuring and other related charges (2,040) (104) -- (2,144)
Operating income (expense) 36,829 3,262 (6,246) 33,845
Total assets 1,900,127 122,313 141,799 2,164,239
Expenditures for additions to long-lived assets 13,532 991 511 15,034
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2000: Services Services Consolidating Totals
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 1,378,814 $ 85,984 $ - $ 1,464,798
Depreciation and amortization 52,277 2,834 843 55,954
Operating income (expense), excluding restructuring and
other related charges 131,370 5,020 (20,737) 115,653
Restructuring and other related charges (10,928) (3,763) - (14,691)
Operating income (expense) 120,442 1,257 (20,737) 100,962
Total assets 1,928,731 122,653 144,926 2,196,310
Expenditures for additions to long-lived assets 20,290 2,916 1,566 24,772
-----------------------------------------------------------------------------------------------------------------------------
1999:
-----------------------------------------------------------------------------------------------------------------------------
Sales $ 1,271,460 $102,880 $ - $ 1,374,340
Depreciation and amortization 45,728 4,519 743 50,990
Operating income (expense), excluding acquisition expenses
and restructuring and other related charges 141,156 12,818 (18,558) 135,416
Acquisition (expenses) income 352 (297) - 55
Restructuring and other related charges (26,023) (2,834) - (28,857)
Operating income (expense) 115,485 9,687 (18,558) 106,614
Total assets 1,900,127 122,313 141,799 2,164,239
Expenditures for additions to long-lived assets 42,978 2,544 2,847 48,369
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</TABLE>
3. In the second quarter of 1999, the Company announced a comprehensive
restructuring plan to streamline company-wide operations through the
implementation of a productivity and consolidation program. This program is in
response to the recent changes in the healthcare industry and complements
Omnicare's ability to gain maximum benefits from its acquisition program. The
productivity and consolidation initiatives are expected to eliminate redundant
efforts, simplify work processes and apply technology to maximize employee
productivity, and standardize operations around best practices. Facilities in
overlapping geographic territories are being consolidated to better align
pharmacies around customers, to improve efficiency and enhance the Company's
ability to deliver innovative services and programs to its customers.
Productivity initiatives are being introduced at the majority of the Company's
pharmacy and other operating locations, which totaled approximately 220 sites at
the commencement of the program. As part of the initiative, the roster of
pharmacies and other operating locations is being reconfigured through the
consolidation, relocation, closure and opening of sites, resulting in a net
reduction of 55 locations. The plan is designed to result in the reduction of
the Company's work force by 15%, or approximately 1,700 full- and part-time
employees, and annualized pretax savings of approximately $46 million upon
completion.
In connection with this program, Omnicare has recorded a total of
$50,085,000 ($31,953,000 after taxes) for restructuring and other related
charges, of which $4,263,000 ($2,686,000 after taxes) and $14,691,000
($9,255,000 after taxes) were recorded during the three and nine months ended
September 30, 2000, respectively. Additional charges of this nature are expected
to be incurred and expensed during the remainder of 2000, at such time the
amounts are required to be recognized per generally accepted accounting
principles. The restructuring charges include severance pay, the buy-out of
current employment agreements, the buy-out of
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<PAGE>
lease obligations, the write-off of other assets (representing $6,058,000 of
pretax non-cash items, cumulative through September 30, 2000) and facility exit
costs. The other related charges are primarily comprised of consulting fees and
duplicate costs associated with the program. Details of the restructuring and
other related charges relating to the productivity and consolidation program
follow (in thousands):
<TABLE>
<CAPTION>
Utilized as of Balance at
1999 December 31, December 31,
Provision 1999 1999
--------- -------------- ------------
<S> <C> <C> <C>
Restructuring charges:
Employee severance $ 12,178 $ (3,717) $ 8,461
Employment agreement buy-outs 6,740 (3,377) 3,363
Lease terminations 5,612 (1,089) 4,523
Other assets and facility exit costs 8,310 (6,662) 1,648
--------- -------------- ------------
Total restructuring charges 32,840 $ (14,845) $ 17,995
============== ============
Other related charges 2,554
---------
Total restructuring and other
related charges $ 35,394
=========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Utilized During
Ended Nine Months
September 30, Ended Balance at
2000 September 30, September 30,
Provision 2000 2000
------------- --------------- --------------
<S> <C> <C> <C>
Restructuring charges:
Employee severance $ 1,326 $ (5,785) $ 4,002
Employment agreement buy-outs 131 (2,286) 1,208
Lease terminations 435 (2,205) 2,753
Other assets and facility exit costs 7,922 (6,785) 2,785
------------- --------------- -------------
Total restructuring charges 9,814 $ (17,061) $ 10,748
=============== =============
Other related charges 4,877
-------------
Total restructuring and other
related charges $ 14,691
=============
</TABLE>
As of September 30, 2000, the Company had incurred approximately $15.2
million of severance and other employee-related costs relating to the reduction
of approximately 1,700 employees. All remaining liabilities recorded at
September 30, 2000 were classified as current liabilities since the Company
expects that the overall restructuring program will be completed in 2000.
4. In October 1996, the Company entered into a five-year agreement with a
consortium of sixteen banks for a $400 million revolving credit facility
available through October 2001. The total amount outstanding under this facility
as of September 30, 2000 was $390 million. Interest rates and commitment fees
for the five-year, $400 million line of credit facility are based on the
Company's level of performance under certain financial ratios, debt covenants
and the amount of borrowings under this facility. In 1998, the Company amended
this five-year, $400 million line of credit facility to permit an additional
364-day, $400 million line of credit facility, which is convertible at maturity
into a one-year term loan. During 2000, Omnicare renewed this 364-day, revolving
line of credit facility through the third quarter of 2001, at a $300 million
level. The amount outstanding at September 30, 2000 under the 364-day facility
was $55 million. Interest rates and commitment fees under the 364-day, $300
million line of credit facility are based on the Company's debt ratings.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Quarter Ended September 2000 vs. 1999
Diluted earnings per share for the three months ended September 30,
2000 were $0.18 as compared with $0.16 earned in the prior year quarter,
excluding from the periods $4,263,000 ($2,686,000 after taxes, or $0.03 per
diluted share) and $2,144,000 ($1,351,000 after taxes, or $0.01 per diluted
share), respectively, of restructuring and other related charges (relating to
the Company's previously announced productivity and consolidation initiative),
and the net reversal of estimated acquisition expenses relating to the
finalization of prior year pooling-of-interests transactions totaling $877,000
($962,000 after taxes, or $0.01 per share) in the third quarter of 1999. Net
income for the 2000 quarter, excluding restructuring and other related charges
and the net reversal of acquisition expenses, was $16,195,000 versus the
$14,333,000 earned in the comparable 1999 quarter. Earnings before interest,
taxes, depreciation and amortization ("EBITDA"), on this basis, totaled
$56,548,000 for the three months ended September 30, 2000 as compared with
EBITDA of $53,368,000 in the third quarter of 1999. Net income for the third
quarter of 2000 was $13,509,000 (or $0.15 per diluted share) as compared to
$13,944,000 (or $0.15 per diluted share) in the same period of 1999. Sales for
the three months ended September 30, 2000 rose to $491,262,000 from the
$474,007,000 recorded in the comparable prior year period.
Omnicare's Pharmacy Services segment recorded sales of $464,944,000 for
the third quarter, ahead of the comparable prior year quarter by $24,336,000.
Operating profit (excluding restructuring and other related charges, and
acquisition expenses) in this segment reached $45,026,000, also ahead of the
prior year quarter amount of $37,695,000. The increase in the sales of this
segment represents, in part, internal growth originating primarily from the
efforts of the Company's National Sales and Marketing Group and pharmacy staff
in developing new pharmacy contracts. Also contributing to the increase in sales
was a modest increase in occupancy rates in many client facilities as the 2000
third quarter progressed, expansion of clinical programs and drug price
inflation. Collectively, these factors led to the sales and operating profit
increases in this segment.
Omnicare's CRO Services segment recorded sales of $26,318,000 during
the third quarter of 2000 as compared to $33,399,000 recorded in the same prior
year period, representing a decline of $7,081,000. This decline was primarily
the result of delays in decision making by pharmaceutical manufacturers in
commencing clinical studies, relating in part to merger activities, as well as
the cancellation of planned projects prior to commencement. Operating profit
(excluding restructuring and other related charges, and acquisition expenses) in
this segment for the third quarter of 2000 was $1,246,000, a decline of
$2,417,000 in comparison to the same prior year quarter operating profit of
$3,663,000, owing primarily to the volatility in sales arising from the
aforementioned factors.
The Company's gross profit as a percentage of sales of 26.5% in the
third quarter of 2000 was relatively consistent with the comparable prior year
quarter rate of 26.6%, and represented a year-to-year increase of $4,121,000 to
$130,121,000. The positive impact on gross profit relating to the Company's
purchasing leverage associated with purchases of pharmaceuticals,
9
<PAGE>
leveraging fixed and variable overhead costs at the Company's pharmacies, and
benefits realized from the Company's formulary compliance program, as well as
the productivity and consolidation initiative, were partially offset by the
unfavorable impact of the federal government's Prospective Payment System
("PPS") for Medicare residents of skilled nursing facilities on the Pharmacy
Services segment (as further explained at the year-to-date discussion below),
and the aforementioned less favorable performance of the CRO Services segment.
Omnicare's selling, general and administrative ("operating") expenses
for the quarter ended September 30, 2000 of $90,687,000 were lower than the
comparable prior year amount by $201,000. Operating expenses as a percentage of
sales totaled 18.5% in the 2000 quarter, representing a decrease from the 19.2%
experienced in the comparable prior year period. This decline is largely due to
the favorable impact of the Company's productivity and consolidation program and
a reduction in estimated retirement expense as a result of the modification of
one of the Company's retirement plans.
In 1999, the Company announced its commitment to the implementation of
a company-wide productivity and consolidation program to take place over the
remainder of 1999 and 2000. This initiative is intended to gain maximum benefit
from the Company's acquisition program and to respond to changes in the
healthcare industry. The program is designed to eliminate redundant efforts,
simplify work processes and apply technology to maximize employee productivity
and standardize operations around best practices. As part of the initiative,
the roster of pharmacies and other operations locations is being reconfigured
through the consolidation, relocation, closure and opening of sites, resulting
in a net reduction of 55 locations. The plan is designed to result in the
reduction of the Company's work force by 15%, or approximately 1,700 full- and
part-time employees, and annualized pretax savings of approximately $46 million
upon completion. In connection with this program, the Company recorded pretax
restructuring and other related expenses of $4,263,000 and $2,144,000 in the
third quarters of 2000 and 1999, respectively, primarily comprised of employee
severance, employment agreement buy-out costs, lease termination costs, other
assets and facility exit costs, and other related charges.
Investment income for the three months ended September 30, 2000 was
$472,000, an increase of $206,000 in comparison to the same period of 1999 due
to a higher average invested cash balance during the third quarter of 2000 than
in the third quarter of 1999, as well as an increase in interest rates during
2000 as compared to 1999.
Interest expense during the three months ended September 30, 2000 was
$14,204,000, an increase of $1,575,000 versus the comparable prior year period,
primarily due to an increase in interest rates in the third quarter of 2000 as
compared to the same period in the prior year, offset in part by repayments on
the 364-day revolving line of credit facility (aggregating $30 million since
September 30, 1999).
The increase in the effective tax rate to 37.0% in the third quarter of
2000 from 35.1% in the comparable prior year quarter is primarily attributable
to the existence of acquisition-related permanent differences in the prior year
third quarter relating to the finalization of pooling-of-interests transactions,
whereas no such items existed in the third quarter of 2000. The effective tax
rate in the 2000 third quarter is higher than the federal statutory rate
primarily due to state and local income taxes.
10
<PAGE>
Year-to-Date September 2000 vs. 1999
Diluted earnings per share for the nine months ended September 30, 2000
were $0.52 as compared with $0.71 earned in the same period of 1999, excluding
from the periods $14,691,000 ($9,255,000 after taxes, or $0.10 per diluted
share) and $28,857,000 ($18,580,000 after taxes, or $0.20 per diluted share),
respectively, of restructuring and other related charges (relating to the
Company's previously announced productivity and consolidation initiative),
as well as acquisition expenses of $822,000 ($586,000 after taxes, or $0.01
per diluted share) and the net reversal of estimated acquisition expenses
relating to the finalization of prior year pooling-of-interests transactions
totaling $877,000 ($962,000 after taxes, or $0.01 per diluted share) from the
nine months ended September 30, 1999. Net income for the nine months ended
September 30, 2000 was $47,833,000 versus the $64,833,000 earned in the
comparable 1999 period, excluding restructuring and other related charges,
acquisition expenses and the net reversal of acquisition expenses. EBITDA, on
this basis, totaled $171,607,000 for the nine months ended September 30, 2000 as
compared with EBITDA of $186,406,000 in the same 1999 period. Net income for the
nine months ended September 30, 2000 was $38,578,000 (or $0.42 per diluted
share) as compared to $46,629,000 (or $0.51 per diluted share) in the same
period of 1999. Sales for the nine months ended September 30, 2000 increased to
$1,464,798,000 from the $1,374,340,000 recorded in the comparable prior year
period.
Omnicare's Pharmacy Services segment recorded sales of $1,378,814,000
for the nine months ended September 30, 2000, an increase over the comparable
prior year period of $107,354,000. The increase in this segment's sales
represents the cumulative effect of its acquisitions of long-term care pharmacy
providers in 1999 and the internal growth of the pharmacy services business.
These favorable factors were partially offset by the unfavorable impact of
PPS, which had the overall impact of reducing earnings on a year-over-year
basis. Because of the substantial reduction in reimbursement for skilled
nursing facilities ("SNFs") brought about by PPS, Omnicare experienced
PPS-related pricing pressure from its skilled nursing facility customers in
1999. Moreover, the increasing reluctance on the part of SNFs to admit Medicare
residents, particularly those requiring complex care, owing to concerns relating
to the adequacy of reimbursement under PPS caused a significant weakening in
Medicare census in many areas, primarily during the second quarter of 1999 and
thereafter. Also, for many SNFs, the average length of stay for Medicare
residents decreased. These factors had the effect of significantly reducing
overall occupancy in the facilities Omnicare serves. Additionally, the mix of
residents in SNFs adversely affected Omnicare's results as these facilities
attempted to avoid high acuity patients, which impacts overall utilization of
drugs. Reimbursement concerns have driven many nursing facilities to admit
residents funded by payors other than Medicare. Although these trends appear
to be stabilizing, they had an unfavorable impact on the year-to-year
comparison of sales, profit margins and net income.
The impact of the implementation of PPS for Medicare residents in SNFs,
specifically lower reimbursement which led to lower occupancy and acuity levels,
continued to weaken the financial condition of many SNFs during 2000. Congress
attempted to remedy this situation by enacting the Balanced Budget Refinement
Act ("BBRA"), which was intended to provide a temporary increase in
reimbursement rates, particularly for higher acuity residents, to be effective
April 1, 2000. However, many of Omnicare's customers reported that payments at
these new rates had not been received during the second quarter, exacerbating
already severe
11
<PAGE>
cash flow problems in some facilities. It was therefore necessary for Omnicare
to apply more stringent standards in accepting new business, and to continue
aggressively withdrawing from uneconomic accounts and those with an unstable
financial condition, which served to offset the addition of new accounts
particularly during the second quarter of 2000, and had a dampening effect on
sales growth. The number of residents served at September 30, 2000 was 631,500
as compared to 628,000 served one year earlier.
Omnicare's CRO Services segment recorded sales of $85,984,000 during
the nine months ended September 30, 2000 as compared to $102,880,000 recorded in
the same prior year period, representing a decline of $16,896,000. This decline
was primarily the result of delays in decision making by pharmaceutical
manufacturers in commencing clinical studies, relating in part to merger
activities, as well as the cancellation of planned projects prior to
commencement. Operating profit (excluding restructuring and other related
charges, and acquisition expenses) for the nine month period ended September 30,
2000 was $5,020,000, a decline of $7,798,000 in comparison to the same prior
year period operating profit of $12,818,000, owing primarily to the volatility
in sales arising from the aforementioned factors.
The Company's gross profit as a percentage of sales decreased to 26.6%
in 2000 from 28.7% in 1999, representing an overall decline of $4,301,000 to
$389,532,000 in the 2000 period. The positive impact on gross profit relating to
the Company's purchasing leverage associated with purchases of pharmaceuticals,
leveraging fixed and variable overhead costs at the Company's pharmacies and
benefits realized from the Company's formulary compliance program, as well as
the productivity and consolidation initiative, were more than offset by the
aforementioned unfavorable impact of PPS on the Pharmacy Services segment and
the less favorable performance of the CRO Services segment.
Omnicare's operating expenses for the nine months ended September 30,
2000 increased $15,462,000 to $273,879,000 as compared to 1999 due primarily to
the overall growth of the Company. Operating expenses as a percentage of sales
of 18.7% in 2000 were less than the 18.8% experienced in the comparable prior
year period. Unfavorably impacting the year-to-year comparison was an increase
in the Company's provision for doubtful accounts brought about by a
deterioration in the financial condition of certain SNF clients throughout 2000
as a result, in part, of the impact of PPS on their business, accounting for an
increase of approximately 0.2 percentage points of sales. This increase,
however, was more than offset, on a percentage of sales basis, by the favorable
impact of the Company's productivity and consolidation program.
In connection with the previously announced productivity and
consolidation program, Omnicare recorded pretax restructuring and other related
expenses of $14,691,000 and $28,857,000 during the nine month periods ended
September 30, 2000 and 1999, respectively, primarily comprised of employee
severance, employment agreement buy-out costs, lease termination costs, other
assets and facility exit costs, and other related charges.
Investment income for the nine months ended September 30, 2000 was
$1,288,000, an increase of $373,000 in comparison to the same period of 1999 due
to a higher average invested cash balance during the first three quarters of
2000 as compared to 1999, as well as an increase in interest rates during 2000
versus 1999.
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<PAGE>
Interest expense during the nine months ended September 30, 2000 was
$41,003,000, an increase of $7,545,000 versus the comparable prior year period.
The increase is primarily attributable to the full-period impact of interest
expense associated with a $170 million increase (offset in part by subsequent
repayments aggregating $30 million) in borrowings under the Company's line of
credit facilities during the first half of 1999, as well as an increase in
interest rates throughout 2000 as compared to the same period in the prior year.
The increases in the Company's line of credit borrowings in 1999 were primarily
attributable to the Company's acquisition program.
The effective tax rate of 37.0% during the first nine months of 2000 is
consistent with the comparable prior year period. The effective tax rates in the
2000 and 1999 periods are higher than the federal statutory rate primarily due
to state and local income taxes.
Liquidity and Capital Resources
Cash and cash equivalents (including restricted cash) at September 30,
2000 were $129.5 million compared to $97.3 million at December 31, 1999. The
Company generated positive net cash flows from operating activities of
approximately $118.1 million during the nine months ended September 30, 2000,
which was used primarily for acquisition-related payments (including amounts
payable pursuant to acquisition agreements relating to pre-2000 acquisitions),
capital expenditures, debt repayment and dividends. Improved management of
working capital significantly contributed to the favorable operating cash flow
results through September 30, 2000.
In October 1996, the Company entered into a five-year agreement with a
consortium of sixteen banks for a $400 million revolving credit facility
available through October 2001. The total amount outstanding under this facility
as of September 30, 2000 was $390 million. Interest rates and commitment fees
for the five-year, $400 million line of credit facility are based on the
Company's level of performance under certain financial ratios, debt covenants
and the amount of borrowings under this facility. In 1998, the Company amended
this five-year, $400 million line of credit facility to permit an additional
364-day, $400 million line of credit facility, which is convertible at maturity
into a one-year term loan. During 2000, Omnicare renewed this 364-day, revolving
line of credit facility through the third quarter of 2001, at a $300 million
level. The amount outstanding at September 30, 2000 under the 364-day facility
was $55 million. Interest rates and commitment fees under the 364-day, $300
million line of credit facility are based on the Company's debt ratings.
The Company's capital requirements are primarily related to its
acquisition program and, to a lesser extent, capital expenditures, including
those related to investments in the Company's information technology systems.
There are no material commitments outstanding at September 30, 2000, other than
estimated future acquisition-related payments to be made in accordance with
purchase agreements.
The Company's current ratio at September 30, 2000 and December 31, 1999
was 2.5 to 1.0 and 2.3 to 1.0, respectively. The increase in the current ratio
is primarily attributable to an increase in working capital combined with a $20
million reduction in current bank debt during the nine months ended September
30, 2000.
13
<PAGE>
On February 2, 2000, 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 share in 2000. Dividends of $6.2 million paid during the nine months
ended September 30, 2000 were consistent with those paid in the comparable prior
year period.
The Company believes its sources of liquidity and capital are adequate
for its ongoing operating needs. If needed, other external sources of financing
are readily available to the Company.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Regarding Forward-Looking Information
In addition to historical information, this report contains
forward-looking statements and performance trends that are subject to certain
known and unknown risks, uncertainties, contingencies and other factors that
could cause actual results, performance or achievements to differ materially
from those stated. Such forward-looking statements and trends include those
relating to internal growth trends, expansion of clinical programs, drug price
inflation, purchasing leverage, the leveraging of costs, the formulary
compliance program, the impact of the productivity and consolidation program,
Omnicare's operating environment, the impact of PPS, nursing home admission
and occupancy trends, census and length of stay trends, the impact of delayed
decision-making and project cancellation by pharmaceutical manufacturers,
the impact of the financial condition of skilled nursing facilities on
Omnicare's performance, the Company's capital requirements, improved management
of working capital, and the adequacy and availability of Omnicare's sources
of liquidity and capital. Such risks, uncertainties, contingencies and other
factors, many of which are beyond the control of Omnicare, include, but are not
limited to: overall economic, financial and business conditions, delays in
reimbursement by the government and other payors to our customers, the ability
to assess and react to the financial condition of customers, the impact of
seasonality on the business of Omnicare, the successful integration of
acquired companies, the effect of new government regulation and/or legislative
initiatives including those relating to reimbursement and drug pricing policies
and in the interpretation and application of such policies, the failure of
Omnicare to obtain or maintain required regulatory approvals or licenses, loss
or delay of CRO contracts for regulatory or other reasons, the ability to
implement the productivity and consolidation program and other opportunities
for lowering costs and to realize anticipated benefits, the impact and pace
of technological advances, the ability to obtain or maintain rights to data,
technology and other intellectual property, the impact of consolidation in the
pharmaceutical industry, changes in tax law and regulation, trends for the
continued growth of the businesses of Omnicare, volatility in Omnicare's stock
price, access to capital and financing, the demand for Omnicare's products
and services, pricing and other competitive factors in the industry and
variations in costs or expenses.
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<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have any financial instruments held for trading
purposes and does not hedge any of its market risks with derivative instruments.
The Company's primary market risk exposure relates to interest rate
risk exposure through its borrowings. The Company's debt obligations at
September 30, 2000 include $390 million outstanding under its five-year, $400
million variable-rate revolving line of credit facility at an approximate
average rate of 7.5% at September 30, 2000 (a one-hundred basis point change in
interest rates would impact interest expense by approximately $1.0 million per
quarter), $55 million outstanding under its 364-day, $300 million variable-rate
revolving line of credit facility at an approximate average rate of 8.1% at
September 30, 2000 (a one-hundred basis point change in interest rates would
impact interest expense by approximately $0.1 million per quarter) and $345
million outstanding under convertible subordinated notes due in 2007, which
accrue interest at a fixed rate of 5%. The fair value of the Company's
line of credit facilities approximates their carrying value, and the fair
value of the convertible subordinated notes is approximately $259 million at
September 30, 2000.
15
<PAGE>
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
4 Amendment No. 2 to Credit Agreement
(dated as of September 1, 2000)
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the
quarter ended September 30, 2000.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Omnicare, Inc.
--------------
Registrant
Date November 13, 2000 By: /s/ David W. Froesel, Jr.
---------------------- ------------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
