ITEM 1 - BUSINESS
BACKGROUND
Omnicare, Inc. (the "Company" or "Omnicare") was incorporated in Delaware on May 19, 1981 to conduct certain health care businesses contributed to it by W. R. Grace & Co. and Chemed Corporation, and in July 1981 public trading of the Company's Common Stock commenced. As part of a multi-year restructuring program undertaken in 1985, the Company, through a series of divestitures and acquisitions, redeployed all of its capital in the long-term pharmacy business. As a result, Omnicare is today a leading independent provider of pharmacy services to long-term care institutions such as nursing homes, retirement centers and other institutional health care facilities. The Company operates principally in one business segment--institutional pharmacy services for the long-term care market. At December 31, 1994, Omnicare provided these services to approximately 147,600 residents in 1,725 nursing facilities located in the States of Alabama, Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, Montana, Ohio, Oklahoma, Oregon, Washington, and West Virginia. The Company does not make any export sales.
The Company entered the long-term care pharmacy industry in December 1988 with the acquisition of its first institutional pharmacy provider. By December 31, 1994, the Company had completed a total of 24 acquisitions in the long-term care pharmacy market at a total capital investment of approximately $213 million. In 1994, the Company acquired seven institutional pharmacy providers at an aggregate capital cost of approximately $87 million and expended an additional $17.6 million in cash payments relating to acquisitions completed prior to 1994.
PHARMACY SERVICES
Omnicare purchases, repackages and dispenses prescription and non-prescription medication in accordance with physician orders and delivers such prescriptions at least daily to the nursing facility for administration to individual patients by the facility's nursing staff. Omnicare typically services nursing homes within a 150-mile radius of its pharmacy locations. Omnicare maintains a 24-hour, on-call pharmacist service 365 days per year for emergency dispensing and delivery or for consultation with the facility's staff or attending physician.
Upon receipt of a prescription, the relevant patient information is entered into Omnicare's computerized dispensing and billing systems. At that time, the dispensing system will check the prescription for any potentially adverse drug interactions or patient sensitivity. When required and/or specifically requested by the physician or patient, branded drugs are dispensed; generic drugs are substituted in accordance with applicable state and federal laws and as requested by the physician or patient. The Company also provides therapeutic interchange, with physician approval, in accordance with the Company's pharmaceutical care guidelines. See "Omnicare Guidelines" below.
Omnicare provides a "unit dose" distribution system. Most of its prescriptions are filled utilizing specialized unit-of-use packaging and delivery systems. Maintenance medications are typically provided in 30-day supplies utilizing either a box unit dose system or unit dose punch card system. The unit dose system, preferred over the bulk delivery systems employed by retail pharmacies, improves control over drugs in the nursing facility and improves patient compliance with drug therapy by increasing the accuracy and timeliness of drug administration.
Integral to Omnicare's drug distribution system is its computerized medical records and documentation system. Omnicare provides to the facility computerized medication administration records, physician's order sheets and treatment records for each patient. Data extracted from these computerized records are also formulated into monthly management reports on patient care and quality assurance. The computerized documentation system in combination with the unit dose drug delivery system results in greater efficiency in nursing time, improved control, reduced drug waste in the facility and lower error rates in both dispensing and administration. These benefits improve drug efficacy and result in fewer drug-related hospitalizations.
CONSULTANT PHARMACIST SERVICES
Federal and state regulations mandate that nursing 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 patient care. The Omnibus Budget Reconciliation Act ("OBRA") implemented in 1990 seeks to further upgrade and standardize care by setting forth more stringent standards relating to planning, monitoring and reporting on the progress of prescription drug therapy as well as facility-wide drug usage.
Omnicare provides consultant pharmacist services which help clients comply with such federal and state regulations applicable to nursing homes. The services offered by Omnicare's consultant pharmacists include: (i) comprehensive, monthly drug regimen reviews for each patient in the facility to assess the appropriateness and efficacy of drug therapies, including a review of the patient's medical records, monitoring drug reactions to other drugs or food, monitoring lab results and recommending alternate therapies or discontinuing unnecessary drugs; (ii) participation on the Pharmacy and Therapeutics, Quality Assurance and other committees of client nursing facilities as well as periodic involvement in staff meetings; (iii) monthly inspection of medication carts and storage rooms; (iv) monitoring and monthly reporting on facility-wide drug usage and drug administration systems and practices; (v) development and maintenance of pharmaceutical policy and procedures manuals; and (vi) assistance to the nursing facility in complying with state and federal regulations as they pertain to patient care.
Additionally, Omnicare offers a specialized line of consulting services which help nursing facilities to enhance care and reduce and contain costs as well as to comply with state and federal regulations. Under this service line, Omnicare provides: (i) data required for OBRA and other regulatory purposes, including reports on psychotropic drug usage (chemical restraints), antibiotic usage (infection control) and other drug usage; (ii) 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; (iii) counseling related to appropriate drug usage and implementation of drug protocols; (iv) 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; (v) mock regulatory reviews for nursing staffs; and (vi) nurse consultant services and consulting for dietary, social services and medical records.
OMNICARE GUIDELINES
In June 1994, to enhance the pharmaceutical care management services that it offers, Omnicare introduced to its client nursing facilities and their attending physicians the Omnicare GERIATRIC PHARMACEUTICAL CARE GUIDELINES(TM) (THE OMNICARE GUIDELINES(TM)) which it believes is the first clinically-based formulary for the elderly residing in long-term care institutions. THE OMNICARE GUIDELINES presents an analysis ranking specific drugs in therapeutic classes as Preferred, Acceptable or Unacceptable based solely on their disease-specific clinical effectiveness in treating the elderly in nursing facilities. The formulary takes into account such factors as pharmacacology, safety and toxicity, efficacy, drug administration, quality of life and other considerations specific to the frail elderly population residing in nursing facilities. The clinical evaluations and rankings were developed exclusively for the Company by the Philadelphia College of Pharmacy and Science, an academic institution recognized for its expertise in geriatric long-term care. In addition, THE OMNICARE GUIDELINES 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 focuses on health benefits, rather than solely on cost, in assigning rankings the Company believes that use of THE OMNICARE GUIDELINES will assist physicians in making the best clinical choices of drug therapy for the patient at the lowest cost to the payor of the pharmacy bill. The Company also believes that the development of and subsequent compliance with THE OMNICARE GUIDELINES will lower costs for the patients it serves and strengthen the Company's purchasing power with pharmaceutical manufacturers.
ANCILLARY SERVICES
Omnicare provides the following ancillary products and services to nursing facilities:
INFUSION THERAPY PRODUCTS AND SERVICES. With cost containment pressures in health care, nursing facilities are increasingly providing subacute care as a means of treating moderately acute but stabilized patients more cost- effectively than hospitals, provided that the nursing staff and pharmacy are capable of supporting higher degrees of acuity. Omnicare provides infusion therapy support services for such residents in its client nursing 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.
Omnicare prepares the product to be administered using proper equipment in a sterile environment and then delivers 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. Omnicare's consultant pharmacists and nurse consultants operate an education and certification program on IV therapy to assure proper staff training and compliance with regulatory requirements in client facilities offering an IV program.
By providing an infusion therapy program, Omnicare enables its client nursing facilities to admit and retain patients who otherwise would need to be cared for in an acute-care facility. The Company believes that by providing these high acuity pharmacy services it has a competitive advantage over other pharmacy providers. The most common infusion therapies Omnicare provides are total parenteral nutrition, antibiotic therapy, chemotherapy, pain management and hydration.
WHOLESALE MEDICAL SUPPLIES/MEDICARE PART-B BILLING. Omnicare distributes disposable medical supplies, including urological, ostomy, nutritional support and wound care products and other disposables needed in the nursing home environment. In addition, Omnicare provides direct Medicare billing services for certain of these product lines for patients eligible under the Medicare Part B program. As part of this service, Omnicare determines patient eligibility, obtains certifications, orders products and maintains inventory on behalf of the nursing facility. Omnicare also contracts to act as billing agent for certain nursing homes that supply these products directly to the patient.
OTHER SERVICES. Omnicare also provides respiratory therapy products and durable medical equipment for its clients in certain of its market areas. Omnicare continues to review the expansion of these as well as other products and services that may further enhance the ability of its client nursing facilities to care for their residents in a cost-effective manner.
PRODUCT AND MARKET DEVELOPMENT
Omnicare's pharmacy business engages in a continuing program for the development of new services and the marketing thereof. While new service and new market development are important factors for the growth of this business, Omnicare does not expect that any new service or marketing effort, including those in the developmental stage, will require the investment of a material portion of Omnicare's assets.
MATERIALS/SUPPLY
Omnicare purchases pharmaceuticals through a wholesale distributor with whom it has a prime vendor contract and, on an increasing basis, under contracts negotiated directly with pharmaceutical manufacturers. The Company also is a member of industry buying groups which contract with manufacturers for discounted prices based on volume which are passed through to the Company by its wholesale distributor. The Company has numerous sources of supply available to it and has not experienced any difficulty in obtaining pharmaceuticals or other products and supplies used in the conduct of its business.
PATENTS, TRADEMARKS AND LICENSES
Omnicare's business operations are not dependent upon any material patents, trademarks or licenses.
INVENTORIES
Omnicare's pharmacies maintain adequate onsite inventories of pharmaceuticals and supplies to ensure prompt delivery service to its customers. Inventories on hand are not considered to be high by industry standards. The Company's primary wholesale distributor also maintains local warehousing in most major geographic markets in which the Company operates.
COMPETITION
By its nature, the long-term care pharmacy business is highly regionalized and, within a given geographic region of operations, highly competitive. In the geographic regions it serves, Omnicare competes with numerous local retail pharmacies, local and regional institutional pharmacies and pharmacies owned by long-term care facilities. Omnicare competes in this market on the basis of quality, cost-effectiveness and the increasingly comprehensive and specialized nature of its services along with the pharmaceutical technology and professional support it offers.
In its program of acquiring institutional pharmacy providers, the Company competes with several other companies with similar acquisition strategies, some of which may have greater resources than the Company.
No individual customer or market group is critical to the total sales of the Company's long-term care pharmacy business.
GOVERNMENT REGULATION
The health care industry in which the Company operates is subject to government regulation on the federal and state levels. Omnicare continuously monitors the effects of such regulatory activity on its operations. The nursing home pharmacy business has long operated under regulatory cost containment pressures from both state and federal legislation primarily through Medicaid and, to a lesser extent, Medicare. Approximately one-half of the Company's revenues are derived from Medicaid and Medicare programs. Medicaid has long-established programs for reimbursement which have over time been revised and refined and have not had a material adverse effect on the pricing policies or receivables collection for nursing home pharmacy services. Any future changes in such reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels or the timing of processing of payments, could adversely affect the Company's business.
Over the past two years, numerous plans for federally-mandated health care reform have been proposed, but none of these proposals has been adopted. While the processes by which federal or state governments may pursue alternative proposals for reform of the health care system are uncertain, market forces in the form of managed care continue to challenge health care providers to provide high quality care while reducing or
containing costs. Management believes that the need to lower health care costs will drive further industry consolidation which may be beneficial to the Company's acquisition program. In addition, the Company's development of significant regional market positions provides opportunities for economies of scale to lower overall costs.
Pharmaceutical therapy is generally considered the most cost-effective form of treatment for chronic ailments afflicting the elderly and, as such, is an essential part of long-term care. Omnicare believes that it is well-positioned to be an integral part of national and state initiatives to address escalating health care costs among the elderly through the Company's careful product selection (including drug formulary management and the provision of pharmacy consulting services), cost-effective drug purchasing and efficient delivery systems. Nevertheless, the Company continues to carefully monitor national and state healthcare reform issues as they evolve and will make refinements to its business strategies or practices which may become necessary or desirable in view of any significant changes in government regulations or reimbursement policies.
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 and the documentation of activities. All of the Company's pharmacies are licensed in the states in which they operate and are registered with the appropriate federal authorities pursuant to the regulation of controlled substances. Client nursing facilities are also separately required to be licensed in the states in which they are operating and, if serving Medicaid or Medicare patients, must be certified by the federal government.
Client nursing facilities are also subject to the Omnibus Budget Reconciliation Act of 1987 ("OBRA") which has been in the process of implementation since 1990. Under OBRA, more stringent requirements have been set forth for nursing homes to qualify for federal funding which impose new, higher quality standards for nursing home operations. While the future impact of the continued implementation of this legislation cannot be predicted, the Company believes the legislation has benefitted specialized providers of professional services to nursing homes, such as institutional pharmacy services providers, which can offer higher quality, more sophisticated services in a cost-effective manner along with assistance in compliance with these regulations.
ENVIRONMENTAL MATTERS
In operating its facilities, Omnicare makes every effort to comply with pollution control laws. No major difficulties have been encountered in effecting compliance. No material capital expenditures for environmental control facilities are expected. While Omnicare cannot predict the effect which any future legislation, regulations, or interpretations may have upon its operations, it does not anticipate any changes that would have a material adverse impact on its operations.
EMPLOYEES
At December 31, 1994, Omnicare employed a total of 2,466 persons (including 538 part-time employees), all of whom were located within the United States.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Omnicare or any of its subsidiaries is a party or of which any of their property is the subject, and no such proceedings are known to be contemplated by governmental authorities.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE COMPANY
All of the executive officers listed above have been actively engaged in the business of the Company or its predecessors for the past five years, with the exception of Mr. Keefe and Mr. Stump. Mr. Keefe served as Vice President of Diagnostek, Inc. from April 1992 to April 1993. From September 1990 to April 1992, he was President of HPI Health Care Services, Inc. ("HPI"), a subsidiary of Diagnostek which it acquired from Omnicare in August 1989. He served as Executive Vice President of HPI from August 1984 until September 1990. Mr. Stump was Vice President-Finance and Chief Financial Officer of 84 Lumber Company from July 1990 to December 1993. From March 1987 to July 1990, he was Senior Vice President and Controller of Coastal Mart, Inc., a wholly-owned subsidiary of the Coastal Corporation.
Executive officers are elected for one-year terms at the annual organizational meeting of the Board of Directors which follows the annual meeting of stockholders each year.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK; HOLDERS OF RECORD
The Company's Common Stock is listed on the New York Stock Exchange. The following table sets forth the ranges of high and low closing prices
for the Common Stock on the New York Stock Exchange during each of the calendar quarters of 1994 and 1993.
The number of holders of record of Omnicare Common Stock on February 28, 1995 was 1,754. This figure does not include stockholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage houses and banks.
DIVIDENDS
Reflecting the Company's financial position and operating performance, on February 3, 1993 and on February 8, 1994 the Board of Directors elected to increase the quarterly cash dividend by $.005 to $.04 and $.045 per share, respectively, for an indicated annual rate of $.16 and $.18, respectively. On February 1, 1995, the quarterly cash dividend was increased to $.05 per share, for an indicated annual rate of $.20 per share in 1995. It is presently intended that cash dividends will continue to be paid on a quarterly basis; however, future dividends are necessarily dependent upon the Company's earnings and financial condition and other factors not currently determinable.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data, which should be read in conjunction with the Company's Consolidated Financial Statements and related Notes and "Management's Discussion and Analysis of Operations and Financial Condition" included elsewhere herein.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA (in thousands except per share data)
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
On September 30, 1994, the Company issued 1,111,322 shares of its common stock for all the outstanding common stock of Kirkland, Washington-based Evergreen Pharmaceutical, Inc., and an affiliated company (collectively, "Evergreen"). Evergreen is a leading provider of institutional pharmacy services for long-term care facilities in the Pacific Northwest with $34 million in sales for the year ended December 31, 1993. The acquisition was accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements have been restated for all periods presented herein to include the results of operations, financial position and cash flow of Evergreen (See Note 2 to the Consolidated Financial Statements). In accordance with accounting rules for pooling of interests transactions, a nonrecurring charge to operating income for acquisition-related expenses was recorded in 1994.
Income from continuing operations, excluding the impact of nonrecurring items, for the year ended December 31, 1994 increased 43% to $15,266,000, or $1.38 per share ($1.32 fully diluted), from $10,661,000, or $1.02 per share, for the year ended December 31, 1993. For the year ended December 31, 1993, income from continuing operations, excluding nonrecurring items, increased 90% to $10,661,000, or $1.02 per share, from the $5,618,000, or $.55 per share, earned in 1992. The results for 1994 include a nonrecurring charge to operating income of $2,380,000, or $1,860,000 after taxes ($.17 per primary
share), for acquisition-related expenses recorded in the third quarter of 1994 in connection with the Company's acquisition of Evergreen.
In 1993, the Company recorded one-time favorable cumulative tax adjustments of $730,000, or $.07 per share, consisting of $450,000, or $.04 per share, arising from a change in tax laws related to the amortization of intangibles as well as $280,000, or $.03 per share, related to the change in accounting for income taxes. Additionally, net income and earnings per share from continuing operations for 1992 include an aftertax charge of $368,000, or $.04 per share, related to the write-off of Omnicare's minority interest in Datacare, Inc., a privately-held hospital computer systems company, which filed bankruptcy in 1992. The investment in Datacare was a passive investment held since 1983 and was unrelated to Omnicare's current operations.
In total, including nonrecurring items, discontinued operations, and the effect of the accounting change, net income for 1994 was $13,406,000, or $1.21 per share ($1.19 fully diluted), while 1993 net income was $11,391,000, or $1.09 per share, and 1992 net income was $13,960,000, or $1.36 per share.
Sales for 1994 of $275,663,000 were 42% higher than the $193,704,000 recorded in 1993. For 1993, sales of $193,704,000 were 47% higher than the $131,867,000 recorded in 1992. Omnicare entered the long-term pharmacy business with its first acquisition of an institutional pharmacy provider in December 1988. Since that date, Omnicare has completed twenty-three additional acquisitions - two in 1990, three in 1991, seven in 1992, four in 1993 and seven in 1994. Except for the acquisitions of Evergreen and Lo-Med Prescription Services, Inc. ("Lo-Med"), purchase accounting was used to record the acquisitions. The acquisition of Evergreen in 1994 is included in the financial results of all years presented as this acquisition was accounted for as a pooling of interests. The acquisition of Lo-Med was also accounted for as a pooling of interests; however, its operations were immaterial to the Company's results of operations prior to 1994 and, therefore, prior year financial statements were not restated for this business combination. These acquisitions (described in detail in Note 2 of the Notes to Consolidated Financial Statements) coupled with the internal growth of the businesses previously acquired led to the significant sales increases.
Increases in gross profit over the three-year period have generally remained in line with sales, with margins fluctuating between 27.4% and 28.6% during the three-year period. Such fluctuations generally reflect the changes in sales mix resulting from acquisition activity. However, after excluding nonrecurring items, operating income as a percent of sales has increased significantly over the period from 8.9% to 9.7% to 10.6% in 1992, 1993 and 1994, respectively. While sales and gross profit have grown significantly over the three-year period, corporate and operating expenses have grown at a much smaller pace resulting in a general decline in selling, general and administrative expenses as a percentage of sales over this period, which reflects the Company's substantial operating leverage.
Over the past two years, numerous plans for federally-mandated health care reform have been proposed, but none of these proposals has been adopted. While the processes by which the federal or state governments may pursue alternate proposals for reform of the health care system are uncertain, market forces in the form of managed care continue to challenge health care providers to provide high quality care while reducing or containing costs. Management believes that the need to lower health care costs will drive further industry
consolidation which should add impetus to the Company's acquisition program. In addition, the Company's development of significant regional market positions provides opportunities for economies of scale to lower overall costs.
Moreover, demographic trends indicate that demand for long-term care will increase well into the middle of the next century. Pharmaceutical therapy is generally the most cost-effective form of treatment for chronic ailments afflicting the elderly and, as such, is an essential part of long-term care. Omnicare believes that it is well-positioned to be an integral part of the solution to escalating health care costs among the elderly through careful product selection (including drug formulary management), cost-effective drug purchasing and efficient delivery systems. This, coupled with Omnicare's pharmacy consulting services for nursing homes which identify, resolve and prevent drug therapy related problems, reduces costs to the health care system while also promoting optimal patient outcomes. Thus, Omnicare should continue to show solid growth in sales and earnings in 1995, benefiting from a full year's contribution from businesses acquired in 1994, from internal growth and from the completion of additional acquisitions.
NON-OPERATING INCOME AND EXPENSE
Investment income increased by 149% to $1,580,000 in 1994 as the Company received the benefit of a significant invested cash balance for all of 1994 due to the receipt of the cash proceeds from the offering of $80.5 million in 5.75% Convertible Subordinated Notes due 2003 ("Notes") in October 1993 and the receipt of $59.2 million of proceeds from the November 1994 stock offering. Investment income nearly tripled in 1993 to $635,000 as the Company's invested cash balances grew in the fourth quarter owing to the receipt of proceeds from the sale of the Notes.
Interest expense increased by $3,473,000 in 1994 as a result of a full year's interest on the Notes as compared with only three months in 1993. Interest expense remained relatively stable in 1993 when compared with 1992 levels.
INCOME TAXES
The Company's effective tax rates for 1992, 1993 and 1994 were 42.0%, 35.1% and 40.3%, respectively. All years were favorably impacted due to income generated by Evergreen Pharmaceutical East, Inc., an S corporation, which was not subject to tax. The 1994 effective tax rate is slightly higher than statutory rates primarily due to the nondeductibility of certain acquisition expenses. As a result of the Omnibus Budget Reconciliation Act of 1993, the Company was permitted to deduct from taxable income amortization of intangibles arising from certain business acquisitions retroactive to July 1991. Accordingly, the Company's effective tax rate in 1993 was favorably impacted by the tax benefit of amortization of intangibles. The effective tax rate of 42.0% in 1992 was higher than statutory rates, primarily because of the nondeductibility of the amortization of intangibles during that period.
DISCONTINUED OPERATIONS
Significant financial data related to the December 1992 sale of the Veratex Group of businesses are set forth in Note 3 of the Notes to Consolidated Financial Statements.
IMPACT OF INFLATION
Inflation has not materially affected Omnicare's profitability inasmuch as price increases have generally been obtained to cover inflationary drug cost increases.
LIQUIDITY AND CAPITAL RESOURCES
In November 1994, the Company completed a public offering of 1,623,741 shares of common stock, resulting in net proceeds of $59,211,000.
In line with Omnicare's plan to redeploy capital into the long-term care pharmacy market, seven acquisitions were completed during 1994 requiring an aggregate capital investment of approximately $87 million. Such acquisitions were primarily financed from cash and cash equivalents on hand, except with respect to the acquisitions of Evergreen, Lo-Med Prescription Services, Inc. and UniCare, Inc., for which the Company issued 1,111,322, 370,932 and 75,378 shares of common stock, respectively. Additionally, $17.6 million of other acquisition-related payments were made during 1994 related to businesses acquired prior to 1994. Additional amounts totalling $16.6 million may become payable through 1998 pursuant to the terms of various acquisition agreements. The 1994 acquisition-related cash outlays have been funded primarily through proceeds from the issuance of the $80.5 million in Notes in 1993. Omnicare ended the year with $79,596,000 in cash and cash equivalents and marketable securities as compared to $63,276,000 at year-end 1993. At December 31, 1994, the Company had invested $31,260,000 in U.S. Treasury-backed repurchase agreements which represent investments under agreements to resell, usually overnight, but in no case longer than thirty days. The Company has a collateralized interest in the underlying securities which are segrated in the accounts of the counterparty bank. Management believes these investments do not create any exposure to the Company's liquidity. Omnicare's current ratio increased substantially to 4.4 to 1 at December 31, 1994 from 3.0 to 1 at December 31, 1993, and working capital at December 31, 1994 increased to $125,076,000 from year-end 1993 working capital of $79,713,000. This increase is primarily attributable to the proceeds from the public stock offering. Book value per common share increased to $14.14 per share as of December 31, 1994 from $9.75 per share at the prior year-end, primarily attributable to the public stock offering proceeds and also secondarily, due to the increase in equity resulting from the growth in net income less dividends paid.
On February 1, 1995, Omnicare's Board of Directors elected to increase the quarterly cash dividend by 11% to 5 cents per share for an indicated annual rate of 20 cents per share for 1995.
In February 1995, the Company reached an agreement with a consortium of six banks to replace its current $50 million revolving credit facility with a new, five-year $135 million revolving credit facility. Interest rates and commitment fees for this new facility are based on the Company's level of performance under certain debt covenants and are expected to result in significantly lower fees and borrowing costs as compared with the former agreement. No amounts were outstanding at December 31, 1994 under the credit facility.
Management believes that Omnicare's capital requirements can be met with the proceeds of the 1994 public stock offering, the currently unused $135 million revolving credit facility and the cash flow from existing as well as acquired businesses. If needed, other external sources of financing are
readily available to the Company. There are no material commitments outstanding at December 31, 1994 other than the acquisition-related payments which may be made contingent on the performance of businesses acquired (see Note 2 of the Notes to Consolidated Financial Statements).
REPORT OF INDEPENDENT ACCOUNTANTS ---------------------------------
To the Stockholders and Board of Directors of Omnicare, Inc.
In our opinion, based on our audits and the report of other auditors with respect to 1993 and 1992, the accompanying consolidated balance sheet and the related consolidated statements of income, cash flow and stockholders' equity present fairly, in all material respects, the financial position of Omnicare, Inc. and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flow for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the combined financial statements of Evergreen Pharmaceutical, Inc. and Evergreen Pharmaceutical East, Inc. (collectively, "Evergreen") as of December 31, 1993 and for the years ended December 31, 1993 and 1992, which statements reflect total assets of $12,210,000 at December 31, 1993 and total revenues of $34,130,000 and $28,873,000 for the years ended December 31, 1993 and 1992, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the 1993 and 1992 amounts included for Evergreen, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above.
As discussed in Note 12 to the financial statements, the Company changed its method of accounting for income taxes in 1993.
Price Waterhouse LLP Cincinnati, Ohio February 1, 1995
The Notes to Consolidated Financial Statements are an integral part of this statement.
The Notes to Consolidated Financial Statements are an integral part of this statement.
The Notes to Consolidated Financial Statements are an integral part of this statement.
The Notes to Consolidated Financial Statements are an integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Omnicare, Inc. ("Company") operates in one business segment which includes the distribution of pharmaceuticals, related pharmacy management services and medical supplies for long-term care institutions and their residents. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries as well as 50% of the accounts of Heartland Healthcare Services, a 50/50 partnership between the Company and Health Care and Retirement Corporation which began operations in 1994. All significant intercompany transactions are eliminated.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all investments in highly liquid instruments with maturities of three months or less at the date purchased to be cash equivalents. Investments in cash equivalents are carried at cost which approximates market with any associated purchase discount or premium amortized over the period to maturity.
Marketable securities consist of U.S. Treasury obligations maturing in 1995 and are stated at cost, which approximates fair value. The fair values are based on quoted market prices. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under the new rules, debt securities that the Company has both the intent and ability to hold to maturity are carried at amortized cost. Debt securities that the Company does not have the intent and ability to hold to maturity are classified either as "available-for-sale" or as "trading" and are carried at fair value. At December 31, 1994, the Company had no investments that qualified as available-for-sale or trading.
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 generally determined using the average cost and first-in, first-out methods.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost. Expenditures for maintenance, repairs, renewals and betterments that do not materially prolong the useful lives of the assets are charged to expense. Depreciation of properties and equipment is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease terms, including renewal options, or their useful lives.
INTANGIBLE AND OTHER ASSETS
Intangible assets arise from business combinations accounted for as purchase transactions and are amortized using the straight-line method over their estimated useful lives, not in excess of forty years.
On an annual basis, the Company reviews the recoverability of the intangible assets. The measurement of possible impairment is based primarily on the ability to recover the balance of the intangible assets from expected future operating cash flow on an undiscounted basis. In management's opinion, no such impairment exists at December 31, 1994.
Debt issuance costs are included in other assets and are amortized on the straight-line method over the life of the related debt.
REVENUE RECOGNITION
Revenue is recognized when products or services are provided to the customer. A significant portion of the Company's revenues from sales of pharmaceutical and medical products are reimbursable from Medicaid and Medicare programs. The Company monitors its receivables from these reimbursement sources under policies established by management and reports such revenues at the net realizable amount expected to be received from these third-party payors.
INCOME TAXES
The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of differences between income for financial reporting and income for tax purposes.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," on a prospective basis; SFAS No. 109 requires the use of an asset and liability method of accounting for deferred income taxes.
PER SHARE DATA
Primary earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Common stock equivalents are not material. Fully diluted earnings per share include common stock equivalents and assume the conversion of the 5.75% Convertible Subordinated Notes due 2003 into common stock. Additionally, interest expense and amortization of debt issuance costs arising from convertible securities are added, net of related income taxes, to income for the purpose of calculating fully diluted earnings per share.
RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made to conform with the current year presentation.
NOTE 2 - ACQUISITIONS
Since 1989, the Company has been involved in a program to acquire providers of pharmaceutical and related pharmacy management services and medical supplies to long-term care facilities and their residents.
During 1994, the Company completed seven acquisitions including Care Pharmaceutical Services, Inc. in Griffith, Indiana and Schaufler Prescription Pharmacy in Belleville, Illinois, in March; Weber Medical Systems, Inc. in Skokie, Illinois and Lo-Med Prescription Services, Inc. (Lo-Med) in Wadsworth, Ohio, in June; UniCare, Inc. in Montgomery, Alabama, in August; and Lawrence Medical Supply, Inc. in Deerfield, Illinois and Evergreen in Kirkland, Washington, in September. Lo-Med was acquired in a pooling of interests transaction for 370,932 shares of common stock and accordingly, the consolidated financial statements include the results of Lo-Med effective January 1, 1994. The impact of the Lo-Med transaction on the Company's historical financial statements is not significant; consequently, prior-year financial statements have not been restated for this transaction.
During 1993, the Company completed four acquisitions including Freed's Pharmacy, Inc. in Overland Park, Kansas, in March and Kansas City
Nursing Services, Inc. in Kansas City, Kansas, Enloe Drugs, Inc., in Decatur, Illinois, and Anderson Medical Services, Inc., in Dover, Ohio, all in the fourth quarter.
During 1992, the Company completed seven acquisitions including Westhaven Services Co. in Toledo, Ohio, in October; Pharmacare, Inc., and an affiliated company in Louisville, Kentucky, in April and five other nursing home pharmacy providers in the second and third quarters: PRN Pharmaceutical Services, Inc., in Indianapolis, Indiana; Home Pharmacy Services, Inc., in Belleville, Illinois; Ross Drug, Inc., in Tulsa, Oklahoma; Interlock Pharmacy Systems in St. Louis, Missouri; and Crystal Care Corporation in Ashland, Kentucky.
Amounts payable in the future are subject to set-off for claims of indemnity. Payments contingent on future growth totalled $16.6 million at December 31, 1994, and will be recorded as additional purchase price, serving to increase intangible assets in the period in which the contingencies are resolved. The 1994 acquisitions carry certain pre-acquisition contingencies which will be resolved within one year of the transaction and which aggregate $1.3 million at December 31, 1994. The excess of purchase price over the fair value of the net tangible and intangible assets acquired is being amortized over periods not in excess of forty years.
Warrants outstanding at December 31, 1994 represent the rights to purchase 270,000 shares of common stock and were issued in connection with certain acquisitions. These warrants can be exercised at anytime through 1997 at prices ranging from $26.86 to $33.15 per share. Warrants to purchase 50,000 shares of common stock, issued in prior years, were exercised in 1994.
The pro forma information does not purport to be indicative of operating results which would have occurred had the acquisitions been made at the beginning of the respective periods or of results which may occur in the future.
NOTE 3 - DISCONTINUED OPERATIONS
On December 21, 1992, the Company sold the stock of its Veratex Group of businesses, excluding Labtronics, Inc., to Chemed Corporation ("Chemed"), then a 27% stockholder, for $63,650,000 in cash. As a result of this sale, the Company decided to divest Labtronics, Inc., a bio-medical engineering business, and completed that disposition in 1993. These operations comprised the entire medical and dental products segment of the Company's business. The $5.2 million gain on these divestitures is net of taxes and expenses associated with the transaction and the write-down of the assets of Labtronics, Inc. to their estimated net realizable values.
The financial statements reflect the operating results of these businesses along with the net gain arising from their disposition as discontinued operations. Significant financial data for the year ended
Liabilities relating to discontinued operations of $2,399,000 and $3,800,000 at December 31, 1994 and 1993, respectively, remain to cover expenses associated with these transactions and obligations and other liabilities retained by the Company subsequent to the dispositions.
Repurchase agreements represent investments in U.S. Treasury obligations under agreements to resell, usually overnight, but in no case longer than 30 days. The Company has a collateralized interest in the underlying securities, which are segregated in the accounts of the bank counterparty. At December 31, 1994, Fifth Third Bank of Cincinnati, Ohio was the counterparty for $19,446,000 of the repurchase agreements, which matured on January 3, 1995.
NOTE 6 - LEASING ARRANGEMENTS
The Company has operating leases which cover various real and personal property. 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 contingent rentals in the Company's operating leases.
On October 1, 1993, the Company issued $80,500,000 principal amount of 5.75% Convertible Subordinated Notes ("Notes") due 2003. The Notes are convertible into common stock at any time at the option of the holder at a price of $28.875 per share. The Notes are redeemable at the option of the Company beginning in October 1996, at redemption prices ranging from 103.83% of the principal amount in 1996 to 100.64% in 2001 and 100% thereafter. Absent conversion of the Notes into common stock or redemption by the Company at its election as described above, the Notes are due on October 1, 2003. Interest on the notes is payable semiannually, due in October and April of each year, until conversion or redemption. Debt issuance costs are included in other assets and amortized using the straight-line method over the ten-year life of the Notes. The Company amortized $310,000 and $77,000 of deferred debt issuance costs in 1994 and 1993, respectively. Based on the market value of the Notes in the last over-the-counter trade prior to year-end, the estimated fair value of the Notes at December 31, 1994 is $125,000,000. The fair value of all other financial instruments of the Company approximates the amounts presented on the consolidated balance sheet.
In 1988, the Company established an Employee Stock Ownership Plan ("ESOP") which currently covers certain acquired entities' employees and all of the corporate headquarters employees. The ESOP used proceeds from a $4 million bank loan to purchase 493,437 shares of the Company's common stock on the open market at prices ranging from $7.75 to $8.50 per share. Inasmuch as the Company has guaranteed the repayment of this obligation, it has recorded the ESOP's bank debt as long-term debt and also as a reduction of stockholders' equity in the accompanying consolidated balance sheet.
The ESOP services its debt with Company contributions, which were previously made to the Company's Employee Savings & Investment Plan, and dividends received on shares held by the ESOP. Principal and interest payments on the bank debt are made in increasing quarterly installments over a ten-year period, the final payment being due on December 31, 1998. The loan bears interest at the per annum rate of 7% and is secured by the unallocated shares of common stock held by the ESOP trust. These unallocated shares had a fair market value equal to $11,301,412 at December 31, 1994.
At December 31, 1993, $2,074,000 was outstanding and $1,453,000 was available for borrowing under the Evergreen line of credit. The interest rate charged equaled 1/2 of 1% over the bank's prime rate (6.5% at December 31, 1993). Amounts outstanding under the line of credit were repaid and the line was closed during 1994.
Other notes payable represented various obligations incurred specific to Evergreen operations. The weighted average interest rate on the notes approximated 8.6% for the periods presented. Included in other notes payable are notes due to the former owners of Evergreen for $871,000 as of December 31, 1993. These obligations were repaid in 1994.
At December 31, 1994, the Company had a $50 million unsecured revolving credit agreement with two banks which expires on January 1, 1996. No amounts were outstanding under this agreement at December 31, 1994 and 1993. Borrowings under this agreement bear interest based upon the bank's cost of funds plus a spread of 1/2 of 1% on the first $25 million of borrowings and a spread of 3/4 of 1% on the second $25 million of borrowings, or the prime rate. The average daily borrowings outstanding during 1993 were $4.9 million, at a weighted average annual interest rate of 3.9%. The Company was required to pay a commitment fee of 1/4 of 1% per annum on the unused portion of the facility. In February 1995, the Company reached an agreement with a consortium of six banks for a new, five-year $135 million revolving line of credit. Borrowings under this agreement bear interest based upon the bank's cost of funds plus a spread of 1/4 of 1% to 3/4 of 1%, dependent upon the Company's performance under certain debt covenants, or the prime rate. Additionally, a commitment fee on the unused portion of the facility is required which ranges from 1/10 of 1% to 1/4 of 1% also based upon the Company's performance under certain debt covenants.
Total interest payments made in 1994, 1993 and 1992 amounted to $5,457,000, $1,234,000 and $1,943,000, respectively.
NOTE 8 - PUBLIC OFFERING OF COMMON STOCK
In November 1994, the Company completed a public offering of 4,140,000 shares of common stock of which 1,623,741 shares were sold by the Company resulting in net proceeds of $59,211,000 after deducting issuance costs.
NOTE 9 - STOCK INCENTIVE PLANS
The Company has stock incentive plans under which it may grant stock awards or options to purchase its common stock. Options are granted at a price equal to the market value at the date of grant and become exercisable beginning one year following the date of grant in four approximately equal annual installments.
At December 31, 1994, options for 181,593 shares (1993-212,256; 1992-190,496) were exercisable and 2,712 shares (1993-53,840; 1992-119,411) were available for granting of additional stock options and awards.
In 1994 and 1992, the Company granted restricted stock awards to certain key employees covering 49,328 and 58,662 shares, respectively, of common stock. No such stock awards were granted in 1993. These shares vest over a three to five year period and are restricted as to the transfer of ownership.
In 1994, 1993 and 1992, the Company granted unrestricted stock awards covering 1,800, 2,100 and 2,000 shares, respectively, of its common stock to members of the Board of Directors of the Company.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company contracted with a division of Chemed, a 6% stockholder, to assist in the development of a new data processing system to integrate and standardize all operational and financial reporting functions. The Company also subleases its corporate offices from Chemed and is charged for the occasional use of Chemed's corporate aviation department and other incidental expenses based on Chemed's cost. The Company believes that the method by which such charges are determined is reasonable and that the charges are essentially equal to that which would have been incurred if the Company had operated as an unaffiliated entity. Charges to the Company for these services were $2,951,000, $1,624,000 and $764,000 in 1994, 1993 and 1992, respectively.
Included in accounts receivable are amounts due from other companies affiliated with the former owners of Evergreen. These amounts, net of payables, totalled $850,000 and $894,000 at December 31, 1994 and 1993, respectively.
Included in other assets as of December 31, 1993 are advances to a company affiliated with the former owners of Evergreen of $421,000. These advances were paid in 1994.
Effective May 1, 1993, Evergreen leased one of its facilities from a partnership, a partner of which is a former owner of Evergreen. Rent expense of $569,000 was paid under this lease in 1994, (1993-$437,000).
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company has a non-contributory, defined benefit pension plan covering certain corporate headquarters employees and the employees of the Veratex Group of businesses (through the December, 1992 sale of Veratex). Benefits accruing to Veratex employees ceased upon the sale of Veratex. Benefits accruing under this plan to corporate headquarters employees were fully vested and frozen as of January 1, 1994.
Retirement benefits are based primarily on an employee's years of service and compensation near retirement. Plan assets are invested in U.S. Treasury obligations. The Company's policy is to fund pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.
Pension costs were determined based on the projected unit credit actuarial cost method using an assumed 8% discount rate and expected long-term rate of return on assets. A 6% rate of increase in compensation levels was assumed in years prior to 1994.
A gain of $170,000 was recognized in 1994 as a result of the freezing of the plan benefits. The gain on the sale of the Veratex Group recorded in 1992 and discussed in Note 3 of the Notes to Consolidated Financial Statements included income of $1,045,000 related to the curtailment of the benefits attributable to the Veratex employees in the pension plan.
Expenses relating to the Company's defined contribution and other similar plans (including the ESOP described in Note 7 and including amounts charged to discontinued operations) were $1,381,000, $824,000 and $593,000 in 1994, 1993 and 1992, respectively.
In 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits". The adoption did not have a material impact on the Company's financial position or results of operations.
NOTE 12 - INCOME TAXES
In 1994, tax benefits of $947,000 related to the exercise of stock options have been credited to paid-in capital. In 1992, deferred state income taxes were not provided because they were not material.
The Omnibus Budget Reconciliation Act of 1993 permitted the Company to deduct from taxable income the amortization of intangibles arising from certain business acquisitions occurring subsequent to July 1991. The effect of this change in tax law was to reduce 1993 income tax expense by $310,000 for the period July 1991 through December 31, 1992 and by an additional $140,000 for the portion of 1993 prior to enactment of the law.
Effective January 1, 1993, the Company adopted SFAS No. 109, which requires the use of an asset and liability method of accounting for income taxes. The cumulative effect of this adoption resulted in a gain of $280,000 ($.03 per share) and was otherwise not material to the Company's financial position or results of operations, on a historical or pro forma basis.
Income tax payments made in 1994, 1993 and 1992 amounted to $5,723,000, $10,892,000 and $2,335,000, respectively.
The Company has evaluated its net deferred tax asset position and has concluded that a valuation allowance is not required as these net assets are more likely than not to be realized.
NOTE 13 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding the Company's executive officers included in Part I of this Form 10-K, the information required under this Item is set forth in the Company's 1995 Proxy Statement which is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information required under this Item is set forth in the Company's 1995 Proxy Statement which is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item is set forth in the Company's 1995 Proxy Statement which is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is set forth in the Company's 1995 Proxy Statement which is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
All other financial statement schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements and Notes in Item 8