COMPANY SUMMARY
This summary highlights basic information about us. You should read this
information in connection with our other filings under the Securities Exchange
Act of 1934. As used in this filing, unless otherwise specified or the context
otherwise requires, the terms 'Omnicare,' 'we,' 'our' and 'us' refer to
Omnicare, Inc. and its consolidated subsidiaries.
THE COMPANY
Omnicare is a leading geriatric pharmaceutical services company. We are the
nation's largest independent provider of pharmaceuticals and related pharmacy
services to long-term care institutions such as skilled nursing facilities
('SNFs'), assisted living facilities ('ALFs'), retirement centers and other
institutional health care facilities. As of December 31, 2000 we provided our
services to approximately 636,500 residents in approximately 8,400 long-term
care facilities in 43 states. We purchase, repackage and dispense
pharmaceuticals, both prescription and non-prescription, and provide
computerized medical record keeping and third-party billing for residents in
those facilities. We also provide consultant pharmacist services, including
evaluating monthly patient drug therapy, monitoring the control, distribution
and administration of drugs within the nursing facility, and assisting in
compliance with state and federal regulations. In addition, we provide ancillary
services, such as infusion therapy, dialysis and medical supplies, and clinical
care planning and financial software information systems to our client
facilities. We also provide comprehensive clinical research services for the
pharmaceutical and biotechnology industries. For the year ended December 31,
2000, we generated total revenue of approximately $2.0 billion and earnings
before interest, taxes, depreciation and amortization ('EBITDA') of $231.9
million, excluding restructuring and other related charges. See ' -- Recent
Developments' and Annex A to this filing.
We believe that we are well positioned to benefit from favorable demographic
trends. Based on U.S. Census Bureau projections, the fastest growing segment of
the population is the group over 65 years of age, which is expected to increase
14% to 40 million persons (or one of every 7.5 United States citizens) by 2010
and grow to 70 million persons by 2030 (or one of every 5 United States
citizens). This age group currently has the largest requirement for
pharmaceutical services in the United States, with health expenditures for
persons over the age of 65 averaging nearly four times that of people under 65,
according to the Pharmaceutical Research and Manufacturers of America.
Furthermore, the oldest age bracket, people aged 85 and above, is expected to
see the most growth over the next 30 years according to the U.S. Census Bureau.
This age group generally is the most likely to be in need of some form of
long-term care or assisted living.
OUR BUSINESS
Our primary line of business is the distribution of pharmaceuticals, related
pharmacy consulting, data management services and medical supplies to long-term
care facilities through our network of 134 specialized, institutional pharmacies
that are strategically located throughout the United States. We typically
service long-term care facilities within a 150-mile radius of our pharmacy
locations and maintain a 24-hour, seven-day per week, on-call pharmacist service
for emergency dispensing and delivery and for consultations with the facility's
staff or attending physicians. We utilize a unit dose delivery system that
differs from the bulk delivery system typically used by retail pharmacies. Our
unit dose delivery system is intended to improve control over pharmaceutical
distribution and patient compliance with drug therapy by increasing the accuracy
and timeliness of drug administration. In conjunction with the unit dose
delivery system, our record keeping/documentation system is designed to result
in greater efficiency in nursing time, improved control and reduced waste in
client facilities, and lower error rates in both dispensing and administration.
We also furnish infusion therapy and dialysis services. We believe we
distinguish ourselves from many of our competitors by also providing proprietary
clinical programs, such as formulary management, health and outcomes management
programs, and integrated electronic database management services for the large
base of elderly patients we serve. In particular, our proprietary formulary, the
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nation's first clinically-based formulary tailored to the geriatric patient in
the long-term care setting, is designed to aid us in improving patient outcomes
while lowering the overall cost to health care payors.
We have been able to leverage our core pharmacy services capabilities
through our contract research organization services ('CRO'). Our CRO is a
leading international provider of comprehensive product development and research
services to client companies in the pharmaceutical, biotechnology, medical
device and diagnostics industries. Our CRO has operations in 23 countries and
provides support for the design of regulatory strategy and clinical development
(phases I through IV) of pharmaceuticals by offering comprehensive and fully
integrated clinical, quality assurance, data management, medical writing and
regulatory support for our clients' drug development programs.
COMPETITIVE STRENGTHS
We believe that our strong competitive position is attributable to a number
of factors, including the following:
Market Leading Position
As the nation's largest independent provider of pharmaceuticals, related
pharmacy consulting and data management services and medical supplies to both
the SNF and ALF markets, our market leading position provides the following
benefits:
Our broad geographic scope allows us to serve a broad spectrum of
customers, from small independent facilities to large national chains;
As one of the largest purchasers of pharmaceuticals for the elderly in
long-term care institutions in the United States, we are able to generate
economies of scale in the purchase of pharmaceuticals and supplies; and
We believe we have significantly lower operating costs than our competitors
due to the size and scope of our operations.
Strong Financial Position and Conservative Capital Structure
We have implemented disciplined financial policies that have helped us to
generate consistent annual revenue growth and strong cash flow and to maintain a
strong balance sheet. Despite the regulatory environment which adversely
affected the long-term care industry in late 1998 through 2000, we were able to
increase our operating cash flow and reduce our debt. Cash flow from operations
grew by 13% to $101.1 million in 1999 versus 1998 and by 31% to $132.7 million
in 2000 versus 1999. Free cash flow (operating cash flow minus capital
expenditures and cash dividends) was $92.0 million in 2000, compared to $34.2
million generated in 1999. Our total debt as a percent of total capitalization
was 42.3% at December 31, 2000, down 190 basis points from 44.2% at
December 31, 1999.
Proprietary Formulary and Health Management Programs
We offer a complete portfolio of traditional institutional pharmacy services
to our customers and believe we have further distinguished our services from our
competitors through our proprietary clinical programs. In 1994, we introduced
the Omnicare Geriatric Pharmaceutical Care Guidelines'r' (the 'Omnicare
Guidelines''r'), a proprietary, clinically based formulary developed in
conjunction with the Philadelphia College of Pharmacy. The Omnicare
Guidelines'r' ranks nearly 850 drugs across 185 therapeutic classifications
based on their relative clinical effectiveness in the elderly and by cost to the
payor. The Omnicare Guidelines'r' assist us in purchasing drugs at a lower cost
and in more effectively managing patient care and costs, which can result in
significant savings for payors and enhanced health outcomes for the residents we
serve. We offer eight major proprietary health management programs targeted at
some of the most prevalent diseases affecting the elderly: congestive heart
failure, depression, osteoporosis, atrial fibrillation, Alzheimer's disease,
dementia, urinary health and pain management. Such
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programs can help identify patients who are candidates for more effective drug
therapy as well as identifying formerly undiagnosed disease states which may be
treatable through appropriate drug therapy. Our consultant pharmacists can then
recommend clinically more appropriate preventative and corrective medications to
the patient's physician. By promoting more appropriate therapy, costs of
inappropriate therapy such as increased nursing time, lab tests, physician
visits and hospitalizations can be reduced. These programs can help our
customers to lower overall health care costs and improve patient outcomes.
Well Positioned Contract Research Organization
Our CRO is one of the leading contract research organizations in the world
and we believe our CRO has several competitive advantages. Because of our market
position as the nation's largest independent institutional pharmacy organization
and our significant relationships with major pharmaceutical manufacturers, we
believe our CRO has access to important business opportunities. We believe our
CRO business is well positioned to help pharmaceutical manufacturers conduct
research on drugs targeted at diseases of the elderly through our access to over
600,000 elderly residing in SNFs and ALFs, which can serve as clinical
investigative sites for needed geriatric pharmaceutical research. Our access to
a large pool of potential participants can allow us to rapidly inform and
recruit patients with existing diseases and risk profiles who are willing to
participate, or could benefit from clinical trials. As a result, our CRO is able
to provide efficient geriatric pharmaceutical research in long-term care
facilities. Equally important, access to our databases, which include extensive
clinical data on a significant number of geriatric patients, allows analysis by
biostatisticians, which reveals correlations between drug regimen and outcomes.
Also drug comparisons can be made, identifying the best drugs to be used under
specific conditions. Such studies containing aggregate data are valuable to
pharmaceutical manufacturers as they attempt to match the medication needs of
the elderly with their product development.
Proven Management Team With Significant Industry Experience
Our management team has successfully developed Omnicare into the leading
independent provider of pharmacy services to long-term care providers. Our
management team has successfully integrated more than 80 acquisitions since
1988, implementing our financial, purchasing and regulatory controls. Our senior
management team, led by President Joel Gemunder, who has been with us since we
were founded in 1981, has extensive experience in the health care industry.
Through the leadership of our senior management team, our revenue has grown from
less than $56 million in 1990 to approximately $2 billion in 2000, through a
combination of acquisitions and internal growth.
Our management team has demonstrated an ability to operate our business in a
difficult reimbursement environment. For example, in mid-1999, we initiated a
restructuring program geared toward significantly streamlining operations,
reducing costs and increasing the efficiency of our operating units by
standardizing around best practices. We merged or closed 67 pharmacy locations
and four CRO and software locations and opened 12 new pharmacies. Headcount was
reduced by approximately 1,800, or 16% of our total workforce of approximately
11,100. We completed this restructuring effort in December 2000.
BUSINESS STRATEGY
Our strategy is to enhance our strong market position and to increase
revenue and cash flow by capitalizing on our position as a leading provider of
pharmacy services. Our business strategy focuses on the pursuit of the following
key initiatives:
Grow Core Pharmacy Distribution Business
An important element of our strategy is to continue to grow our core
institutional pharmacy business by increasing market penetration in the
long-term care market. Much of our growth from 1989 to 1999
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was through acquisitions. We intend to continue to grow our business both
through internal growth and selected acquisitions. We believe SNFs continue to
present opportunities for us to increase market presence, particularly since the
financial condition of many of our competitors has been adversely affected by
recent Medicare reimbursement changes, especially the Prospective Payment System
('PPS'). Moreover, we believe further growth can be generated through expansion
in the ALF market, where the number of facilities has been growing at a more
rapid pace than SNFs. As residents in ALFs age, they generally require
increasing levels of pharmaceutical care both for prevention as well as
treatment of chronic illnesses; as a result, the acuity level of the residents
has been rising, causing greater drug utilization. Moreover, in contrast to
SNFs, ALFs receive most of their reimbursement from private pay sources. In both
the SNF and ALF markets, we believe there is an opportunity to increase our
number of residents served.
Expansion of Services
Our strategy includes leveraging our core pharmacy distribution business by
expanding our services within the facilities we serve. We believe that there are
significant opportunities to increase our revenue and margins by providing
additional services such as infusion therapy, dialysis and health management to
our SNF, ALF and other customers. Due to recent favorable Medicare reimbursement
changes affecting SNFs, particularly with respect to high acuity residents, we
intend to expand our infusion therapy business. We recently introduced an onsite
dialysis program for residents of SNFs who suffer from end stage renal disease
('ESRD' or kidney failure). This service allows residents with ESRD to be cared
for onsite at the SNF rather than being transported to a clinic, typically three
times per week for a total of 12 hours of treatment per week. We are currently
serving over 200 ESRD patients in twenty-five facilities. We are also expanding
our health management programs, which utilize a case management approach to
dealing with underdiagnosis and undertreatment in the elderly. Generally, such
programs seek to foster the optimization of drug therapy and often require
increases in utilization of certain drugs. Through these programs, we believe
overall health care costs, including increased hospitalizations, staffing time,
lab tests and ambulance transfers, can be reduced and patient outcomes enhanced.
Extend Our Services to Broader Geriatric Markets
There are more than 30 million Americans, representing approximately 90% of
the population over the age of 65, living independently. We believe this
represents the largest potential market into which we can extend our clinical
expertise and services. Seniors often receive care and prescriptions from
multiple health care practicioners. As a result, we believe seniors are highly
susceptible to medication errors and drug-related problems. With our geriatric
formulary expertise and health management capabilities, we believe we can
provide significant value to this broad-based elderly population and to those
financially responsible for their care. For example, we presently are acting as
a third-party pharmaceutical case management partner for certain retiree health
benefit plans of a Fortune 10 company. This program, which serves more than
30,000 retirees, was launched in early 2000. This program involves medical
information analysis along with employing the Omnicare Guidelines'r',
outcomes-based algorithm technology and our proprietary clinical data and
expertise to make recommendations to improve the effectiveness of drug therapy
in seniors, including identifying potentially underdiagnosed and undertreated
conditions. The goal is to enhance the care of these retirees while lowering the
employer's overall health care costs. We believe our geriatric outcomes
management will be of interest to managed care organizations, large employer-
funded benefit plan sponsors, insurers, pension plans and state Medicaid
programs.
REGULATORY ENVIRONMENT
In recent years Congress has passed a number of federal laws that have
effected major changes in the health care system. The Balanced Budget Act of
1997 (the 'BBA') sought to achieve a balanced federal budget by, among other
things, changing the reimbursement policies applicable to various health care
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providers through the introduction in 1998 of the PPS for Medicare-eligible
residents of SNFs. Prior to PPS, SNFs under Medicare received cost-based
reimbursement. Under PPS, Medicare pays SNFs a fixed fee per patient per day
based upon the acuity level of the resident, covering substantially all items
and services furnished during a Medicare-covered stay, including pharmacy
services. PPS resulted in a significant reduction of reimbursement to SNFs.
Admissions of Medicare residents, particularly those requiring complex care,
declined in many SNFs due to concerns relating to the adequacy of reimbursement
under PPS. This caused a weakness in Medicare census leading to a significant
reduction of overall occupancy in the SNFs we serve. This decline in occupancy
and acuity levels adversely impacted our results beginning in 1999, as we
experienced lower utilization of our services, coupled with PPS related pricing
pressure from our SNF customers. In 1999, Congress enacted the 1999 Balanced
Budget Refinement Act ('BBRA') which gave SNFs a 20% rate increase for
high-acuity patients, and an overall 4% across the board increase in payments
otherwise determined under the BBA for all patients. These rate increases went
into effect in April 2000 and are expected to partially restore the reduction of
reimbursement caused by PPS. In December 2000 the Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000 ('BIPA') was signed into law.
BIPA, effective April 2001, will further increase reimbursement by means of a
6.7% rate increase for certain high-acuity rehabilitation patients, a 16.66%
across the board increase in the nursing component of the rate for all patients,
and for fiscal year 2001 a 3.16% rate increase for all patients. For the year
ended December 31, 2000, our payor mix was approximately 46% private pay and
long-term care facilities (including payments from SNFs on behalf of their
Medicare-eligible residents), 43% Medicaid, 3% Medicare (including direct
billing for medical supplies) and 8% other private sources (including the CRO
business).
RECENT DEVELOPMENTS
On February 12, 2001, we announced our financial results for the year ended
December 31, 2000. Our diluted earnings per share were 72 cents, excluding
restructuring and other related charges ($17.1 million after taxes, or 19 cents
per share) compared with 88 cents per diluted share for the year ended 1999,
excluding restructuring and net pooling-of-interests expenses ($22.3 million
after taxes, or 25 cents per share). Net income, on that basis, was $66.0
million for the year ended 2000 versus $80.0 million for the year ended 1999.
EBITDA, on the same basis, was $231.9 million for the year ended 2000 versus
$241.0 million for the year ended 1999. Net income for the year ended
December 31, 2000 was $48.8 million (or 53 cents per diluted share) as compared
to $57.7 million (or 63 cents per diluted share) for the 1999 full year period.
Revenues were $1.97 billion for the year ended 2000, up from $1.86 billion for
the year ended 1999. Our cash flow from operations was $132.7 million for the
year ended 2000, a 31% increase from the $101.1 million generated for the year
ended 1999. At December 31, 2000, we had cash and cash equivalent balances of
$113.9 million. More information concerning our financial results for the year
ended December 31, 2000 can be found in Annex A to this filing.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with our historical consolidated financial statements and related
notes and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' included elsewhere in this filing. On February 12, 2001,
we announced our financial results for the year ended December 31, 2000. See
' -- Recent Developments' and Annex A to this filing.
We derived the income statement data for the years ended December 31, 1997,
1998 and 1999 from our audited financial statements, which are included
elsewhere in this filing. We derived the income statement data for the nine
months ended September 30, 1999 and 2000 and the balance sheet data as of
September 30, 2000 from our unaudited financial statements, which are included
elsewhere in this filing. In the opinion of management, the unaudited financial
statements from which the data below is derived contain all adjustments, which
consist only of normal recurring adjustments, necessary to present fairly our
financial position and results of operations as of the applicable dates and for
the applicable periods. Historical results are not necessarily indicative of the
results to be expected in the future.
UNAUDITED
AUDITED NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- -----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(In thousands, except ratios and per share data)
INCOME STATEMENT DATA: (a)(b)(c)
Sales................................................ $1,034,384 $1,517,370 $1,861,921 $1,374,340 $1,464,798
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income from continuing operations.................... $ 54,105 $ 80,379 $ 57,721 $ 46,629 $ 38,578
Loss from discontinued operations.................... (2,154)(d) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income........................................... $ 51,951 (d) $ 80,379 $ 57,721 $ 46,629 $ 38,578
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Dividends per share.................................. $ 0.07 $ 0.08 $ 0.09 $ 0.0675 $ 0.0675
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS AND OTHER FINANCIAL DATA (UNAUDITED):
EBITDA (adjusted) (e)................................ $ 140,516 $ 222,825 $ 241,008 $ 186,406 $ 171,607
Ratio of EBITDA (adjusted) to interest (e)........... 168.1x 11.0x 5.4x 5.7x 4.3x
Ratio of earnings to fixed charges (f)............... 19.0x 6.5x 3.3x 3.7x 2.7x
Ratio of total debt to EBITDA (adjusted) (e)......... 2.7x 2.9x 3.4x 3.3x(i) 3.5x(i)
Total debt to total capitalization................... 31.0% 40.4% 44.2% 44.7% 42.8%
Capital expenditures (g)............................. $ 41,278 $ 53,179 $ 58,749 $ 48,369 $ 24,772
UNAUDITED
SEPTEMBER 30, 2000
-------------------------
AS ADJUSTED
FOR NOTE
ACTUAL OFFERING(H)
---------- ------------
BALANCE SHEET DATA: (b)
Cash and cash equivalents.................................................................... $ 129,485 $ 124,985
Working capital.............................................................................. 471,716 522,216
Total assets................................................................................. 2,196,310 2,204,060
Long-term debt (including current portion)................................................... 792,377 800,127
Stockholders' equity......................................................................... 1,059,148 1,059,148
- ---------
(a) The consolidated financial statements have been restated for the 1997 period
to include the results of operations of CompScript, Inc. ('CompScript') and
IBAH, Inc. ('IBAH') acquired in June 1998 pooling-of-interests transactions.
(b) We have had an active acquisition program in effect since 1989. See Note 2
of the notes to our 1999 consolidated financial statements for information
concerning these acquisitions.
(footnotes continued on next page)
6
(footnotes continued from previous page)
(c) Included in the 1997 income from continuing operations amount, and the 1998,
1999 and 2000 net income amounts are the following after-tax charges
(credits) (in thousands):
UNAUDITED
AUDITED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ---------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
Acquisition expenses,
pooling-of-interests............. $ 3,935(1) $13,869(1) $ (376)(1) $ (376) $ --
Restructuring and other related
charges.......................... 1,208(2) 2,689(2) 22,698 (2) 18,580 9,255
Other expenses..................... 6,457(3) -- -- -- --
------- ------- ------- ------- -------
Total.............................. $11,600 $16,558 $22,322 $18,204 $ 9,255
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- ---------
(1) See Note 2 of the notes to our 1999 consolidated financial statements.
(2) See Note 12 of the notes to our 1999 consolidated financial statements.
(3) See Note 13 of the notes to our 1999 consolidated financial statements.
(d) Represents the closure of the software commercialization unit of Research
Biometrics, Inc., a subsidiary of IBAH, in 1997. All operating results of
this business have been reclassified from continuing operations to
discontinued operations.
(e) EBITDA represents earnings before interest, income taxes and depreciation
and amortization, excluding special items. Special items include
pooling-of-interests expenses, restructuring and other related charges,
other expenses, and losses from discontinued operations, and represent
charges or expenses which management believes are either one-time
occurrences or otherwise not related to ongoing operations. We believe that
certain investors find EBITDA to be a useful tool for measuring a company's
ability to service its debt; however, EBITDA does not represent cash flow
from operations, as defined by generally accepted accounting principles, and
should not be considered as a substitute for net earnings as an indicator of
our operating performance or cash flow as a measure of liquidity. We also
believe that the ratio of EBITDA to interest is an accepted measure of debt
service ability; however, such ratio should not be considered a substitute
for the ratio of earnings to fixed charges as a measure of debt service
ability. Our calculation of EBITDA may differ from the calculation of EBITDA
by others.
(f) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest
(expensed or capitalized), amortization of debt issuance costs and the
estimated interest component of rent expense. Giving effect to our proposed
offering of $300 million of senior subordinated notes (the 'note offering')
and our proposed refinancing of our existing credit facilities and
application of the net proceeds from the note offering and borrowings under
our proposed new credit facility to repay indebtedness as described under
'Use of Proceeds form the Note Offering,' as if these transactions occurred
on the first day of the relevant period, our pro forma ratios of earnings to
fixed charges for the year ended December 31, 1999 and the nine months ended
September 30, 2000 would have been 2.9x and 2.4x, respectively. If we
complete the note offering but do not refinance our existing credit
facilities and do not enter into the new credit facility, these pro forma
ratios would be 2.9x and 2.5x for the year ended December 31, 1999 and the
nine months ended September 30, 2000, respectively.
(g) Primarily represents the purchase of computer hardware/software, machinery
and equipment, and furniture, fixtures and leasehold improvements.
(h) Gives effect to the proposed note offering and the proposed refinancing of
our existing credit facilities and application of the net proceeds from the
note offering and borrowings under our proposed new credit facility to repay
outstanding indebtedness as described under 'Use of Proceeds from the Note
Offering.' If we complete the note offering but do not refinance our
existing credit facilities and do not enter into the new credit facility,
cash and cash equivalents would be $129,485 and working capital would be
$526,716. See 'Use of Proceeds from the Note Offering.'
(i) The adjusted EBITDA amounts used in this calculation are for the twelve
month periods ended September 30, 1999 and 2000.
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FORWARD-LOOKING INFORMATION
This filing contains and incorporates by reference certain statements that
constitute 'forward-looking statements' within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include all statements regarding the intent, belief or current expectations
regarding the matters discussed in this filing (including statements as to
'beliefs,' 'expectations,' 'anticipations,' 'intentions' or similar words) and
all statements which are not statements of historical fact.
These forward-looking statements involve known and unknown risks,
uncertainties, contingencies and other factors that could cause results,
performance or achievements to differ materially from those stated. These
forward-looking statements and trends include those relating to expectations
concerning our financial performance, the note offering and the refinancing of
our existing credit facilities, internal growth trends, expansion of clinical
programs, drug price inflation, purchasing leverage, the leveraging of costs,
the impact of our formulary compliance and health management programs, the
positioning of our CRO, the impact of our productivity and consolidation
program, our operating environment, the impact of PPS, the impact of
legislation, nursing home admission and occupancy trends, census and length of
stay trends, the impact of demographic trends, the impact of new drug
development, the impact of delayed decision-making and project cancellation by
pharmaceutical manufacturers, the impact of the financial condition of long-term
care facilities on our performance, our capital requirements, improved
management of working capital, and the adequacy and availability of our sources
of liquidity and capital. Such risks, uncertainties, contingencies, assumptions
and other factors, many of which are beyond our control, include without
limitation:
overall economic, financial and business conditions;
delays in reimbursement by the government and other payors to us and our
customers;
the overall financial condition of our customers;
the ability to assess and react to the financial condition of customers;
the impact of consolidation in the pharmaceutical and long-term health care
industries;
the impact of seasonality on our business;
the effect of new government regulation, executive orders and/or
legislative initiatives, including those relating to reimbursement and drug
pricing policies and in the interpretation and application of these
policies;
whether legislation giving further financial relief from PPS will be
passed;
our failure to obtain or maintain required regulatory approvals or
licenses;
the failure of the long-term care facilities we serve to maintain required
regulatory approvals;
loss or delay of CRO contracts for regulatory or other reasons;
the ability to attract and retain needed management;
the ability to implement opportunities for lowering costs and to realize
related anticipated benefits;
the impact and pace of technological advances;
the ability to obtain or maintain rights to data, technology and other
intellectual property;
trends for the continued growth of our business;
volatility in our stock price;
access to capital and financing;
pricing and other competitive factors in our industry;
variations in costs or expenses;
variations in our operating results;
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the continued availability of suitable acquisition candidates and the
successful integration of acquired companies;
the demand for our products and services;
changes in tax law and regulation; and
other risks and uncertainties described in 'Risk Factors' and elsewhere in
this filing.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, our actual results, performance or
achievements could differ materially from those expressed in, or implied by,
such forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
thereof. We do not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
9
RISK FACTORS
You should carefully consider the risks described below, in addition to the
other information discussed in this filing and our other filings under the
Securities Exchange Act. Additional risks and uncertainties not currently known
to us or that we currently consider to be immaterial may also materially and
adversely affect our business operations. If any of the following risks actually
occur, we could be materially adversely affected.
RISKS RELATING TO OUR BUSINESS
GOVERNMENT-SPONSORED PROGRAMS AND THIRD PARTY PAYORS MAY REDUCE PAYMENTS TO US.
Approximately one-half of our pharmacy services billings are directly
reimbursed by government sponsored programs. These programs include Medicaid
and, to a lesser extent, Medicare. The remainder of our billings are paid or
reimbursed by individual residents, long-term care facilities and other third
party payors, including private insurers. The Medicaid and Medicare programs are
highly regulated. The failure, even if inadvertent, of us and/or our client
institutions to comply with applicable reimbursement regulations could adversely
affect our business.
Our sales and profitability are affected by the efforts of all payors to
contain or reduce the cost of health care by lowering reimbursement rates,
limiting the scope of covered services, and negotiating reduced or capitated
pricing arrangements. Any changes which lower reimbursement levels under
Medicare, Medicaid or private pay programs, including managed care contracts,
could adversely affect us. Furthermore, other changes in these reimbursement
programs or in related regulations could adversely affect us. These changes may
include modifications in the timing or processing of payments and other changes
intended to limit or decrease the growth of Medicaid, Medicare or third party
expenditures.
HEALTH CARE REFORM AND LEGISLATION MAY REDUCE PAYMENTS TO US OR OUR CUSTOMERS.
In recent years Congress has passed a number of federal laws that have
effected major changes in the health care system. For example, the BBA sought to
achieve a balanced federal budget by, among other things, changing the
reimbursement policies applicable to various health care providers, including
the introduction in 1998 of PPS for Medicare-eligible residents of SNFs. Prior
to PPS, SNFs under Medicare were reimbursed for services based upon actual costs
incurred in providing services subject to certain limits. Now, PPS requires SNFs
to manage the cost of care for Medicare beneficiaries. Under PPS, Medicare pays
SNFs a fixed fee per patient day based on the acuity level of the resident,
covering substantially all items and services furnished during a
Medicare-covered stay, including pharmacy services. PPS resulted in a reduction
in admissions of Medicare residents, particularly those requiring complex care,
causing a weakness in Medicare census leading to a significant reduction of
overall occupancy in the SNFs we serve. This decline in occupancy and acuity
levels adversely impacted our results beginning in 1999, as we experienced lower
utilization of our services, coupled with PPS related pricing pressure from our
SNF customers. The BBA also imposes numerous other cost savings measures
affecting Medicare SNF services. Because of the significant reductions in
reimbursement which occurred, the impact of PPS has been to decrease census for
some facilities, to lower acuity levels of residents in some nursing homes, to
lower pricing and to produce an unfavorable payor mix for us.
With respect to Medicaid, the BBA repealed the 'Boren Amendment' federal
payment standard for payments to Medicaid nursing facilities ('NFs') effective
October 1, 1997 giving states greater latitude in setting payment rates for NFs.
We are unable to predict whether budget constraints or other factors will cause
states to reduce Medicaid reimbursement to NFs or delay payments to NFs. The law
also grants states greater flexibility to establish Medicaid managed care
programs without the need to obtain a federal waiver. Although these waiver
programs generally exempt institutional care, including NF and institutional
pharmacy services, we cannot assure you that these programs ultimately will not
change the Medicaid reimbursement system for long-term care, including pharmacy
services from fee-for-service to managed care negotiated or capitated rates.
10
In 1999 and again in 2000, Congress enacted legislation intended to reduce
the impact of the BBA on SNFs. This legislation includes increases in payment
rates for certain services and delays in the implementation of some BBA
requirements. While this legislation is intended to restore a portion of the
reimbursement which had been significantly reduced under the BBA, we cannot
assure you that these changes will materially improve the financial condition of
SNFs or alter their admission practices such that occupancy levels or acuity
levels will increase from current levels. Further, in order to rein in health
care costs, we anticipate that federal and state governments will continue to
review and assess alternate health care delivery systems, payment methodologies
and operational requirements for health care providers, including long-term care
facilities and pharmacies. It is not possible to predict what additional health
care initiatives, if any, will be implemented, the effect of potential
legislation or regulation, or the interpretation or administration of such
legislation or regulation, including the adequacy and timeliness of payment to
or costs required to be incurred by client facilities, on our business. Further,
we cannot assure you that Medicare and/or Medicaid payment rates for
pharmaceutical supplies and services will continue to be based on current
methodologies or remain comparable to present levels. Accordingly, there can be
no assurance that any such future health care legislation or regulation will not
adversely affect our business. See 'Business -- Government Regulation.'
GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS.
Our pharmacy business is subject to extensive and often changing federal,
state and local regulations, and our pharmacies are required to be licensed in
the states in which they are located or do business. The failure to obtain or
renew any required regulatory approvals or licenses could adversely affect the
continued operation of our business. The long-term care facilities that contract
for our services are also subject to federal, state and local regulations and
are required to be licensed in the states in which they are located. The failure
by these long-term care facilities to comply with these or future regulations or
to obtain or renew any required licenses could result in our inability to
provide pharmacy services to these facilities and their residents. We are also
subject to federal and state laws that prohibit certain direct and indirect
payments between health care providers. These laws, commonly known as the fraud
and abuse laws, prohibit payments intended to induce or encourage the referral
of patients to, or the recommendation of, a particular provider of items or
services. Violation of these laws can result in loss of licensure, civil and
criminal penalties and exclusion from the Medicare, Medicaid and other federal
health care programs.
FEDERAL AND STATE LAWS THAT PROTECT PATIENT HEALTH INFORMATION MAY INCREASE OUR
COSTS AND LIMIT OUR ABILITY TO COLLECT AND USE THAT INFORMATION.
Numerous federal and state laws and regulations govern the collection,
dissemination, use and confidentiality of patient-identifiable health
information, including the federal Health Insurance Portability and
Accountability Act of 1996, referred to as HIPAA, and related rules. As part of
our pharmaceutical dispensing, medical record keeping, third party billing,
contract research and other services, we collect and maintain
patient-identifiable health information. There can be no assurance that our
inability to comply with existing or new laws or regulations, or incurring the
costs necessary to comply with these laws or regulations, as to the collection,
dissemination, use and confidentiality of patient health information, will not
have a material adverse effect on us.
WE ARE SUBJECT TO RISKS RELATING TO OUR ACQUISITION STRATEGY.
One component of our strategy contemplates our making selected acquisitions.
Acquisitions involve inherent uncertainties. These uncertainties include the
effect on the acquired businesses of integration into a larger organization and
the availability of management resources to oversee the operations of these
businesses. The successful integration of acquired businesses will require,
among others:
consolidation of financial and managerial functions and elimination of
operational redundancies;
achievement of purchasing efficiencies;
the addition and integration of key personnel; and
11
the maintenance of existing business.
Even though an acquired business may have enjoyed strong growth as an
independent company prior to an acquisition, we cannot be sure that the business
will continue to have strong growth after an acquisition.
We also may acquire businesses with unknown or contingent liabilities,
including liabilities for failure to comply with health care laws and
regulations. We have policies and procedures to conduct reviews of potential
acquisition candidates for compliance with health care laws and to conform the
practices of acquired businesses to our standards and applicable laws. We also
generally seek indemnification from sellers covering these matters. We may,
however, incur material liabilities for past activities of acquired businesses.
We cannot be sure of the successful integration of any acquisition or that
an acquisition will not have an adverse impact on our results of operations or
financial condition.
WE OPERATE IN HIGHLY COMPETITIVE BUSINESSES.
The long-term care pharmacy business is highly regionalized and, within a
given geographic region of operations, highly competitive. In the geographic
regions we serve, we compete with numerous local retail pharmacies, local and
regional institutional pharmacies and pharmacies owned by long-term care
facilities. We compete on the basis of quality, cost-effectiveness and the
increasingly comprehensive and specialized nature of our services, along with
the clinical expertise, pharmaceutical technology and professional support we
offer.
Our CRO business competes against other full-service contract research
organizations and client internal resources. The CRO industry is highly
fragmented with a number of full-service contract research organizations and
many small, limited-service providers, some of which serve only local markets.
Clients choose a CRO based upon, among other reasons, reputation, references
from existing clients, the client's relationship with the organization, the
organization's experience with the particular type of project and/or therapeutic
area of clinical development, the organization's ability to add value to the
client's development plan, the organization's financial stability and the
organization's ability to provide the full range of services required by the
client.
WE ARE DEPENDENT ON OUR SENIOR MANAGEMENT TEAM AND OUR PHARMACY PROFESSIONALS.
We are highly dependent upon the members of our senior management and our
pharmacists and other pharmacy professionals. Our business is managed by a small
number of key management personnel who have been extensively involved in the
success of our business. We cannot assure you that we will be able to retain
these key management personnel in the future. In addition, our continued success
depends on our ability to attract and retain pharmacists and other pharmacy
professionals. Competition for qualified pharmacists and other pharmacy
professionals is strong. The loss of pharmacy personnel or the inability to
attract, retain or motivate sufficient numbers of qualified pharmacy
professionals could adversely affect our business. Although we generally have
been able to meet our staffing requirements for pharmacists and other pharmacy
professionals in the past, our inability to do so in the future could have a
material adverse effect on us.
RISKS RELATING TO THE NOTE OFFERING
WE HAVE SUBSTANTIAL OUTSTANDING INDEBTEDNESS.
At September 30, 2000, our total consolidated long-term debt (including
current maturities), after giving effect to the note offering and the proposed
refinancing of our existing credit facilities and the application of the net
proceeds from the note offering and borrowings proposed under our new credit
facility to repay indebtedness as described in 'Use of Proceeds from the Note
Offering,' accounted for approximately 43% of our total capitalization (which
percentage would be the same if we complete the note offering but do not
refinance our existing credit facilities and do not enter into the new credit
facility).
12
The degree to which we are leveraged could have important consequences to
you, including:
a substantial portion of our cash flow from operations will be required to
be dedicated to interest and principal payments and may not be available
for operations, working capital, capital expenditures, expansion,
acquisitions or general corporate or other purposes;
our ability to obtain additional financing in the future may be impaired;
we may be more highly leveraged than our competitors, which may place us at
a competitive disadvantage;
our flexibility in planning for, or reacting to, changes in our business
and industry may be limited; and
our degree of leverage may make us more vulnerable in the event of a
downturn in our business or in our industry or the economy in general.
Our ability to make payments on and to refinance our debt, including the
notes, will depend on our ability to generate cash in the future. This, to a
certain extent, is subject to general economic, business, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
We cannot assure you that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under credit
facilities in an amount sufficient to enable us to pay our debt, including the
notes, or to fund our other liquidity needs. We may need to refinance all or a
portion of our debt, including the notes, on or before maturity. We cannot
assure you that we would be able to refinance any of our debt, including any
credit facilities and the notes, on commercially reasonable terms or at all.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE
TO INCUR SUBSTANTIALLY MORE DEBT WHICH COULD FURTHER EXACERBATE THE RISKS
ASSOCIATED WITH OUR LEVERAGE.
We and our subsidiaries may be able to incur substantial additional debt in
the future. As of September 30, 2000, adjusted to give effect to the note
offering and the proposed refinancing of our existing credit facilities and the
application of the net proceeds from the note offering and borrowings under the
proposed new credit facility to repay outstanding indebtedness as described in
'Use of Proceeds from the Note Offering,' our proposed new credit facility would
permit additional borrowings of up to $342 million. If we complete the note
offering but do not refinance our existing credit facilities and do not enter
into the proposed new credit facility, as of September 30, 2000 and as adjusted
to give effect to the note offering and application of the net proceeds from the
note offering to repay a portion of the outstanding indebtedness under our
existing credit facilities, we would be able to borrow an additional $544
million under our existing credit facilities. If new debt is added to our and
our subsidiaries' current debt levels, the leverage-related risks that we and
they now face could intensify.
WE PROPOSE TO ENGAGE IN CERTAIN REFINANCING TRANSACTIONS.
We are in the process of replacing our existing bank credit facilities. We
have received a commitment for a new $495 million credit facility to replace
these existing credit facilities. While we are endeavoring to have our new
credit facility close concurrently with the closing of the note offering, we
cannot guarantee that either the note offering or the replacement of our
existing credit facilities will occur. We cannot assure you that the new credit
facility, if entered into, will not contain terms less favorable to us than
those currently contemplated by us. If we are unable to close the new credit
facility on terms favorable to us, we intend to use the proceeds from the sale
of the notes (if the note offering is completed) to repay a portion of the
amounts currently outstanding under our existing credit facilities, which would
remain in place until such time as we refinance them (and we could continue to
borrow under those facilities in accordance with their terms, subject to
compliance with the indenture). Our existing credit facilities have final
maturity dates of August 31, 2001 and October 22, 2001, respectively. If we do
not enter into the new credit facility concurrently with the closing of the note
offering, we will
13
need to obtain the consent of the lenders under our existing credit facilities
to complete the note offering. See 'Description of Certain
Indebtedness -- Refinancing of Existing Credit Facilities.'
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM BORROWINGS UNDER OUR CREDIT
FACILITIES.
We intend to use the proceeds from the note offering to repay outstanding
indebtedness under our existing revolving credit facilities. However, we will be
able to reborrow these amounts in the future under our proposed new credit
facility or, if the new credit facility is not entered into, under our existing
credit facilities. We have substantial flexibility and broad discretion with
respect to these borrowings and you will be relying on the judgment of our
management regarding the application of proceeds from these borrowings.
14
USE OF PROCEEDS FROM THE NOTE OFFERING
We estimate that the net proceeds from the note offering will be
approximately $292 million. Concurrently with the closing of the note offering,
we propose to close upon a new $495 million revolving credit facility. We intend
to use the proceeds from the note offering and borrowings under the proposed new
credit facility to repay outstanding indebtedness under our existing credit
facilities, which indebtedness at December 31, 2000 aggregated $435 million. The
indebtedness to be repaid under our existing credit facilities was incurred for
acquisitions and general corporate purposes, including working capital. Loans
under the existing credit facilities bear interest at rates based on our levels
of performance under certain financial ratios, in the case of one facility, and
based on debt ratings, in the case of the other facility. If we enter into the
proposed new credit facility, upon repayment of amounts outstanding under our
existing credit facilities, the existing credit facilities would terminate. If
we complete the note offering but do not enter into the new credit facility, we
intend to use the net proceeds from the note offering to repay a portion of our
outstanding indebtedness under the existing credit facilities, which would then
remain in place until such time as we refinance them (and we would be able to
reborrow under them in accordance with their terms, subject to compliance with
the indenture). If we do not enter into the new credit facility concurrently
with the closing of the note offering, we will need to obtain the consent of the
lenders under our existing credit facilities to complete the note offering. See
'Description of Certain Indebtedness.'
We may incur borrowings under credit facilities for, among other things,
general corporate purposes or to make acquisitions. We regularly engage in
discussions with potential acquisition candidates. As of the date of this filng,
we are not a party to any definitive agreement regarding any material
acquisition. There can be no assurance that any potential acquisitions will be
consummated.
15
CAPITALIZATION
This table sets forth our consolidated capitalization at September 30, 2000:
on an historical basis;
on an as adjusted basis to reflect the proposed sale of the notes in the
note offering and the proposed refinancing of our existing credit
facilities and application of the net proceeds from the note offering and
borrowings under our proposed new credit facility to repay outstanding
indebtedness as described under 'Use of Proceeds from the Note Offering.'
If we complete the note offering but do not refinance our existing credit
agreements and do not enter into the new credit facility, the information under
'As Adjusted for the Note Offering' would be no different from that reflected
under that column below.
UNAUDITED
SEPTEMBER 30, 2000
--------------------------------
AS ADJUSTED FOR THE
ACTUAL NOTE OFFERING
---------- -------------------
(In thousands)
Current portion of long-term debt:.......................... $ 56,749 $ 1,749
---------- ----------
Long-term obligations, net of current portion:
Long-term bank debt....................................... 390,628 153,378
% Senior Subordinated Notes due 2011................... -- 300,000
5% Convertible Subordinated Debentures due 2007........... 345,000 345,000
---------- ----------
Total long-term obligations............................. 735,628 798,378
---------- ----------
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized, none issued and outstanding as of
September 30, 2000...................................... -- --
Common stock, $1 par value, 200,000,000 shares authorized,
92,579,700 shares issued and outstanding as of
September 30, 2000...................................... 92,580 92,580
Paid-in capital........................................... 691,410 691,410
Retained earnings......................................... 307,471 307,471
Treasury stock -- at cost (442,800 shares)................ (8,780) (8,780)
Deferred compensation..................................... (19,953) (19,953)
Accumulated other comprehensive income.................... (3,580) (3,580)
---------- ----------
Total stockholders' equity.............................. 1,059,148 1,059,148
---------- ----------
Total capitalization.................................... $1,851,525 $1,859,275
---------- ----------
---------- ----------
-------------------
On February 12, 2001, we announced our financial results for the year ended
December 31, 2000. See 'Company Summary -- Recent Developments' and Annex A to
this filing.
16
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes our selected financial data, which should be
read in conjunction with our historical consolidated financial statements and
related notes and 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' included elsewhere in this filing. On February 12,
2001, we announced our financial results for the year ended December 31, 2000.
See 'Company Summary -- Recent Developments' and Annex A to this filing.
We derived the income statement data for the years ended December 31, 1997,
1998 and 1999 from our audited financial statements, which are included
elsewhere in this filing. We derived the income statement data for the years
ended December 31, 1995 and 1996 from audited financial statements not included
in this filing. We derived the income statement data for the nine months ended
September 30, 1999 and 2000 and the balance sheet data as of September 30, 2000
from our unaudited financial statements, which are included elsewhere in this
filing. In the opinion of management, the unaudited financial statements from
which the data below is derived contain all adjustments, which consist only of
normal recurring adjustments, necessary to present fairly our financial position
and results of operations as of the applicable dates and for the applicable
periods. Historical results are not necessarily indicative of the results to be
expected in the future.
UNAUDITED
AUDITED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
(In thousands, except ratios and per share data)
INCOME STATEMENT DATA: (a)(b)(c)
Sales......................... $477,359 $641,440 $1,034,384 $1,517,370 $1,861,921 $1,374,340 $1,464,798
-------- -------- ---------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations.................. $ 17,521 $ 43,663 $ 54,105 $ 80,379 $ 57,721 $ 46,629 $ 38,578
Loss from discontinued
operations.................. (1,546)(d) (389)(d) (2,154)(d) -- -- -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income.................... 15,975 (d) 43,274 (d) 51,951 (d) 80,379 57,721 46,629 38,578
Deemed dividend on preferred
stock....................... (2,712)(e) -- -- -- -- -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income available to common
stockholders................ $ 13,263 (d)(e) $ 43,274 (d) $ 51,951 (d) $ 80,379 $ 57,721 $ 46,629 $ 38,578
-------- -------- ---------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ---------- ----------
EARNINGS PER SHARE DATA:
Basic:
Income from continuing
operations available to
common stockholders........ $ 0.26 $ 0.62 $ 0.63 $ 0.90 $ 0.63 $ 0.51 $ 0.42
Loss from discontinued
operations................. (0.02)(d) -- (d) (0.02)(d) -- -- -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income available to
common stockholders........ $ 0.24 (d)(e) $ 0.62 (d) $ 0.61 (d) $ 0.90 $ 0.63 $ 0.51 $ 0.42
-------- -------- ---------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ---------- ----------
Diluted:
Income from continuing
operations available to
common stockholders........ $ 0.26 $ 0.57 $ 0.62 $ 0.90 $ 0.63 $ 0.51 $ 0.42
Loss from discontinued
operations................. (0.02)(d) -- (d) (0.02)(d) -- -- -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income available to
common stockholders........ $ 0.24 (d)(e) $ 0.57 (d) $ 0.60 (d) $ 0.90 $ 0.63 $ 0.51 $ 0.42
-------- -------- ---------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ---------- ----------
Dividends per share......... $ 0.05 $ 0.06 $ 0.07 $ 0.08 $ 0.09 $ 0.0675 $ 0.0675
-------- -------- ---------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding:
Basic......................... 56,216 69,884 85,692 89,081 90,999 90,900 91,972
-------- -------- ---------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ---------- ----------
Diluted....................... 69,406 81,089 86,710 89,786 91,238 91,175 91,972
-------- -------- ---------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ---------- ----------
RATIOS AND OTHER FINANCIAL DATA
(UNAUDITED):
EBITDA (adjusted) (f)......... $ 56,145 $ 85,537 $ 140,516 $ 222,825 $ 241,008 $ 186,406 $ 171,607
Ratio of EBITDA (adjusted) to
interest (f)................ 19.9x (11.0)x 168.1x 11.0x 5.4x 5.7x 4.3x
Ratio of earnings to fixed
charges (g)................. 8.0x (16.9)x 19.0x 6.5x 3.3x 3.7x 2.7x
Ratio of total debt to EBITDA
(adjusted) (f).............. 1.6x 0.1x 2.7x 2.9x 3.4x 3.3x(k) 3.5x(k)
Total debt to total
capitalization.............. 27.7% 1.5% 31.0% 40.4% 44.2% 44.7% 42.8%
Capital expenditures (h)...... $ 15,860 $ 30,234 $ 41,278 $ 53,179 $ 58,749 $ 48,369 $ 24,772
AUDITED UNAUDITED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: (a)(b)
Cash and cash equivalents. $ 48,251 $232,961 $ 138,062 $ 54,312 $ 97,267 $ 93,632 $ 129,485
Working capital........... 112,091 342,401 354,825 369,749 430,102 408,837 471,716
Total assets.............. 405,312 828,309 1,412,146 1,903,829 2,167,973 2,164,239 2,196,310
Long-term debt (excluding
current portion) (i).... 85,046 5,755 359,148 651,556 736,944 736,976 735,628
Stockholders' equity (j).. 228,853 689,219 829,753 963,471 1,028,380 1,019,262 1,059,148
17
- ---------
(a) The consolidated financial statements have been restated for the 1995 to
1997 periods to include the results of operations of CompScript and IBAH,
acquired in June 1998 pooling-of-interests transactions.
(b) We have had an active acquisition program in effect since 1989. See Note 2
of the notes to our 1999 consolidated financial statements for information
concerning these acquisitions.
(c) Included in 1995, 1996 and 1997 income from continuing operations amounts,
and the 1998, 1999 and 2000 net income amounts are the following aftertax
charges (credits) (in thousands):
UNAUDITED
AUDITED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------- ------- ------- ------- ------
Acquisition expenses,
pooling-of-interests....................... $ 989 $1,468 $ 3,935(1) $13,869(1) $ (376)(1) $ (376) $ --
Restructuring and other related charges..... -- -- 1,208(2) 2,689(2) 22,698 (2) 18,580 9,255
Other expenses.............................. -- 510(4) 6,457(3) -- -- -- --
Goodwill impairment charge -- CompScript.... 3,862 -- -- -- -- -- --
------ ------ ------- ------- ------- ------- ------
Total....................................... $4,851 $1,978 $11,600 $16,558 $22,322 $18,204 $9,255
------ ------ ------- ------- ------- ------- ------
------ ------ ------- ------- ------- ------- ------
- ---------
(1) See Note 2 of the notes to our 1999 consolidated financial statements.
(2) See Note 12 of the notes to our 1999 consolidated financial statements.
(3) See Note 13 of the notes to our 1999 consolidated financial statements.
(4) Represents the write-off (based on an independent appraisal) of acquired
research and development costs associated with IBAH's acquisition of
Research Biometrics, Inc.
(d) Represents the divestiture of the Drug Delivery Services Division of IBAH in
1995 and the closure of the software commercialization unit of Research
Biometrics, Inc., a subsidiary of IBAH, in 1996 and 1997. All operating
results of these businesses have been reclassified from continuing
operations to discontinued operations.
(e) On August 11, 1995, IBAH completed a private equity placement of
approximately 1,000 shares of convertible preferred stock, par value $.01
per share, at a purchase price of $7.003125 per share, for a total of
$6,935, net of transaction costs. Each share of convertible preferred stock
was convertible into three shares of common stock. All of the preferred
stock was converted to common stock before or in conjunction with our 1998
acquisition of IBAH. Since the convertible shares of preferred stock were
immediately convertible into common stock, the most beneficial conversion
discount was recorded analogous to a deemed dividend in the 1995 statement
of income.
(f) EBITDA represents earnings before interest, income taxes and depreciation
and amortization, excluding special items. Special items include
pooling-of-interests expenses, restructuring and other related charges,
other expenses, and losses from discontinued operations, and represent
charges or expenses which management believes are either one-time
occurrences or otherwise not related to ongoing operations. We believe that
certain investors find EBITDA to be a useful tool for measuring a company's
ability to service its debt; however, EBITDA does not represent cash flow
from operations, as defined by generally accepted accounting principles, and
should not be considered as a substitute for net earnings as an indicator of
our operating performance or cash flow as a measure of liquidity. We also
believe that the ratio of EBITDA to interest is an accepted measure of debt
service ability; however, such ratio should not be considered a substitute
for the ratio of earnings to fixed charges as a measure of debt service
ability. Our calculation of EBITDA may differ from the calculation of EBITDA
by others.
(g) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest
(expensed or capitalized), amortization of debt issuance costs and the
estimated interest component of rent expense. Giving effect to the note
offering and the proposed refinancing of our existing credit facilities and
application of the net proceeds from the note offering and borrowings
(footnotes continued on next page)
18
(footnotes continued from previous page)
under our proposed new credit facility to repay indebtedness as described
under 'Use of Proceeds from the Note Offering,' as if these transactions
occurred on the first day of the relevant period, our pro forma ratios of
earnings to fixed charges for the year ended December 31, 1999 and the nine
months ended September 30, 2000 would have been 2.9x and 2.4x, respectively.
If we complete the note offering but do not refinance our existing credit
facilities and do not enter into the new credit facility, these pro forma
ratios would be 2.9x and 2.5x for the year ended December 31, 1999 and the
nine months ended September 30, 2000, respectively.
(h) Primarily represents the purchase of computer hardware/software, machinery
and equipment, and furniture, fixtures and leasehold improvements.
(i) In 1997, we issued $345,000 of Convertible Notes (See Note 6 of the notes to
our 1999 consolidated financial statements).
(j) In 1996, we and IBAH sold 6,241 (pre-1996 Omnicare stock split) shares of
common stock in public offerings, resulting in net proceeds of $297,171.
(k) The adjusted EBITDA amounts used in this calculation are for the twelve
month periods ended September 30, 1999 and 2000.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, related notes and other financial information appearing elsewhere in
this filing. In addition, see 'Forward-Looking Information' and 'Risk Factors.'
On February 12, 2001, we announced our financial results for the year ended
December 31, 2000. See 'Company Summary -- Recent Developments' and Annex A to
this filing.
RESULTS OF OPERATIONS
The following table presents our sales and results of operations
information, excluding certain special items such as pooling-of-interests
expenses, restructuring and other related charges, other expenses and losses
from discontinued operations. Special items represent charges or expenses which
management believes are either one-time occurrences or otherwise not related to
ongoing operations. Such items are described further below and in the notes to
our consolidated financial statements. Such items have been shown separately in
order to facilitate analysis of our operating trends.
FOR THE YEARS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ----------- -----------
(In thousands, except per share data)
Sales.............................. $1,034,384 $1,517,370 $1,861,921 $1,374,340 $1,464,798
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income, as reported............ $ 51,951 $ 80,379 $ 57,721 $ 46,629 $ 38,578
Acquisition expenses, pooling-of-
interests (net of taxes)......... 3,935 13,869 (376) (376) --
Restructuring and other related
charges (net of taxes)........... 1,208 2,689 22,698 18,580 9,255
Other expenses (net of taxes)...... 6,457 -- -- -- --
Loss from discontinued operations
(net of taxes)................... 2,154 -- -- -- --
---------- ---------- ---------- ---------- ----------
Pro forma net income............... $ 65,705 $ 96,937 $ 80,043 $ 64,833 $ 47,833
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings per share:
Net income, as reported........ $ .61 $ .90 $ .63 $ .51 $ .42
Acquisition expenses,
pooling-of-interests (net of
taxes)....................... .05 .16 -- -- --
Restructuring and other related
charges (net of taxes)....... .01 .03 .25 .20 .10
Other expenses (net of
taxes)....................... .08 -- -- -- --
Loss from discontinued
operations (net of taxes).... .02 -- -- -- --
---------- ---------- ---------- ---------- ----------
Basic (pro forma).............. $ .77 $ 1.09 $ .88 $ .71 $ .52
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted (pro forma)............ $ .76 $ 1.08 $ .88 $ .71 $ .52
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 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 our 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
20
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.
Our 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 our 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 the federal
government's PPS for Medicare residents of SNFs, which had the overall impact of
reducing earnings on a year-over-year basis. Because of the substantial
reduction in reimbursement for SNFs brought about by PPS, we experienced
PPS-related pricing pressure from our SNF customers in 1999. Moreover,
admissions of Medicare residents, particularly those requiring complex care,
declined in many SNFs due to concerns relating to the adequacy of reimbursement
under PPS. This caused a 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 we
serve. Additionally, the mix of residents in SNFs adversely affected our results
as some facilities attempted to avoid high acuity patients, which impacts
overall utilization of drugs. Reimbursement concerns have driven many SNFs 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 BBRA, which provides a
temporary increase in reimbursement rates, particularly for higher acuity
residents, effective April 1, 2000. However, many of our customers reported that
payments at these new rates had not been received during the second quarter,
exacerbating already severe cash flow problems in some facilities. It was
therefore necessary for us 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.
Our 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.
Our 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 our purchasing
leverage associated with purchases of pharmaceuticals, leveraging fixed and
variable overhead costs at our pharmacies and benefits realized from our
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.
Our 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 our
overall growth. Operating expenses as a
21
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 our 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 our productivity and consolidation program.
In connection with the previously announced productivity and consolidation
program, we 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.
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 our 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 our line of credit borrowings in 1999 were primarily attributable
to our 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Excluding the impact of acquisition-related expenses for
pooling-of-interests transactions and restructuring and other related charges
from both periods, net income for the year ended December 31, 1999 decreased 17%
in comparison to net income earned in 1998. Basic and diluted earnings per share
in 1999, on this basis, decreased 19% in comparison to 1998. Net income, and
basic and diluted earnings per share, in 1999 declined 28% and 30%,
respectively, in comparison to 1998.
The reduction in earnings primarily reflects the difficult operating
environment in the long-term care industry. The implementation of the PPS for
Medicare residents of SNFs, as further discussed below under the caption
' -- Outlook,' created an unsettled operating environment during 1999. We
experienced PPS-related pricing pressure and demands for per diem or capitated
pricing from SNF customers late in 1998 and to a greater extent in 1999. Much of
this pricing pressure was offset by the addition of new business, the benefits
of increased compliance with our proprietary geriatric formulary, the Omnicare
Guidelines'r', and reduced operating costs. However, admissions of Medicare
residents, particularly those requiring complex care, declined in many SNFs due
to concerns relating to the adequacy of reimbursement under PPS. This caused a
weak Medicare census in many areas. Moreover, for many SNFs, the average length
of stay for Medicare residents decreased. These factors contributed to
significantly reducing overall occupancy in the facilities we serve.
Additionally, the mix of residents in SNFs adversely affected our results as
some facilities attempted to avoid high acuity patients, which impacted overall
utilization of drugs. Reimbursement concerns also increasingly drove many SNFs
to admit residents funded by payors other than Medicare. These trends continued
throughout 1999 and had an unfavorable impact on sales, profit margins and net
income. We did, however, see some stabilization of these trends during the
latter part of 1999.
Despite the difficult operating environment, sales increased 23% in 1999
versus 1998. The sales increase represents the cumulative effect of the
acquisition of long-term care pharmacy providers and the
22
continued internal growth of the pharmacy services and CRO businesses. During
1999, we completed five institutional pharmacy acquisitions (excluding
insignificant purchases of other assets). Also increasing sales was the
full-year impact of 1998 acquisitions. We also increased our revenues internally
through the efforts of our National Sales and Marketing Group and pharmacy staff
in developing new pharmacy contracts with long-term care facilities.
Additionally, we were able to increase internal growth through the efforts of
our CRO sales personnel by obtaining contracts from pharmaceutical,
biotechnology and medical device manufacturers for new contract research
business.
Our consolidated sales increased by $345 million in 1999 versus 1998. We
estimate that approximately $200 million of our consolidated revenue growth in
1999 was attributable to acquisitions, of which $193 million and $7 million
related to the Pharmacy Services segment and CRO Services segment, respectively.
On June 2, 1999, we announced the completion of the acquisition of the
institutional pharmacy operations of Life Care Pharmacy Services, Inc. ('Life
Care'), an affiliate of Life Care Centers of America, for $63 million in cash
and 300,000 warrants to purchase our common stock at $29.70 per share. The
warrants have a seven-year term and are first exercisable in June 2002. Life
Care had, at the time of the acquisition, contracts to provide dispensing
services to approximately 17,000 residents in 12 states.
We estimate that internal growth contributed approximately $145 million of
our increased revenue in 1999 compared to 1998, of which $141 million and $4
million related to the Pharmacy Services segment and the CRO Services segment,
respectively. Revenues increased internally primarily through new contracts with
long-term care facilities obtained by the National Sales and Marketing Group and
by the pharmacy staff, and for the CRO segment through the efforts of our sales
personnel by obtaining contracts from pharmaceutical, biotechnology and medical
device manufacturers for new contract research business. Additionally, when
pharmaceutical prices are increased, we generally are able to obtain price
increases to cover such drug price inflation; therefore, such inflation
increases revenues. We estimate that drug price inflation for our highest dollar
volume products in 1999 was approximately 4% to 5%, and this trend is continuing
in 2000. We are not able to isolate and separately quantify accurately the
increased volumes associated with each of these factors. The factors favorably
impacting revenues were offset in part by a decrease of approximately $11
million in infusion therapy revenue during the year, resulting primarily from
the aforementioned reduction in pricing, utilization and servicing of higher
acuity patients as a result of PPS.
Acquisitions and internal growth brought the total number of nursing
facility residents served at December 31, 1999 to 631,200.
Gross profit as a percentage of sales decreased to 28.1% in 1999 from 30.2%
in 1998. Numerous factors positively impacted gross profit, including our
purchasing leverage associated with purchases of pharmaceuticals, the leveraging
of fixed and variable overhead costs at our pharmacies, benefits realized from
our formulary compliance program, cost reductions associated with the
productivity and consolidation initiative, and changes in sales mix including
increased sales from contract research. These favorable factors were more than
offset by the aforementioned unfavorable impact of PPS on the Pharmacy Services
segment, in particular such factors as PPS-related pricing pressure, a reduction
in Medicare census at some SNFs, a decline in the average length of stay for
Medicare residents and a shift in the mix of patients served to lower acuity
patients, all of which contributed to reduced gross profit margin for us in
1999. In addition to the initiation of productivity and consolidation programs
in 1999 in part to lower operating costs, we are also renegotiating or
eliminating uneconomic customer accounts in an effort to further offset the
unfavorable impacts of PPS.
Sales mix for us includes primarily sales of pharmaceuticals and, to a
lesser extent, contract research services, infusion therapy products and
services, and medical supplies and other. Sales of pharmaceuticals account for
the majority of our sales and gross profit.
Contract research services, infusion therapy and medical supplies gross
profits are typically higher than gross profits associated with sales of
pharmaceuticals.
23
Increased leverage in purchasing favorably impacts gross profit and is
primarily derived through discounts from suppliers. Leveraging of fixed and
variable overhead costs primarily relates to generating higher sales volumes
from pharmacy facilities with no increase in fixed costs (e.g., rent) and
minimal increases in variable costs (e.g., utilities). We believe we will be
able to continue to leverage fixed and variable overhead costs through internal
growth.
As noted earlier herein, we are generally able to obtain price increases to
cover drug price inflation. In order to enhance our gross margins, we
strategically allocate our resources to those activities that will increase
internal sales growth and favorably impact sales mix or will lower costs. In
addition, through the ongoing development of our pharmaceutical purchasing
programs, we were able to obtain discounts and thereby manage our pharmaceutical
costs.
Selling, general and administrative ('operating') expenses for the year
ended December 31, 1999 increased 24% to $351,639,000 as compared to 1998 due
primarily to our overall growth. Operating expenses as a percentage of sales of
18.9% in 1999 were modestly higher than the 18.7% experienced in the prior year.
Unfavorably impacting the year-to-year comparison was an increase in our
provision for doubtful accounts brought about by a deterioration in the
financial condition of certain SNF clients as a result, in part, of the impact
of PPS on their business, causing an increase of 0.4 percentage points of sales.
Acquisition expenses for 1999 of $822,000 represent expenses related to a
pooling-of-interests transaction. Furthermore, during 1999, we recorded income
of $877,000 relating to the net reversal of estimated CompScript and IBAH
acquisition-related expenses resulting from the finalization of those costs
during the year. Acquisition expenses for 1998 of $15,441,000 represent expenses
primarily related to our pooling-of-interests transactions with IBAH and
CompScript.
On June 29, 1999, we announced our 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 our acquisition program and to respond to changes in the healthcare
industry. The program is designed to eliminate redundant efforts and simplify
work processes to maximize employee productivity and standardize operations
around best practices. This will be achieved by reconfiguring the roster of
pharmacies and other operating locations through consolidation/relocation of
approximately 44 facilities, the closing of approximately 20 sites and the
creation of nine new sites. The plan is designed to result in the reduction of
our 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, we recorded restructuring and other related
expenses of $35,394,000 in 1999, primarily comprised of employee severance,
employment agreement buy-out costs, lease termination costs, other assets and
facility exit costs, and other related charges. Restructuring and other related
charges of $3,627,000 for 1998 represent costs related to the restructuring of
the CompScript mail order business and the consolidation and restructuring of
certain IBAH operations.
Investment income for 1999 was $1,532,000, a decrease of $1,824,000 in
comparison with 1998 resulting from a lower average invested cash balance during
1999. The use of cash is primarily attributable to our acquisition program and,
to a lesser extent, capital expenditures.
Interest expense during 1999 was $46,166,000, an increase of $22,555,000
versus the prior year largely reflecting the impact of increased net borrowings
of $85 million and $75 million in 1999 under our five-year, $400 million and
364-day, $300 million line of credit facilities, respectively. These increased
borrowings were utilized primarily to fund our acquisition program. Also
impacting the comparison is the full-year effect in 1999 of interest expense
associated with a $250 million draw on our five-year, $400 million line of
credit facility late in the third quarter of 1998 in connection with our
acquisition of the pharmacy business of Extendicare, Inc.
The effective tax rate decreased to 37.0% in 1999 from 40.8% in 1998,
primarily due to a reduction from 1998 in nondeductible acquisition expenses
relating to pooling-of-interests transactions and a decrease in state and local
income taxes in 1999 due to our state tax planning programs. We expect the
benefit realized from the state tax planning programs to continue. The effective
tax rates in 1999 and 1998 are
24
higher than the statutory rate primarily due to state and local income taxes and
various nondeductible expenses (e.g., acquisition costs, etc.).
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Excluding the impact of acquisition-related expenses for
pooling-of-interests transactions, restructuring and other related charges,
other expenses and losses from discontinued operations from both periods, net
income for the year ended December 31, 1998 increased 48% over net income earned
in 1997. Basic and diluted earnings per share, on this basis, for 1998 increased
42% over 1997. Net income in 1998 increased in comparison to 1997 by 55%.
Additionally, basic and diluted earnings per share grew by 48% and 50%,
respectively, during 1998 in comparison to 1997.
Sales increased 47% in 1998 versus 1997. The sales increase is primarily the
result of completing 12 institutional pharmacy acquisitions (excluding
insignificant purchases of other assets) and the acquisition of one data
management business and two CROs in 1998. Additionally, internal growth and the
efforts of the National Sales and Marketing Group and pharmacy staff added to
the increase in sales. Also increasing sales was the inclusion for the entire
year of 1997 acquisitions.
Our total sales increased by $483 million in 1998 versus 1997. We estimate
that approximately $278 million of our consolidated revenue growth in 1998 was
attributable to acquisitions, of which $268 million and $10 million related to
the Pharmacy Services segment and CRO Services segment, respectively. We
estimate that internal growth contributed approximately $205 million of our
increased revenue in 1998 compared to 1997, of which $180 million and $25
million related to the Pharmacy Services segment and the CRO Services segment,
respectively. Our revenue attributable to infusion therapy grew by approximately
$57 million in 1998 compared to 1997. The remainder of our increased revenues in
1998 compared to 1997 attributable to internal growth reflects interrelated
factors associated with sales mix, pricing and volume, acuity levels of
residents and efforts of our National Sales and Marketing Group and pharmacy
staff in developing new pharmacy contracts.
On September 17, 1998, we announced the completion of the acquisition of the
institutional pharmacy operations of Extendicare, Inc., operating under the name
of United Professional Companies, Inc. ('UPC'). The acquisition of the UPC
pharmacy business provided us with contracts to provide pharmacy services to
approximately 55,000 residents of long-term care facilities in 12 states and
annualized revenues of approximately $166 million. The acquisition also offers
us the opportunity to provide pharmacy services to 9,300 additional residents of
long-term care facilities in Canada and the United Kingdom. The purchase price
consisted of $250 million in cash, 125,000 shares of our common stock and
warrants to purchase up to 1.5 million shares of our common stock at $48.00 per
share.
Acquisitions and internal growth brought the total number of nursing
facility residents served at December 31, 1998 to 578,700.
Gross margin increased to 30.2% in 1998 from 29.8% in 1997. Our purchasing
leverage associated with purchases of pharmaceuticals, leveraging fixed and
variable overhead costs at our pharmacies, changes in sales mix including
increased sales from infusion therapy and contract research organizations
positively impacted gross margins. However, this was partially offset by the
lower margins of the significant number of companies we acquired in 1998.
Acquired companies generally have lower margins due to lesser purchasing
leverage prior to their acquisition by us, as well as a smaller sales base over
which to leverage fixed and variable overhead costs.
Acquisition expenses for 1998 of $15,441,000 represent expenses primarily
related to our pooling-of-interests transactions with IBAH and CompScript.
Acquisition expenses for 1997 relate to pooling transactions completed by us,
CompScript and IBAH during 1997.
Restructuring and other related charges of $3,627,000 for 1998 represent
severance and exit costs related to the restructuring of the CompScript mail
order pharmacy business and the consolidation and restructuring of certain IBAH
operations. Restructuring and other related charges included in 1997 represents
a charge taken by IBAH for $1,208,000 related primarily to the restructuring of
the International CRO business.
25
Other expenses in 1997 included $6,313,000 for the estimated costs, and
legal and other expenses, associated with resolving an investigation of our
Belleville, Illinois subsidiary, Home Pharmacy, as well as the $800,000
write-down of a note receivable by CompScript.
Investment income decreased by 41%, or $2,364,000, to $3,356,000 in 1998
compared to 1997 resulting from reduced levels of average invested cash due to
the use of cash in our acquisition program.
Interest expense increased to $23,611,000 in 1998 from $6,556,000 in 1997
due to borrowings of $305,000,000 from our five-year, $400 million revolving
line of credit to finance acquisitions during the latter part of 1998, and our
$345,000,000 of Convertible Notes issued in December 1997.
The effective tax rate decreased to 40.8% in 1998 from 43.6% in 1997,
primarily due to a decrease in state and local income taxes in 1998 attributable
to state tax planning programs. The effective tax rates in 1998 and 1997 are
higher than the statutory rate primarily due to state and local income taxes and
various nondeductible expenses (e.g., acquisition costs, nonrecurring charges
and foreign losses not benefited).
Discontinued operations for 1997 reflect IBAH's closure of the software
commercialization unit of Research Biometrics, Inc. in June 1997. Accordingly,
all operating results of this unit were reclassified from continuing operations
to discontinued operations. This unit recorded a net loss of $607,000 in 1997.
In addition, a loss on the disposal of this unit of $1,547,000 was reflected in
the 1997 consolidated statement of income.
IMPACT OF INFLATION
Inflation has not materially affected our profitability as price increases
have generally been obtained to cover inflationary drug cost increases.
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 and $54.3
million at December 31, 1998. We generated positive net cash flows from
operating activities of approximately $118.1 million during the nine months
ended September 30, 2000 (as compared to net cash flows from operating
activities of $101.1 million and $89.5 million during the years ended
December 31, 1999 and December 31, 1998, respectively), which were used
primarily for acquisition-related payments (including amounts payable pursuant
to acquisition agreements relating to prior-year acquisitions), capital
expenditures, debt repayment and dividends. Improved management of working
capital contributed to the favorable operating cash flow results experienced
throughout these reporting periods.
Acquisitions of businesses required cash payments of $32.0 million
(including amounts payable pursuant to acquisition agreements relating to
pre-2000 acquisitions) during the nine months ended September 30, 2000, which
were primarily funded by operating cash flows. Acquisitions of businesses during
1999 and 1998 required $144.1 million and $398.7 million, respectively, of cash
payments (including amounts payable pursuant to acquisition agreements relating
to pre-1999 and pre-1998 acquisitions, respectively) which were primarily funded
by borrowings under our revolving credit facilities. Acquisitions in 1999 and
1998 were also funded, in part, with shares of our common stock having a market
value of approximately $11 million (0.5 million shares) and $262 million (7.2
million shares), respectively. As of September 30, 2000, additional amounts
totaling $18.1 million may become payable in the future pursuant to the terms of
various acquisition agreements.
In December 1997, we issued $345 million principal amount of our Convertible
Notes. The Convertible Notes mature on December 1, 2007 and bear interest at a
rate of 5% per annum. The Convertible Notes are convertible into common stock at
any time through maturity, unless previously redeemed, at the option of the
holder at a price of $39.60 per share.
In October 1996, we entered into a five-year agreement with a consortium of
16 banks for a $400 million revolving credit facility available through October
2001. The total amount outstanding under this
26
facility as of September 30, 2000 was $390 million, the same amount as of
December 31, 1999 ($305 million was outstanding under this facility at December
31, 1998). Interest rates and commitment fees for the five-year, $400 million
line of credit facility are based on our level of performance under certain
financial ratios, debt covenants and the amount of borrowings under this
facility. In 1998, we 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, we
renewed this 364-day, revolving line of credit facility until 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, $20 million less than the amount
outstanding as of December 31, 1999 (no amounts were outstanding under the
original 364-day facility at December 31, 1998). Interest rates and commitment
fees under the 364-day, $300 million line of credit facility are based on our
debt ratings. We are in the process of replacing our existing bank credit
facilities. We have received a commitment for a new $495 million credit facility
to replace these existing credit facilities. While we anticipate that our new
credit facility will close concurrently with the closing of the note offering,
we cannot guarantee that this will occur. In addition, we cannot assure that the
new credit facility, if entered into, will not contain terms less favorable to
us than those currently contemplated by us. If we are unable to close the new
credit facility, we intend to use the net proceeds from the note offering (if
completed) to repay a portion of the amounts currently outstanding under our
existing credit facilities and the existing credit facilities would remain in
place until such time as we refinance them (and we could continue to borrow
under those facilities in accordance with their terms, subject to compliance
with the indenture). Our existing credit facilities have final maturity dates of
August 31, 2001 and October 22, 2001, respectively. If we complete the note
offering but do not enter into the new credit facility concurrently with the
closing of the note offering, we will need to obtain the consent of the lenders
under our existing credit facilities to complete the note offering. See
'Description of Certain Indebtedness -- Refinancing of Existing Credit
Facilities.'
Our capital requirements are primarily related to our acquisition program
and, to a lesser extent, capital expenditures, including those related to
investments in our information technology systems. There are no material
commitments and contingencies outstanding at September 30, 2000, other than
estimated future acquisition-related payments to be made in accordance with
purchase agreements (primarily earnout payments).
Our current ratio at September 30, 2000 was 2.5 to 1.0. By comparison, our
ratios at December 31, 1999 and December 31, 1998 were 2.3 to 1.0 and 2.6 to 1.0
respectively. The increase in the current ratio during the nine months ended
September 30, 2000 is primarily attributable to an increase in working capital
combined with a $20 million reduction in current bank debt. The decrease in the
current ratio from December 31, 1998 to December 31, 1999 is primarily
attributable to an increase in current liabilities relating to the
classification of $75 million outstanding under the 364-day, $400 million line
of credit as current at December 31, 1999, as well as the existence of a
restructuring reserve of approximately $18 million at December 31, 1999 recorded
in connection with our previously discussed productivity and consolidation
initiative.
Dividends of $6.2 million were paid during the nine months ended
September 30, 2000, as compared to $8.2 million and $6.8 million paid during the
years ended December 31, 1999 and 1998, respectively.
We believe our sources of liquidity and capital, including the proceeds from
the note offering (if completed), are adequate for our ongoing operating needs.
However, we may in the future incur additional indebtedness or issue additional
equity. We believe external sources of financing are readily available to us.
OUTLOOK
We derive approximately one-half of our revenues directly from government
sources, principally Medicaid and to a lesser extent Medicare, and one-half from
the private sector (including individual residents, third-party insurers and
SNFs). In recent years, Congress passed several laws that made major changes in
the health care system, both nationally and at the state level. These include
the BBA, which sought to achieve a balanced federal budget by, among other
things, reducing federal spending on the
27
Medicare and Medicaid programs. The BBA made substantial changes to the
reimbursement policies applicable to various health care providers, including
the new PPS for Medicare-funded residents of SNFs. Prior to PPS, SNFs under
Medicare received cost-based reimbursement. Under PPS, Medicare pays SNFs a
fixed fee per patient per day based upon the acuity level of the resident. This
per diem payment covers substantially all items and services furnished during a
Medicare-covered stay, including ancillary services such as pharmacy.
Accordingly, under PPS, SNFs have greater incentive to manage the utilization of
services effectively and to operate more efficiently.
The impact of the implementation of PPS, which significantly reduced
reimbursement to many SNFs, has been evidenced by an erosion of census for some
facilities, lower acuity levels of residents in some nursing homes, lower
pricing and an unfavorable payor mix for us. While we expect that the impact of
PPS on the long-term care industry will continue to affect us and our clients in
2001, it appears that the unfavorable operating trends attributable to PPS have
begun to stabilize.
Moreover, Congress enacted recent legislation designed to mitigate the
effects of payment cuts in the BBA, including PPS. The BBRA temporarily
increases the PPS per diem rates by 20%, effective April 1, 2000, for 15 patient
acuity categories, including medically complex patients with generally higher
pharmacy costs, pending revisions to the PPS. The increases will continue until
HCFA implements a refined PPS that better accounts for medically complex
patients. The revised rates may be more or less than the temporary 20% increase
under the BBRA. The BBRA also provides for a 4% increase in payments otherwise
determined under the BBA for all patient acuity categories for fiscal years 2001
and 2002 (in addition to the 20% increase in the 15 high acuity categories).
BIPA also eliminates scheduled reductions in payment levels to SNFs for fiscal
year 2001, and allows increases of the market-basket index minus 0.5 percentage
point in fiscal years 2002 and 2003. Also, there will be a 16.66% increase for
the nursing component of the rate for all patients for services furnished from
April 1, 2001 until October 1, 2002, along with a 6.7% rate increase for certain
high acuity rehabilitation categories effective April 1, 2001. We believe these
changes should help to improve the liquidity and financial condition of our
clients as well as provide incentives to increase Medicare admissions,
particularly among the more acutely ill, which we believe should improve the
operating environment in long-term care for our clients and for us.
Demographic trends indicate that the demand for long-term care will increase
well into the middle of this century as the elderly population grows
significantly. Moreover, those over 65 consume a disproportionately high level
of health care services when compared with the under 65 population. There is
widespread consensus that appropriate pharmaceutical care is generally
considered the most cost-effective form of treatment for the chronic ailments
afflicting the elderly and also one which is able to improve the quality of
life. Further, the pace and quality of new drug development is yielding many
promising new drugs targeted at the diseases of the elderly. These new drugs may
be more expensive than older, less effective drug therapies due to rising
research costs. However, they are significantly more effective in curing or
ameliorating illness and in lowering overall health care costs by reducing among
other things, hospitalizations, physician visits, nursing time and lab tests.
These trends not only support long-term growth for the geriatric pharmaceutical
industry but also containment of health care costs and the well being of the
nation's growing elderly population.
In order to fund this growing demand, we anticipate that the government and
the private sector will continue to review, assess and possibly alter health
care delivery systems and payment methodologies. While it is not possible to
predict the effect of any further initiatives on our business, we believe that
our expertise in geriatric pharmaceutical care and pharmaceutical cost
management position us to help meet the challenges of today's health care
environment. Further, the rate of new drug discovery continues to accelerate and
pharmaceutical manufacturers, in order to keep pace, will continue to turn to
contract research organizations to assist them in accelerating drug research
development and commercialization, providing a foundation for growth in our CRO
business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any financial instruments held for trading purposes and do
not hedge any of our market risks with derivative instruments.
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Our primary market risk exposure relates to interest rate risk exposure
through our borrowings. Our debt obligations at September 30, 2000 include $390
million outstanding under our $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 on that outstanding amount
would impact interest expense by approximately $1.0 million per quarter), $55
million outstanding under our 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 on that outstanding amount
would impact interest expense by approximately $0.1 million per quarter) and
$345 million outstanding under the Convertible Notes, which accrue interest at a
fixed rate of 5%. The fair value of our line of credit facilities approximates
their carrying value, and the fair value of the Convertible Notes is
approximately $259 million at September 30, 2000 (approximately $294 million at
February 15, 2001).
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BUSINESS
BACKGROUND
We are a leading provider of pharmacy services to long-term care
institutions such as SNFs, ALFs and other institutional health care facilities.
We also provide comprehensive clinical research for the pharmaceutical and
biotechnology industries.
We operate in two business segments. The largest segment, Pharmacy Services,
provides distribution of pharmaceuticals, related pharmacy consulting, data
management services and medical supplies to long-term care facilities. Pharmacy
Services purchases, repackages and dispenses pharmaceuticals, both prescription
and non-prescription, and provides computerized medical record-keeping and
third-party billing for residents in such facilities. We also provide consultant
pharmacist services, including evaluating residents' drug therapy, monitoring
the control, distribution and administration of drugs within the nursing
facility and assisting in compliance with state and federal regulations. In
addition, we provide ancillary services, such as infusion therapy and dialysis,
distribute medical supplies and offer clinical and financial software
information systems to our client long-term care facilities. At December 31,
2000, we provided these services to approximately 636,500 residents in
approximately 8,400 long-term care facilities in 43 states. The Pharmacy
Services segment provides no services outside of the United States. Our other
business segment is CRO Services. CRO Services is a leading international
provider of comprehensive product development and research services to client
companies in the pharmaceutical, biotechnology, medical device and diagnostics
industries, operating in 23 countries around the world. Financial information
regarding our business segments is presented at note 15 (segment information) of
the notes to our 1999 consolidated financial statements.
PHARMACY SERVICES
We purchase, repackage and dispense prescription and non-prescription
medication in accordance with physician orders and deliver such prescriptions to
the nursing facility for administration to individual residents by the
facility's nursing staff. We typically service nursing homes within a 150-mile
radius of our pharmacy locations. We maintain a 24-hour, seven-day per week,
on-call pharmacist service for emergency dispensing and delivery or for
consultation with the facility's staff or the resident's attending physician.
Upon receipt of a prescription, the relevant resident information is entered
into our computerized dispensing and billing systems. At that time, the
dispensing system checks the prescription for any potentially adverse drug
interactions or resident 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 resident. We also provide therapeutic
interchange, with physician approval, in accordance with our pharmaceutical care
guidelines. See 'The Omnicare Guidelines'r' below for further discussion.
We provide a 'unit dose' distribution system. Most of our 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. We believe the
unit dose system, preferred over the bulk delivery systems employed by retail
pharmacies, improves control over drugs in the nursing facility and improves
resident compliance with drug therapy by increasing the accuracy and timeliness
of drug administration.
Integral to our drug distribution system is our computerized medical records
and documentation system. We provide to the facility computerized medication
administration records and physician's order sheets and treatment records for
each resident. Data extracted from these computerized records is also formulated
into monthly management reports on resident care and quality assurance. We
believe the computerized documentation system, in combination with the unit 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. We believe these benefits improve drug efficacy
and result in fewer drug-related hospitalizations.
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CONSULTANT PHARMACIST SERVICES
Federal and state regulations mandate that long-term care facilities, in
addition to providing a source of pharmaceuticals, retain consultant pharmacist
services to monitor and report on prescription drug therapy in order to maintain
and improve the quality of resident care. The Omnibus Budget Reconciliation Act
('OBRA') implemented in 1990 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. We provide consultant pharmacist services which help clients comply
with the federal and state regulations applicable to nursing homes. The services
offered by our consultant pharmacists include:
comprehensive, monthly drug regimen reviews for each resident in the
facility to assess the appropriateness and efficacy of drug therapies,
including a review of the resident's medical records, monitoring drug
reactions to other drugs or food, monitoring lab results and recommending
alternate therapies or discontinuing unnecessary drugs;
participation on the pharmacy and therapeutics, quality assurance and other
committees of client facilities as well as periodic involvement in staff
meetings;
monitoring and monthly reporting on facility-wide drug usage;
development and maintenance of pharmaceutical policy and procedures
manuals; and
assistance to the nursing facility in complying with state and federal
regulations as they pertain to patient care.
We have also developed a proprietary software system for the use of our
consultant pharmacists. The system, called OSC2OR'r' (Omnicare System of
Clinical and Cost Outcomes Retrieval), enables our pharmacists not only to
perform their above described functions efficiently but also provides the
platform for consistent data retrieval for outcomes research and management.
Additionally, we offer a specialized line of consulting services which help
long-term care facilities to enhance care and reduce and contain costs as well
as to comply with state and federal regulations. Under this service line, we
provide:
data required for OBRA and other regulatory purposes, including reports on
psychotropic drug usage (chemical restraints), antibiotic usage (infection
control) and other drug usage;
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;
counseling related to appropriate drug usage and implementation of drug
protocols;
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;
mock regulatory reviews for nursing staffs; and
nurse consultant services and consulting for dietary, social services and
medical records.
THE OMNICARE GUIDELINES'r'
In June 1994, to enhance the pharmaceutical care management services that we
offer, we introduced to our client facilities and their attending physicians the
Omnicare Guidelines'r' which we believe is the first clinically-based formulary
for the elderly residing in long-term care institutions. The Omnicare
Guidelines'r' 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 long-term care facilities. The
formulary takes into account such factors as pharmacology, safety and toxicity,
efficacy, drug administration, quality of life and other considerations specific
to the frail elderly population residing
31
in facilities. The clinical evaluations and rankings were developed exclusively
for us by the Philadelphia College of Pharmacy, an academic institution
recognized for its expertise in geriatric long-term care. In addition, the
Omnicare Guidelines'r' provides relative cost information comparing the prices
of the drugs to patients, their insurers or other payors of the pharmacy bill.
As the Omnicare Guidelines'r' focuses on health benefits, rather than solely
on cost, in assigning rankings, we believe that use of the Omnicare
Guidelines'r' assists physicians in making the best clinical choices of drug
therapy for the patient at the lowest cost to the payor of the pharmacy bill.
Accordingly, we believe that the development of and compliance with the Omnicare
Guidelines'r' is important in lowering costs for SNFs operating under PPS.
HEALTH AND OUTCOMES MANAGEMENT
We have expanded upon the data in the Omnicare Guidelines'r' to develop
health and outcomes management programs targeted at major categories of disease
commonly found in the elderly, such as congestive heart failure, osteoporosis
and atrial fibrillation. Such programs seek to identify patients who may be
candidates for more clinically efficacious drug therapy and to work with
physicians to optimize pharmaceutical care for these geriatric patients. We
believe these programs enhance the quality of care of elderly patients while
reducing costs to the health care system which arise from the adverse outcomes
of sub-optimal or inappropriate drug therapy.
OUTCOMES-BASED ALGORITHM TECHNOLOGY
Combining data provided by our proprietary systems, the Omnicare
Guidelines'r' and health management programs, our pharmacists seek to determine
the best clinical and most cost-effective drug therapies and make
recommendations for the most appropriate pharmaceutical treatment. Since late
1997, we have augmented their efforts with the development of proprietary,
outcomes-based algorithm technology which electronically screens and identifies
patients at risk for certain diseases and assists in determining treatment
protocols. This system combines pharmaceutical, clinical, care planning and
research data, and screens such data through approximately 3,000 diseased-based
algorithms, allowing our pharmacists to make recommendations to improve the
effectiveness of drug therapy in seniors, including identifying potentially
underdiagnosed and undertreated conditions.
ANCILLARY SERVICES
We provide the following ancillary products and services to long-term care
facilities:
Infusion Therapy Products and Services. With cost containment pressures in
health care, SNFs and NFs are called upon to treat moderately acute but
stabilized patients that would otherwise be treated in the more costly hospital
environment, provided that the nursing staff and pharmacy are capable of
supporting higher degrees of acuity. We provide infusion therapy support
services for such client facilities and, to a lesser extent, hospice and home
care patients. Infusion therapy consists of the product (a nutrient, antibiotic,
chemotherapy or other drugs in solution) and the intravenous administration of
the product.
We prepare the product to be administered using proper equipment in a
sterile environment and then deliver the product to the nursing home for
administration by the nursing staff. Proper administration of intravenous ('IV')
drug therapy requires a highly trained nursing staff. Our 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, we enable our client SNFs and NFs
to admit and retain patients who otherwise would need to be cared for in an
acute-care facility. The most common infusion therapies we provide are total
parenteral nutrition, antibiotic therapy, chemotherapy, pain management and
hydration.
32
Dialysis Services. We offer comprehensive dialysis services onsite in client
long-term care facilities for those residents with kidney failure or ESRD. We
offer both hemodialysis and peritoneal dialysis for residents who would
otherwise be required to be transported to an off-site clinic for dialysis
treatment multiple times per week. Our onsite service eliminates travel for the
resident which can often be a disruptive and traumatic activity. For our
facility clients our dialysis services significantly reduce transportation and
staffing costs while providing added capability so that the available
populations of patients it can serve increases.
Wholesale Medical Supplies/Medicare Part B Billing. We distribute disposable
medical supplies, including urological, ostomy, nutritional support and wound
care products and other disposables needed in the nursing home environment. In
addition, we provide direct Medicare billing services for certain of these
product lines for patients eligible under the Medicare Part B program. As part
of this service, we determine patient eligibility, obtain certifications, order
products and maintain inventory on behalf of the nursing facility. We also
contract to act as billing agent for certain nursing homes that supply these
products directly to the patient.
Other Services. We also provide clinical care plan and financial information
systems to our client facilities to assist them in determining appropriate care
as well as in predicting and tracking costs. We also offer respiratory therapy
products and durable medical equipment. We continue to review the expansion of
these as well as other products and services that may further enhance the
ability of our client SNFs and NFs to care for their patients in a
cost-effective manner.
CONTRACT RESEARCH ORGANIZATION SERVICES
Our CRO Services segment provides comprehensive product development services
globally to client companies in the pharmaceutical, biotechnology, medical
devices and diagnostics industries. CRO Services provides support for the design
of regulatory strategy and clinical development (phases I through IV) of
pharmaceuticals by offering comprehensive and fully integrated clinical, quality
assurance, data management, medical writing and regulatory support for our
clients' drug development programs. CRO Services also provides pharmaceutics
services, in parallel with the stages described above. This process involves
product dose form development, including the formulation of placebo and active
drug, clinical manufacturing and process development for commercial
manufacturing, the development of analytical methodology, execution of a high
number of analytical tests, as well as stability testing and clinical packaging.
Including the conduct of business in the United States, CRO Services operates in
23 countries.
We believe that our involvement in the CRO business is a logical adjunct to
our core institutional pharmacy business and will serve to leverage our assets
and strengths, including our access to a large geriatric population and our
ability to collect data for health and outcomes management. We believe such
assets and strengths will be of significant value in developing new drugs
targeted at diseases of the elderly and in meeting the Food and Drug
Administration's geriatric dosing and labeling requirements for all prescription
drugs provided to the elderly, as well as in documenting health outcomes to
payors and plan sponsors in a managed care environment.
PRODUCT AND MARKET DEVELOPMENT
Our Pharmacy Services and CRO Services businesses engage in a continuing
program for the development of new services and for marketing these services.
While new service and new market development are important factors for the
growth of these businesses, we do not expect that any new service or marketing
efforts, including those in the developmental stage, will require the investment
of a significant portion of our assets.
MATERIALS/SUPPLY
We purchase pharmaceuticals through a wholesale distributor with whom we
have a prime vendor contract, at prices based primarily upon contracts
negotiated by us directly with pharmaceutical manufacturers. We also are a
member of industry buying groups which contract with manufacturers for
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discounted prices based on volume which are passed through to us by our
wholesale distributor. We have numerous sources of supply available to us and
have not experienced any difficulty in obtaining pharmaceuticals or other
products and supplies used in the conduct of our business.
PATENTS, TRADEMARKS, AND LICENSES
Our business operations are not dependent upon any material patents,
trademarks or licenses.
SEASONALITY
Our business operations are not significantly impacted by seasonality.
INVENTORIES
We seek to maintain adequate on-site inventories of pharmaceuticals and
supplies to ensure prompt delivery service to our customers. Our primary
wholesale distributor also maintains local warehousing in most major geographic
markets in which we operate.
COMPETITION
By its nature, the long-term care pharmacy business is highly regionalized
and, within a given geographic region of operations, highly competitive. We are
the nation's largest independent provider of pharmaceuticals and related
pharmacy services to long-term care institutions such as SNFs, ALFs, retirement
centers and other institutional health facilities. In the geographic regions we
serve, we compete with numerous local retail pharmacies, local and regional
institutional pharmacies and pharmacies owned by long-term care facilities. We
compete in these markets on the basis of quality, cost-effectiveness and the
increasingly comprehensive and specialized nature of our services, along with
the clinical expertise, pharmaceutical technology and professional support we
offer. Our CRO business competes against other full-service CROs and client
internal resources. The CRO industry is highly fragmented with a number of
full-service CROs and many small, limited-service providers, some of which serve
only local markets. Clients choose a CRO based on, among other reasons,
reputation, references from existing clients, the client's relationship with the
CRO, the CRO's experience with the particular type of project and/or therapeutic
area of clinical development, the CRO's ability to add value to the client's
development plan, the CRO's financial stability and the CRO's ability to provide
the full range of services required by the client. We believe that we compete
favorably in these respects.
CUSTOMERS
At December 31, 2000, our Pharmacy Services segment served 636,500 residents
in approximately 8,400 long-term care facilities and other institutional health
care settings.
Our CRO Services segment serves a broad range of clients, including most of
the major multi-national pharmaceutical and many of the major biotechnology
companies as well as smaller companies in the pharmaceutical and biotechnology
industries.
No single client comprised more than 10% of consolidated revenues during
1999 or 2000. Our business would not be materially or adversely affected by the
loss of any one customer or small group of customers.
GOVERNMENT REGULATION
Institutional pharmacies, as well as the long-term care facilities they
serve, are subject to extensive federal, state and local regulation. These
regulations cover required qualifications, day-to-day operations, reimbursement
and the documentation of activities. In addition, our CRO Services are subject
to substantial regulation, both domestically and abroad. We continuously monitor
the effects of regulatory activity on our operations.
34
Licensure, Certification and Regulation. States generally require that
companies operating a pharmacy within the state be licensed by the state board
of pharmacy. We currently have pharmacy licenses for each pharmacy we operate.
In addition, we currently deliver prescription products from our licensed
pharmacies to four states in which we do not operate a pharmacy. These states
regulate out-of-state pharmacies, however, as a condition to the delivery of
prescription products to patients in these states. Our pharmacies hold the
requisite licenses applicable in these states. In addition, our pharmacies are
registered with the appropriate state and federal authorities pursuant to
statutes governing the regulation of controlled substances.
Client long-term care facilities are also separately required to be licensed
in the states in which they operate and, if serving Medicare or Medicaid
patients, must be certified to be in compliance with applicable program
participation requirements. Client facilities are also subject to the nursing
home reforms of the Omnibus Budget Reconciliation Act of 1987, which imposed
strict compliance standards relating to quality of care for nursing home
operations, including vastly increased documentation and reporting requirements.
In addition, pharmacists, nurses and other health care professionals who provide
services on our behalf are in most cases required to obtain and maintain
professional licenses and are subject to state regulation regarding professional
standards of conduct.
Federal and State Laws Affecting the Repackaging, Labeling, and Interstate
Shipping of Drugs. Federal and state laws impose certain repackaging, labeling,
and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail outlets. A drug repackager must register with the Food and
Drug Administration ('FDA') as a manufacturing establishment, and is subject to
FDA inspection for compliance with relevant good manufacturing practices
('GMPs'). We hold all required registrations and licenses, and we believe our
repackaging operations are in compliance with applicable state and federal GMP
requirements. In addition, we believe we comply with all relevant requirements
of the Prescription Drug Marketing Act for the transfer and shipment of
pharmaceuticals.
State Laws Affecting Access to Services. Some states have enacted 'freedom
of choice' or 'any willing provider' requirements as part of their state
Medicaid programs or in separate legislation. These laws and regulations may
prohibit a third-party payor from restricting the pharmacies from which their
participants may purchase pharmaceuticals. Similarly, these laws may preclude a
nursing facility from requiring their patients to purchase pharmacy or other
ancillary medical services or supplies from particular providers that deal with
the nursing home. Such limitations may increase the competition which we face in
providing services to nursing facility residents.
Medicare and Medicaid. The nursing home pharmacy business has long operated
under regulatory and cost containment pressures from state and federal
legislation primarily affecting Medicaid and, to a lesser extent, Medicare.
As is the case for nursing home services generally, we receive reimbursement
from the Medicaid and Medicare programs, directly from individual residents
(private pay), and from other payors such as third-party insurers. We believe
that our reimbursement mix is in line with nursing home expenditures nationally.
For the year ended December 31, 2000, our payor mix was approximately as
follows: 46% private pay and long-term care facilities (including payments from
SNFs on behalf of their Medicare-eligible residents), 43% Medicaid, 3% Medicare
(including direct billing for medical supplies) and 8% other private sources
(including the CRO business).
For those patients who are not covered by government-sponsored programs or
private insurance, we generally directly bill the patient or the patient's
responsible party on a monthly basis. Depending upon local market practices, we
may alternatively bill private patients through the nursing facility. Pricing
for private pay patients is based on prevailing regional market rates or 'usual
and customary' charges.
The Medicaid program is a cooperative federal-state program designed to
enable states to provide medical assistance to aged, blind, or disabled
individuals, or members of families with dependent children whose income and
resources are insufficient to meet the costs of necessary medical services.
State participation in the Medicaid program is voluntary. To become eligible to
receive federal funds, a state
35
must submit a Medicaid 'state plan' to the Secretary of HHS for approval. The
federal Medicaid statute specifies a variety of requirements which the state
plan must meet, including requirements relating to eligibility, coverage of
services, payment and administration.
Federal law and regulations contain a variety of requirements relating to
the furnishing of prescription drugs under Medicaid. First, states are given
authority, subject to certain standards, to limit or specify conditions for the
coverage of particular drugs. Second, federal Medicaid law establishes standards
affecting pharmacy practice. These standards include general requirements
relating to patient counseling and drug utilization review and more specific
standards for SNFs and NFs relating to drug regimen reviews for Medicaid
patients in such facilities. Recent regulations clarify that, under federal law,
a pharmacy is not required to meet the general requirements for drugs dispensed
to nursing facility residents if the nursing facility complies with the drug
regimen review standards. However, the regulations indicate that states may
nevertheless require pharmacies to comply with the general requirements,
regardless of whether the nursing facility satisfies the drug regimen review
requirement, and the states in which we operate currently do require our
pharmacies to comply with these general standards. Third, federal regulations
impose certain requirements relating to reimbursement for prescription drugs
furnished to Medicaid patients. Among other things, regulations establish 'upper
limits' on payment levels. In addition to requirements imposed by federal law,
states have substantial discretion to determine administrative, coverage,
eligibility and payment policies under their state Medicaid programs that may
affect our operations. For example, some states have enacted 'freedom of choice'
requirements that may prohibit a nursing facility from requiring residents to
purchase pharmacy or other ancillary medical services or supplies from
particular providers that deal with the nursing home. Such limitations may
increase the competition that we face in providing services to nursing facility
patients.
The Medicare program is a federally funded and administered health insurance
program for individuals age 65 and over or who are disabled. The Medicare
program consists of three parts: Part A, which covers, among other things,
inpatient hospital, skilled nursing facility, home health care and certain other
types of health care services; Medicare Part B, which covers physicians'
services, outpatient services, items and services provided by medical suppliers,
and a limited number of specifically designated prescription drugs; and Medicare
Part C, established by the BBA, which generally allows beneficiaries to enroll
in additional types of Managed Care programs beyond the traditional Medicare fee
for service program. Part C is generally referred to as 'Medicare+ Choice.' Many
Medicare beneficiaries are being served through such Medicare+ Choice
organizations. In addition to the limited Medicare coverage for specified
products described above, some Medicare+ Choice organizations providing health
care benefits to Medicare beneficiaries offer expanded drug coverage. The
Medicare program establishes certain requirements for participation of providers
and suppliers in the Medicare program. Pharmacies are not subject to such
certification requirements. SNFs and suppliers of medical equipment and
supplies, however, are subject to specified standards. Failure to comply with
these requirements and standards may adversely affect an entity's ability to
participate in the Medicare program and receive reimbursement for services
provided to Medicare beneficiaries.
Medicare and Medicaid providers and suppliers are subject to inquiries or
audits to evaluate their compliance with requirements and standards set forth
under these government-sponsored programs. Such audits and inquiries, as well
as our own internal compliance programs, from time to time have identified
overpayment and other billing errors resulting in repayment or self-reporting.
We believe that our billing practices materially comply with applicable state
and federal requirements. However, there can be no assurance that such
requirements will not be interpreted in the future in a manner inconsistent with
our interpretation and application.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings,
executive orders and freezes and funding reductions, all of which may adversely
affect our business. There can be no assurance that payments for pharmaceutical
supplies and services under the Medicare and Medicaid programs will continue to
be based on current methodologies or remain comparable to present levels. In
this regard, we may be subject to rate reductions as a result of federal
budgetary or other legislation related to the Medicare and Medicaid programs. In
addition, various state Medicaid programs periodically experience budgetary
shortfalls which may result in Medicaid payment reductions and delays in payment
to us.
In addition, the failure, even if inadvertent, of our and/or our client
institutions to comply with applicable reimbursement regulations could adversely
affect our business. Additionally, changes in such reimbursement programs or in
regulations related thereto, such as reductions in the allowable reimbursement
levels, modifications in the timing or processing of payments and other changes
intended to limit or decrease the growth of Medicaid and Medicare expenditures,
could adversely affect our business.
36
Referral Restrictions. We are subject to federal and state laws which govern
financial and other arrangements between health care providers. These laws
include the federal anti-kickback statute, which prohibits, among other things,
knowingly and willfully soliciting, receiving, offering or paying any
remuneration directly or indirectly in return for or to induce the referral of
an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under federal health care programs. Many
states have enacted similar statutes which are not necessarily limited to items
and services for which payment is made by federal health care programs.
Violations of these laws may result in fines, imprisonment, and exclusion from
the federal programs or other state-funded programs. Federal and state court
decisions interpreting these statutes are limited, but have generally construed
the statutes to apply if 'one purpose' of remuneration is to induce referrals or
other conduct within the statute.
Federal regulations establish 'safe harbors,' which give immunity from
criminal or civil penalties under the federal anti-kickback statute to parties
meeting all of the safe harbor requirements. While the failure to satisfy all
criteria for a safe harbor does not mean that an arrangement violates the
statute, it may subject the arrangement to review by the HHS Office of Inspector
General ('OIG'), which is charged with enforcing the federal anti-kickback
statute. In response to requests the OIG issues written advisory opinions
regarding the applicability of certain aspects of the anti-kickback statute to
specific arrangements or proposed arrangements. Advisory opinions are binding as
to the Secretary and the party requesting the opinion.
The OIG issues 'Fraud Alerts' identifying certain questionable arrangements
and practices which it believes may implicate the federal anti-kickback statute.
The OIG has issued a Fraud Alert providing its views on certain joint venture
and contractual arrangements between health care providers. The OIG also issued
a Fraud Alert concerning prescription drug marketing practices that could
potentially violate the federal statute. Pharmaceutical marketing activities may
implicate the federal anti-kickback statute because drugs are often reimbursed
under the Medicaid program and, to a lesser extent, under the Medicare program.
According to the Fraud Alert, examples of practices that may implicate the
statute include certain arrangements under which remuneration is made to
pharmacists to recommend the use of a particular pharmaceutical product.
The Ethics in Patient Referrals Act ('Stark I'), effective January 1, 1992,
generally prohibits physicians from referring Medicare patients to clinical
laboratories for testing if the referring physician (or a member of the
physician's immediate family) has a 'financial relationship,' through ownership
or compensation with the laboratory. The Omnibus Budget Reconciliation Act of
1993 contains provisions commonly known as 'Stark II' ('Stark II') expanding
Stark I by prohibiting physicians from referring Medicare and Medicaid patients
to an entity with which a physician has a 'financial relationship' for the
furnishing of certain items set forth in a list of 'designated health services,'
including outpatient prescription drugs, durable medical equipment, enteral
supplies and equipment and other services. Subject to certain exceptions, if
such a financial relationship exists, the entity is generally prohibited from
claiming payment for such services under the Medicare or Medicaid programs, and
civil monetary penalties may be assessed for each prohibited claim submitted.
On January 4, 2001, HCFA released the first part of the long-awaited
Stark II final rule. This final rule will be divided into two phases. Phase I
focuses on the provisions related to prohibited referrals, the general exception
to ownership and compensation arrangement prohibitions and the related
definitions. Most of Phase I of the rulemaking will become effective January 4,
2002, one year after the date of its publication in the Federal Register.
Phase II of the final rule is expected to be released in 2001. Phase II will
cover the remaining portions of the statute, including those pertaining to
Medicaid. Phase I of the final rule eases certain of the restrictions in the
proposed rule. The final rule also, among other things: recognizes an exception
for referrals for residents covered under a Part A SNF stay; conforms certain
physician supervision requirements to HCFA coverage and payment policies for the
specific services; clarifies the definitions of designated health services and
indirect financial relationships; and creates new exceptions for indirect
compensation arrangements and fair market value transactions.
37
Other provisions in the Social Security Act and in other federal and state
laws authorize the imposition of penalties, including criminal and civil fines
and exclusions from participation in Medicare and Medicaid, for false claims,
improper billing and other offenses.
In addition, a number of states have undertaken enforcement actions against
pharmaceutical manufacturers involving pharmaceutical marketing programs,
including programs containing incentives to pharmacists to dispense one
particular product rather than another. These enforcement actions arose under
state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like.
We believe our contract arrangements with other health care providers, our
pharmaceutical suppliers and our pharmacy practices are in compliance with
applicable federal and state laws. There can be no assurance that such laws will
not, however, be interpreted in the future in a manner inconsistent with our
interpretation and application.
Health Care Reform and Federal Budget Legislation. In recent years, federal
legislation has resulted in major changes in the health care system, and
included other provisions which could significantly effect healthcare providers,
either nationally or at the state level. The BBA signed into law on August 5,
1997, sought to achieve a balanced federal budget by, among other things,
reducing federal spending on the Medicare and Medicaid programs. With respect to
Medicare, the law mandates establishment of PPS for SNFs under which facilities
are paid a federal per diem rate for virtually all covered SNF services,
including ancillary services such as pharmacy. Payment is determined by one of
44 resource utilization group ('RUG') categories. PPS was implemented for cost
reporting periods beginning on or after July 1, 1998. Prior to PPS, SNFs under
Medicare received cost-based reimbursement. In the Conference Report
accompanying the BBA, the conferees specifically noted that, to ensure that the
frail elderly residing in SNFs receive needed and appropriate medication
therapy, the Secretary of HHS is to consider, as part of PPS for SNFs, the
results of studies conducted by independent organizations, including those which
examine appropriate payment mechanism and payment rates for medications therapy,
and develop case mix adjustments that reflect the needs of such patients.
With respect to Medicare suppliers, the BBA also imposes limits on annual
updates in payments to Medicare SNFs for routine services, and institutes
consolidated billing for items and services furnished to SNF residents in a
Medicare Part A covered stay and services for all non-physician Part B items and
services for SNF residents no longer eligible for Part A SNF care. While this
provision was to become effective July 1, 1998, it was delayed indefinitely and
administratively. (Later, this provision was repealed except for services
furnished to residents in a Part A SNF stay and to therapy services covered
under Part B below.)
The BBA also imposed numerous other cost savings measures affecting Medicare
SNF services. On November 29, 1999, Congress enacted the BBRA which was designed
to mitigate the effects of the BBA. The BBRA allows SNFs to choose to receive
the full federal PPS rates on or after December 15, 1999 (based upon the fiscal
year-end of the SNF) rather than participating in the three-year transition
period. Also, effective April 1, 2000, the BBRA temporarily increased the PPS
per diem rates by 20% for 15 patient acuity categories, including medically
complex patients with generally higher pharmacy costs, pending appropriate
revisions to the PPS. The increases will continue until HCFA implements a
refined RUG system that better accounts for medically-complex patients. The
revised rates may be more or less than the temporary 20% increase under the
BBRA. The BBRA also provides for a 4% increase in payments otherwise determined
under the BBA for all patient acuity categories for fiscal years 2001 and 2002
(in addition to the 20% increase in the 15 high acuity categories). We believe
these changes should improve the financial condition of SNFs and provide
incentives to increase occupancy and Medicare admissions, particularly among the
more acutely ill.
BIPA, signed into law December 21, 2000, includes provisions designed to
further mitigate the effects of reimbursement cuts contained in the BBA. Among
other things, BIPA eliminates the scheduled reduction in the SNF market basket
update in fiscal year 2001, implemented in two phases. Specifically, the update
rate for October 1, 2000 through March 31, 2001 is the market basket index
('MBI') increase minus 1 percentage point; the update for the period April 1,
2001 through September 30, 2001 is the
38
MBI increase plus 1 percentage point. This increase will not be included when
determining payment rates for the subsequent period. In fiscal years 2002 and
2003, payment updates will equal the MBI increase minus 0.5 percentage point.
Temporary increases in the federal per diem rates under the BBRA will be in
addition to these payment increases. BIPA also increases payment for the nursing
component of each RUG category by 16.66% for services furnished after April 1,
2001 and before October 1, 2002. Moreover, BIPA further refines the consolidated
billing requirements. Specifically, effective January 1, 2001, the law limits
consolidated billing requirements to items and services furnished to SNF
residents in a Medicare Part A covered stay and to therapy services covered
under Part B. In other words, for residents not covered under a Part A stay,
SNFs may choose to bill for non-therapy Part B services and supplies, or they
may elect to have suppliers continue to bill Medicare directly for these
services. BIPA also modifies the treatment of the rehabilitation patient
categories to ensure that Medicare payments for SNF residents with 'ultra high'
and 'high' rehabilitation therapy needs are appropriate in relation to payments
for residents needing 'medium' or 'low' levels of therapy. Specifically,
effective for services furnished on or after April 1, 2001 and before
implementation of the refined RUG system (discussed above), the law increases by
6.7% the federal per diem payments for 14 rehabilitation categories, effective
April 1, 2001. The 20% additional payment under the BBRA for three
rehabilitation categories is removed to make this provision budget neutral. BIPA
also permits the Secretary of HHS to establish a process for geographic
reclassification of SNFs based upon the method used for inpatient hospitals.
The BBA also mandates that suppliers obtain a surety bond as a condition of
issuance or renewal of a Medicare Part B supplier number. In January 1998, new
rules were proposed to establish additional supplier standards, including the
requirement to obtain a surety bond. Under the proposal, a supplier would be
required to obtain a surety bond for each tax identification number for which it
has a Medicare supplier number.
In October 2000, HCFA issued final supplier standards, which expanded
certain operational requirements for suppliers. In the final rule, HCFA decided
to delay the surety bond rule pending 'extensive changes' to this requirement.
HCFA states that it will consider public comments received on the surety bond,
primarily relating to costs, along with its experience with surety bonds for
home health agencies and the GAO study of Medicare surety bonds, when it issues
a proposed rule on surety bonds in the future. Until HCFA issues another rule on
this provision, there is no surety bond requirement for suppliers.
With respect to Medicaid, the BBA repealed the 'Boren Amendment' federal
payment standard for Medicaid payments to Medicaid NFs effective October 1,
1997, giving states greater latitude in setting payment rates for such
facilities. There can be no assurance that budget constraints or other factors
will not cause states to reduce Medicaid reimbursement to NFs or that payments
to NFs will be made on a timely basis. The law also grants states greater
flexibility to establish Medicaid managed care programs without the need to
obtain a federal waiver. Although these waiver projects generally exempt
institutional care, including NF and institutional pharmacy services, no
assurances can be given that these programs ultimately will not change the
reimbursement system for long-term care, including pharmacy services, from
fee-for-service to managed care negotiated or capitated rates. Our operations
have not been adversely affected in states with managed care programs in effect.
We are unable to predict what impact, if any, future Medicaid managed care
systems might have on our operations.
On January 12, 2001, the Secretary of HHS issued final regulations to
implement changes to the Medicaid 'upper payment limit' requirements. The
purpose of the rule is to stop states from using certain accounting techniques
to inappropriately obtain extra federal Medicaid matching funds that are not
necessarily spent on health care services for Medicaid beneficiaries. Although
the rule will be phased in over eight years to reduce the adverse impact on
certain states, the rule eventually could result in decreased federal funding to
state Medicaid programs, which, in turn, could prompt certain states to reduce
Medicaid reimbursements to providers, such as our client NFs and us.
Although it is unclear what the long-term impact of PPS will be, since
implemention the impact of PPS has been evidenced by an erosion of census for
some facilities, lower acuity levels of residents in some nursing homes lower
pricing and an unfavorable payor mix for us. While we expect that the impact
39
of PPS on the long-term care industry will continue to affect us and our
clients, it appears that the unfavorable operating trends experienced to date
have begun to stabilize. Further, we anticipate that federal and state
governments will continue to review and assess alternate health care delivery
systems, payment methodologies and operational requirements for health care
providers including protection of confidential patient information. It is not
possible to predict the effect of elements of potential legislation or
regulation, or the interpretation or administration of such legislation or
regulation, including the adequacy and timeliness of payment to or costs
required to be incurred by client facilities, on our business. Accordingly,
there can be no assurance that any such future health care legislation or
regulation will not adversely affect our business.
BIPA also clarifies HCFA policy with regard to coverage of drugs and
biologicals, and addresses certain payment issues. Among other things, the Act
specifies that payment for drugs under Part B must be made on the basis of
assignment. In other words, the provider must accept the Medicare fee schedule
amount as payment in full; beneficiaries are not liable for any out-of-pocket
costs other than standard deductible and coinsurance payments. BIPA also
mandates a study by the General Accounting Office ('GAO') on payment for drugs
and biologicals under Medicare Part B, and requires the GAO to report to
Congress and the Secretary of HHS within nine months of enactment on specific
recommendations for revised payment methodologies.
BIPA also addresses HCFA's attempts to modify the calculation of average
wholesale prices ('AWPs') of drugs, upon which Medicare and Medicaid
reimbursement is based. The federal government has been actively investigating
whether pharmaceutical manufacturers have been manipulating AWPs. In May 2000,
HCFA proposed using new Department of Justice pricing data for updating Medicare
payment allowances for drugs and biologicals, although HCFA withdrew this
proposal in November 2000, citing the likelihood of Congressional action in this
area. The Act establishes a temporary moratorium on direct or indirect
reductions (but not increases) in payment rates in effect on January 1, 2001,
until the Secretary reviews the GAO report.
It is uncertain at this time what additional health care reform initiatives,
including a Medicare prescription drug benefit, if any, will be implemented, or
whether there will be other changes in the administration of governmental health
care programs or interpretations of governmental policies or other changes
affecting the health care system. There can be no assurance that future health
care or budget legislation or other changes will not have an adverse effect on
our business.
Contract Research Organization Service. The preclinical, clinical,
manufacturing, analytical and clinical trial supply services performed by our
CRO Services are subject to various regulatory requirements designed to ensure
the quality and integrity of the data or products of these services.
The industry standard for conducting preclinical and laboratory testing is
embodied in the good laboratory practice ('GLP' and Investigational New Drugs
('IND')) regulations administered by the FDA. Research conducted at institutions
supported by funds from the National Institutes of Health ('NIH') must also
comply with multiple project assurance agreements and guidelines administered by
NIH and the HHS Office of Research Protection. The requirements for facilities
engaging in pharmaceutical, analytical, manufacturing, clinical trial, supply
preparation, labeling and distribution are set forth in the good manufacturing
practice ('GMP') regulations and in good clinical practice 'GCP' regulations and
guidelines. GCP, IND and GMP regulations have been mandated by the FDA and the
European Medicines Evaluation Agency (the 'EMEA') and have been adopted by
similar regulatory authorities in other countries. GCP, IND and GMP regulations
stipulate requirements for facilities, equipment, supplies and personnel engaged
in the conduct of studies to which these regulations apply. The regulations
require that written, standard operating procedures ('SOPs') are followed during
the conduct of studies and for the recording, reporting and retention of study
data and records. To help assure compliance, our CRO Services has a worldwide
staff of experienced quality assurance professionals which monitor ongoing
compliance with GCP, IND and GMP regulations by auditing study data and
conducting regular inspections of testing procedures and facilities. The FDA and
many other regulatory authorities require that study results and
40
data submitted to such authorities are based on studies conducted in accordance
with GCP and IND provisions. These provisions include:
complying with specific regulations governing the selection of qualified
investigators;
obtaining specific written commitments from the investigators;
disclosure of conflicts of interest;
verifying that patient informed consent is obtained;
instructing investigators to maintain records and reports;
verifying drug or device accountability; and
permitting appropriate governmental authorities access to data for their
review.
Records for clinical studies must be maintained for specific periods for
inspection by the FDA, European Union ('EU') or other authorities during audits.
Non-compliance with GCP or IND requirements can result in the disqualification
of data collected during the clinical trial and may lead to debarment of an
investigator or CRO if fraud is detected.
CRO Services' SOPs related to clinical studies are written in accordance
with regulations and guidelines appropriate to a global standard with regional
variations in the regions where they will be used, thus helping to ensure
compliance with GCP. CRO Services also complies with International Congress of
Harmonization, EU GCP regulations and U.S. GCP regulations for North America.
Our United States manufacturing, analytical and other laboratories are
subject to licensing and regulation under federal, state and local laws relating
to maintenance of appropriate processes and procedures under the Clinical
Laboratories Improvement Act ('CLIA'), hazard communication and employee
right-to-know regulations, the handling and disposal of medical specimens and
hazardous waste and radioactive materials, as well as the safety and health of
laboratory employees. All of our laboratories are operated in material
compliance with applicable federal and state laws and regulations relating to
maintenance of trained personnel, proper equipment processes and procedures
required by CLIA regulations of HHS, and the storage and disposal of all
laboratory specimens including the regulations of the Environmental Protection
Agency and the Occupational Safety and Health Administration. Certain of our
facilities are engaged in drug development activities involving controlled
substances. The use of, and accountability for, controlled substances are
regulated by the United States Drug Enforcement Administration. Our relevant
employees receive initial and periodic training to ensure compliance with
applicable hazardous material regulations and health and safety guidelines.
Although we believe that we are currently in compliance in all material
respects with such federal, state and local laws, failure to comply could
subject us to denial of the right to conduct business, fines, criminal penalties
and other enforcement actions.
Finally, new final rules have been adopted by HHS related to the
responsibilities of CROs, other healthcare entities and their business
associates to maintain the privacy of patient identifiable medical information.
These rules are discussed in more detail in the following section. We intend to
comply with these rules when they become effective and when compliance is
required on February 29, 2003, and to obtain all required patient
authorizations.
Health Information Practices. HIPAA authorized the Secretary of the federal
Department of Health and Human Services to issue standards for the privacy and
security of medical records and other individually identifiable patient data,
HIPAA requirements apply to health plans, healthcare providers and healthcare
clearinghouses that transmit health information electronically. Regulations
adopted to implement HIPAA also require that business associates acting for or
on behalf of these HIPAA-covered entities be contractually obligated to meet
HIPAA standards. Regulations setting standards for the format of electronic
transactions became effective in October 2000.
Although HIPAA was intended ultimately to reduce administrative expenses and
burdens faced within the healthcare industry, we believe the law will initially
bring about significant and, in some cases, costly changes. HHS has released two
rules to date mandating the use of new standards with respect to certain
healthcare transactions and health information. The first rule requires the use
of uniform standards for
41
common healthcare transactions, including healthcare claims information,
including pharmacy claims, plan eligibility, referral certification and
authorization, claims status, plan enrollment and disenrollment, payment and
remittance advice, plan premium payments and coordination of benefits, and it
establishes standards for the use of electronic signatures. HHS finalized the
new transaction standards on August 17, 2000, and we, as well as our nursing
facility clients, will be required to comply with them by October 16, 2002.
Second, HHS developed new standards relating to the privacy of individually
identifiable health information. In general, these regulations restrict the use
and disclosure of medical records and other individually identifiable health
information held or disclosed by health care providers and other affected
entities in any form, whether communicated electronically, on paper, or orally,
subject only to limited exceptions. In addition, the regulations provide
patients with significant new rights to understand and control how their health
information is used. These regulations do not preempt more stringent state laws
and regulations that may apply to us. The privacy standards were issued on
December 28, 2000, with an effective date of April 14, 2001, and a compliance
date of April 14, 2003.
Rules governing the security of health information have been proposed but
have not yet been issued in final form. Once issued in final form, affected
parties will have approximately two years to be fully compliant. Sanctions for
failing to comply with HIPAA include criminal penalties and civil sanctions.
We are evaluating the effect of HIPAA. At this time, we anticipate that we
will be able to fully comply with those HIPAA requirements that have been
adopted. However, we cannot at this time estimate the cost of such compliance,
nor can we estimate the cost of compliance with standards that have not yet been
finalized by HHS or which may be revised. The new and proposed health
information standards are likely to have a significant effect on the manner in
which we handle health data and communicate with payors. We cannot assure you
that any inability to comply with existing or future standards, or the cost of
our compliance with such standards, will not have a material adverse effect on
our business, financial condition or results of operations.
Compliance Program and Corporate Integrity Agreement. The OIG has issued
guidance to various sectors of the healthcare industry to help providers design
effective voluntary compliance programs to prevent fraud, waste and abuse in
healthcare programs, including Medicare and Medicaid. In 1998, Omnicare
voluntarily adopted a compliance program to assist us in complying with
applicable government regulations. In addition, in April 1998, Home Pharmacy
Services, Inc. ('Home'), one of our wholly-owned subsidiaries, entered into a
settlement agreement with the U.S. Department of Justice and the State of
Illinois regarding certain practices involving refunds for returned drugs. Under
the Settlement Agreement, Home paid $5.3 million in fines and restitution to the
United States and Illinois, and Omnicare and Home agreed to a corporate
integrity program for four years, which includes annual reporting obligations.
If Omnicare fails to meet a material obligation under the agreement, the OIG may
initiate proceedings to suspend or exclude Omnicare from participation in
federal health programs, including Medicare and Medicaid. The terms of the
corporate integrity agreement expire in April 2002. Neither Omnicare nor any of
its other operating units were implicated in the government investigation.
ENVIRONMENTAL MATTERS
In operating our facilities, historically we have not encountered any major
difficulties in effecting compliance with applicable pollution control laws. No
material capital expenditures for environmental control facilities are expected.
While we cannot predict the effect which any future legislation, regulations, or
interpretations may have upon our operations, we do not anticipate any changes
that would have a material adverse impact on our operations.
EMPLOYEES
At December 31, 2000, employed approximately 9,300 persons (including 3,700
part-time employees), approximately 8,900 and 400 of whom were located within
and outside the United States, respectively.
42
LEGAL PROCEEDINGS
There are no pending legal or governmental proceedings to which we are a
party or to which any of our property is subject that we believe would have a
material adverse effect on us.
On July 26, 1999, Neighborcare Pharmacy Services, Inc., a subsidiary of
Genesis Health Ventures, Inc., filed suit in the Circuit Court for Baltimore
County, Maryland, against us and Heartland Health Services ('HHS'), a joint
venture in which one of our subsidiaries is a partner (the 'Action'). The Action
relates to certain master service agreements ('MSAs') between Neighborcare and
HCR/Manorcare ('Manorcare'), on the one hand, and us or HHS and Manorcare, on
the other, under which pharmacy services are provided to nursing homes and other
long-term care facilities operated by Manorcare. Neighborcare alleges that we
and HHS tortiously interfered with Neighborcare's purported rights under its
MSAs, and seeks compensatory damages allegedly of not less than $100 million
annually, injunctive relief canceling our contracts and HHS's contracts with
Manorcare and punitive damages. Neighborcare and Manorcare are involved in an
arbitration (the 'Arbitration') to determine the validity and enforceability of
Neighborcare's MSAs and the extent to which either of those parties has breached
the MSAs. We are advised by Manorcare that during the pendency of the
Arbitration, Neighborcare is continuing to provide and be paid for pharmacy
services under the MSAs, and that the Arbitration hearing is currently scheduled
for the summer of 2001. On November 4, 1999, we and HHS moved to dismiss or, in
the alternative, to stay the Action in its entirety on the grounds that the
Arbitration between Neighborcare and Manorcare should resolve many, if not all,
of the issues raised in the Action. On November 12, 1999, the Baltimore County
Circuit Court stayed the Action pending conclusion of the Arbitration, and we
withdrew our motion to dismiss. Although the outcome of the Action cannot be
ascertained at this time and the results of legal proceedings cannot be
predicted, we believe, based on our knowledge and understanding of the facts and
the advice of our counsel, that there is no reasonable basis in law or in fact
for concluding that we have any liability in the Action. Consequently, we
believe that the resolution of the Action is not likely to have a material
adverse effect on our financial condition or results of operations.
PROPERTIES
We have offices, distribution centers and other key operating facilities in
various locations in and outside the United States. A list of the more
significant facilities we operated as of December 31, 2000 follows. The owned
properties are held in fee and are not subject to any material encumbrance. We
consider all of these facilities to be in good operating condition and generally
to be adequate for present and anticipated needs.
LEASED AREA
OWNED AREA ------------------------------
LOCATION TYPE (SQ. FT.) (SQ. FT.) EXPIRATION DATE
-------- ---- --------- --------- ---------------
King of Prussia, Pennsylvania Offices -- 150,000 June 30, 2010
Fort Washington, Pennsylvania Offices and -- 120,000 January 14, 2012
Laboratories
Des Plaines, Illinois Offices and -- 47,971 May 31, 2008
Distribution Center
Kirkland, Washington Offices and -- 44,744 April 14, 2003
Distribution Center
Covington, Kentucky Offices -- 42,400 December 31, 2012
Milwaukee, Wisconsin Offices and -- 41,440 March 31, 2009
Distribution Center
Perrysburg, Ohio Offices and 40,500 -- --
Distribution Center
Cheshire, Connecticut Offices and -- 38,400 June 30, 2010
Distribution Center
Florissant, Missouri Offices and 38,014 -- --
Distribution Center
Louisville, Kentucky Offices and -- 37,400 September 30, 2001
Distribution Center
Livonia, Michigan Offices and -- 32,824 May 31, 2007
Distribution Center
43
LEASED AREA
OWNED AREA ------------------------------
LOCATION TYPE (SQ. FT.) (SQ. FT.) EXPIRATION DATE
-------- ---- --------- --------- ---------------
Hunt Valley, Maryland Offices and -- 31,600 October 31, 2001
Distribution Center
St. Louis, Missouri Offices and -- 30,400 June 30, 2001
Distribution Center
Kansas City, Missouri Offices and -- 29,948 October 21, 2009
Distribution Center
Decatur, Illinois Offices and 20,000 9,000 Month-to-Month
Distribution Center
Salt Lake City, Utah Offices and -- 28,400 January 31, 2009
Distribution Center
Portland, Oregon Offices and -- 28,150 April 30, 2008
Distribution Center
Troy, New York Offices -- 25,124 March 31, 2002
Cincinnati, Ohio Offices and -- 24,375 September 30, 2009
Distribution Center
Chestnut Ridge, New York Offices and -- 24,000 April 30, 2010
Distribution Center
Oklahoma City, Oklahoma Offices and -- 24,000 Month-to-Month
Distribution Center
Crystal, Minnesota Offices and -- 23,752 January 31, 2008
Distribution Center
Wadsworth, Ohio Offices and -- 22,960 June 30, 2001
Distribution Center
Henderson, Kentucky Offices and -- 20,000 January 31, 2002
Distribution Center
Mentor, Ohio Offices and -- 20,000 Month-to-Month
Distribution Center
Fort Washington, Pennsylvania Offices and -- 20,000 December 31, 2002
Laboratories
Greensburg, Pennsylvania Offices and -- 20,000 February 3, 2002
Distribution Center
Spartanburg, South Carolina Offices and 9,500 10,000 July 8, 2001
Distribution Center
Indianapolis, Indiana Offices and -- 18,740 January 1, 2011
Distribution Center
Pittsburgh, Pennsylvania Offices and -- 18,334 January 31, 2009
Distribution Center
Springfield, Ohio Offices and -- 18,000 December 12, 2003
Distribution Center
Rockford, Illinois Offices and -- 18,000 November 30, 2009
Distribution Center
Milford, Ohio Offices and -- 18,000 December 12, 2008
Distribution Center
Peabody, Massachusetts Offices and -- 17,500 April 30, 2002
Distribution Center
Plainview, New York Offices and -- 17,500 June 30, 2005
Distribution Center
Malta, New York Offices and -- 17,400 December 31, 2005
Distribution Center
Griffith, Indiana Offices and -- 17,100 May 31, 2002
Distribution Center
Springfield, Missouri Offices and -- 17,000 September 30, 2003
Distribution Center
Miami, Florida Offices and -- 16,665 May 1, 2004
Distribution Center
44
LEASED AREA
OWNED AREA ------------------------------
LOCATION TYPE (SQ. FT.) (SQ. FT.) EXPIRATION DATE
-------- ---- --------- --------- ---------------
Des Plaines, Illinois Offices and -- 16,173 May 31, 2008
Distribution Center
Pompton Plains, New Jersey Offices and -- 16,041 August 1, 2001
Distribution Center
Englewood, Ohio Offices and -- 15,000 January 31, 2004
Distribution Center
West Seneca, New York Offices and -- 15,000 November 30, 2001
Distribution Center
West Boylston, Massachusetts Offices and -- 14,800 May 3, 2003
Distribution Center
Fort Wright, Kentucky Offices -- 14,237 March 31, 2008
Spokane, Washington Offices and -- 14,025 October 31, 2006
Distribution Center
Ashland, Kentucky Offices and -- 14,000 October 31, 2003
Distribution Center
Boca Raton, Florida Offices and -- 13,950 December 31, 2002
Distribution Center
St. Petersburg, Florida Offices and -- 13,245 August 31, 2001
Distribution Center
Rochester, New York Offices and -- 13,000 December 31, 2003
Distribution Center
Hallowell, Maine Offices and -- 13,000 September 30, 2002
Distribution Center
Wessex, United Kingdom Offices -- 12,000 June 30, 2016
Alexandria, Louisiana Offices and -- 12,000 April 30, 2001
Distribution Center
Omaha, Nebraska Offices and -- 11,450 May 31, 2001
Distribution Center
Thomasville, North Carolina Offices and -- 11,325 January 15, 2004
Distribution Center
South Elgin, Illinois Offices and -- 11,175 August 1, 2002
Distribution Center
Rockford, Illinois Offices and -- 11,100 February 28, 2004
Retail Outlet
Peoria, Illinois Offices and -- 11,022 June 30, 2001
Distribution Center
Louisville, Kentucky Offices and -- 11,000 August 31, 2001
Distribution Center
Van Nuys, California Offices and -- 10,400 February 28, 2003
Distribution Center
Cherry Hill, New Jersey Offices and -- 10,000 November 1, 2009
Distribution Center
45
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Omnicare, Inc. and their respective
ages and positions are as follows:
NAME AGE POSITION WITH OMNICARE
- ---- --- ----------------------
Edward L. Hutton.................. 81 Chairman, Director
Joel F. Gemunder.................. 61 President, Director
Patrick E. Keefe.................. 55 Executive Vice President-Operations, Director
Timothy E. Bien................... 50 Senior Vice President-Professional Services and
Purchasing
David W. Froesel, Jr.............. 49 Senior Vice President and Chief Financial Officer,
Director
Cheryl D. Hodges.................. 48 Senior Vice President and Secretary, Director
Peter Laterza..................... 43 Vice President and General Counsel
Charles H. Erhart, Jr............. 75 Director
Mary Lou Fox...................... 69 Director
Thomas C. Hutton.................. 50 Director
Sandra E. Laney................... 57 Director
Andrea R. Lindell, DNSc, RN....... 57 Director
Sheldon Margen, M.D............... 81 Director
Kevin J. McNamara................. 47 Director
John H. Timoney................... 67 Director
Mr. E.L. Hutton is Chairman of Omnicare and has held this position since May
1981. Additionally, he is Chairman and Chief Executive Officer and a director of
Chemed Corporation, Cincinnati, Ohio (a diversified public corporation with
interests in plumbing and drain cleaning services, janitorial supplies and
health care services) and has held these positions since November 1993 and April
1970, respectively. Previously, he was President and Chief Executive Officer of
Chemed, positions he had held from April 1970 to November 1993. Mr. Hutton is
the father of Thomas C. Hutton, who is a director of Omnicare.
Mr. Gemunder is President of Omnicare and has held this position since May
1981. From January 1981 until July 1981, he served as Chief Executive Officer of
the partnership organized as a predecessor to Omnicare for the purpose of owning
and operating certain health care businesses of Chemed and Daylin, Inc., each
then a subsidiary of W.R. Grace & Co. Mr. Gemunder was an Executive Vice
President of Chemed and Group Executive of its Health Care Group from May 1981
through July 1981 and a Vice President of Chemed from 1977 until May 1981. Mr.
Gemunder is a director of Chemed and Ultratech Stepper, Inc. (a manufacturer of
photolithography equipment for the computer industry).
Mr. Keefe is Executive Vice President -- Operations of Omnicare and has held
this position since February 1997. Previously he was Senior Vice
President -- Operations since February 1994. From April 1993 to February 1994,
he was Vice President -- Operations of Omnicare. From April 1992 to April 1993,
he served as Vice President -- Pharmacy Management Programs of Diagnostek, Inc.,
Albuquerque, New Mexico (mail-service pharmacy and health care services). From
September 1990 to April 1992, Mr. Keefe served as President of HPI Health Care
Services, Inc., a subsidiary of Diagnostek, which was acquired from Omnicare in
August 1989. From August 1984 to September 1990, he served as Executive Vice
President of HPI.
Mr. Bien is Senior Vice President -- Professional Services and Purchasing of
Omnicare, a position he has held since May 1996. From May 1992 until May 1996,
he served as Vice President of Professional Services and Purchasing of Omnicare.
Prior to that, he was Vice President and a former owner of Home Care Pharmacy, a
wholly-owned subsidiary that Omnicare acquired in December 1988.
Mr. Froesel is Senior Vice President and Chief Financial Officer of
Omnicare. He has held that position since joining Omnicare in March 1996. Mr.
Froesel was Vice President of Finance and Administration at Mallinckrodt
Veterinary, Inc. from May 1993 to February 1996. From July 1989 to April 1993,
he was worldwide Corporate Controller of Mallinckrodt Medical Inc.
Ms. Hodges is Senior Vice President and Secretary of Omnicare and has held
these positions since February 1994. From August 1986 to February 1994, she was
Vice President and Secretary of Omnicare. From August 1982 to August 1986, she
served as Vice President -- Corporate and Investor Relations.
46
Mr. Laterza is Vice President and General Counsel of Omnicare. He has held
that position since joining Omnicare in July 1998. Mr. Laterza was Assistant
General Counsel of The Pittston Company from October 1993 to June 1998. From
January 1992 until September 1993 he was associated with the law firm of Gibson,
Dunn & Crutcher, and from October 1985 until December 1991 he was associated
with the law firm of Cravath, Swaine & Moore.
Mr. Erhart retired as President of W.R. Grace & Co., Columbia, Maryland
(international specialty chemicals, construction and packaging) in August 1990.
He had held this position since July 1989. From November 1986 to July 1989, he
was Chairman of the Executive Committee of Grace. From May 1981 to November
1986, he served as Vice Chairman and Chief Administrative Officer of Grace. Mr.
Erhart is a director of Chemed.
Ms. Fox was formerly Senior Vice President-Marketing of Omnicare, a position
she held from May 1996 to January 2001. Previously she served as Vice
President -- Marketing for Omnicare since February 1994. From July 1993 to
February 1994, she was Vice President -- Marketing of Omnicare's Pharmacy
Services Group (a group of subsidiaries engaged in providing pharmacy services
to long-term care facilities). She also served as President of Westhaven
Services Co., Toledo, Ohio (pharmacy services for long-term care facilities), a
subsidiary of Omnicare, from October 1992 to May 1998. From 1976 until
Omnicare's acquisition of Westhaven in October 1992, she was the sole
stockholder and the President of Westhaven.
Mr. T.C. Hutton is a Vice President of Chemed and has held this position
since February 1988. Mr. Hutton is a director of Chemed. He is the son of Edward
L. Hutton, Chairman of Omnicare.
Ms. Laney is Senior Vice President and Chief Administrative Officer of
Chemed and has held these positions since November 1993 and May 1991,
respectively. From May 1984 to November 1993, she was a Vice President of
Chemed. Ms. Laney is a director of Chemed.
Dr. Lindell is Dean and Professor in the College of Nursing at the
University of Cincinnati, a position she has held since December 1990. Dr.
Lindell is also Associate Senior Vice President for Interdisciplinary Education
Programs for the Medical Center at the University of Cincinnati, since July
1998. She also serves as Interim Dean of the College of Allied Health Sciences
at the University of Cincinnati. From August 1981 to August 1990, Dr. Lindell
served as Dean and a Professor in the School of Nursing at Oakland University,
Rochester, Michigan.
Dr. Margen is a Professor Emeritus in the School of Public Health,
University of California, Berkeley, a position he has held since May 1989. He
had served as a Professor of Public Health at the University of California,
Berkeley, since 1979.
Mr. McNamara is President of Chemed and has held this position since August
1994. From November 1993 to August 1994, Mr. McNamara was Executive Vice
President, Secretary and General Counsel of Chemed. Previously, from May 1992 to
November 1993, he held the positions of Vice Chairman, Secretary and General
Counsel of Chemed. From August 1986 to May 1992, he served as Vice President,
Secretary and General Counsel of Chemed. From November 1990 to December 1992,
Mr. McNamara served as an Executive Vice President and Chief Operating Officer
of Omnicare. He is a director of Chemed.
Mr. Timoney is a retired executive of Applied Bioscience International Inc.
(research organization serving the pharmaceutical and biotechnology industries)
('Applied Bioscience'), at which he held a number of positions from 1986 through
1996. From December 1995 through September 1996, he was Chief Executive Officer
of Clinix International, Inc., a wholly owned subsidiary of Applied Bioscience.
From June 1992 to September 1996, Mr. Timoney was Senior Vice Present of Applied
Bioscience. From September 1986 through June 1992, he was Vice President, Chief
Financial Officer, Secretary and Treasurer of Applied Bioscience. In addition,
from September 1986 through June 1995 he was a director of Applied Bioscience.
Mr. Timoney has also held financial and executive positions with IMS Health
Incorporated (market research firm serving the pharmaceutical and healthcare
industries), Chemed and Grace.
47
DESCRIPTION OF CERTAIN INDEBTEDNESS
REFINANCING OF EXISTING CREDIT FACILITIES
We have received a commitment for a new $495 million credit facility to
replace our existing credit facilities. We anticipate that our new credit
facility will close concurrently with the note offering. However, we cannot
guarantee that either the note offering or the replacement of our existing
credit facilities will occur. In addition, we cannot assure that the new credit
facility, if entered into, will not contain terms less favorable to us than
those currently contemplated by us. If we are unable to close the new credit
facility concurrently with the closing of the note offering, we intend to use
the net proceeds from the sale of the notes (if completed) to repay a portion of
our outstanding indebtedness under the existing credit facilities, which would
then remain outstanding until such time as we refinance them (and we could
continue to borrow under those facilities in accordance with their terms,
subject to compliance with the indenture). Our existing credit facilities have
final maturity dates of August 31, 2001 and October 22, 2001, respectively. If
we do not enter into the new credit facility concurrently with the closing of
the note offering, we will need to obtain the consent of the lenders under our
existing credit facilities to complete the note offering.
PROPOSED NEW CREDIT FACILITY
Concurrently with the closing of the note offering, we propose to enter into
a new $495 million revolving credit facility, including a $25 million letter of
credit subfacility, with Bank One, NA (having its principal office in Chicago,
Illinois) ('Bank One'), as administrative agent, Banc One Capital Markets, Inc.,
as joint lead arranger and sole book runner, UBS Warburg LLC, as joint lead
arranger and syndication agent, Lehman Commercial Paper Inc., as syndication
agent, SunTrust Bank, as documentation agent, and Deutsche Bank AG, New York
Branch, as documentation agent (the 'New Credit Facility'). We currently
contemplate that the New Credit Facility will consist of a $495 million
revolving loan commitment that has a three-year final maturity and will allow
us to increase the commitment to $500 million or to reduce the commitment in
increments of $5 million. We expect that the $25 million letter of credit
subcommitment will allow for the issuance of letters of credit that have a
maximum duration not to exceed the maturity of the facility. We expect that
the New Credit Facility will be guaranteed by subsidiaries that, together with
Omnicare, Inc., in the aggregate account for at least 90% of our consolidated
assets and revenues. We contemplate that loans under the New Credit Facility
will bear interest, at our option, at a rate equal to either (i) the higher of
(a) Bank One's prime rate or (b) the federal funds rate plus 0.50% or (ii) (a)
the quotient of (A) the interest rate in the London interbank market for loans
of the same general interest period duration, divided by (B) one minus the
maximum aggregate reserves imposed on Eurocurrency liabilities, plus (b) between
one and one-quarter percent and two and one-half percent (depending on certain
senior long-term debt ratings).
The New Credit Facility is expected to limit, among other things, our
ability to incur contingent obligations, to make investments, to make additional
acquisitions or merge with another entity, to sell or to create or incur liens
on assets, to repay other indebtedness prior to its stated maturity (including
the notes) and to amend the indenture relating to the notes. In addition, we
expect that the New Credit Facility will require us to meet certain financial
tests and will be contingent on us receiving gross proceeds of $300 million from
the note offering. We contemplate that we will be able to reborrow amounts
repaid under the New Credit Facility prior to maturity.
It is proposed that the New Credit Facility will replace our two existing
credit facilities as described below in the section 'Existing Credit
Facilities.' Assuming that we enter into the New Credit Agreement concurrently
with the closing of the note offering, we expect to borrow approximately $143
million under the New Credit Facility at such time.
EXISTING CREDIT FACILITIES
In October 1996, we entered into a syndicated $400 million revolving credit
facility, including a $25 million letter of credit subfacility, with Bank One,
as administrative agent, and certain other lenders named therein (the 'Existing
Revolving Credit Facility'). The Existing Revolving Credit Facility consists of
a $400 million revolving loan commitment that has a final maturity date of
October 22, 2001. The $25 million letter of credit subcommitment allows for the
issuance of letters of credit that have a maximum duration not to exceed the
maturity of the facility. The Existing Revolving Credit Facility is guaranteed
by subsidiaries that, together with Omnicare, Inc., in the aggregate account for
at least 90% of our consolidated assets and revenues. At our option, loans under
the Existing Revolving Credit Facility bear interest at a rate equal to either
(i) the higher of (a) Bank One's prime rate or (b) the federal funds rate plus
0.50% or (ii) (a) the quotient of (A) the interest rate in the London interbank
market for loans of the same general interest period duration, divided by
(B) one minus the maximum aggregate reserves imposed
48
on Eurocurrency liabilities, plus (b) between nine-tenths of a percent and one
and one-quarter percent (depending on certain financial ratios). This facility
also contains a scaled utilization fee of between one tenth and one quarter of a
percent (depending on certain financial ratios) if on average more than half of
the commitment is utilized during any quarter. The total amount outstanding
under the Existing Revolving Credit Facility as of September 30, 2000 was $390
million.
In addition, in December 1998 we entered into a syndicated revolving $400
million 364-day credit facility with Bank One, as administrative agent, and
certain other lenders named therein (the 'Existing 364-day Credit Facility').
This facility is convertible at maturity into a one-year term loan. In September
2000, we extended the Existing 364-day Credit Facility through August 31, 2001
at a $300 million commitment level. The Existing 364-day Credit Facility is
guaranteed by subsidiaries that in the aggregate represent at least 90% of our
consolidated assets and revenues. At our option, loans under the Existing
364-day Credit Facility bear interest at a rate equal to either (i) the higher
of (a) Bank One's prime rate or (b) the federal funds rate plus 0.50% or (ii)
(a) the quotient of (A) the interest rate in the London interbank market
applicable for loans of the same interest period duration, divided by (B) one
minus the maximum aggregate reserves imposed on Eurocurrency liabilities, plus
(b) between one percent and two percent (depending on our then current senior
long-term debt ratings). The amount outstanding at September 30, 2000 under the
Existing 364-day Credit Facility was $55 million.
Both the Existing Revolving Credit Facility and the Existing 364-day Credit
Facility limit, among other things, our ability to incur contingent obligations,
to make investments, to make additional acquisitions or merge with another
entity, to repay other indebtedness prior to its stated maturity (including the
notes), to sell assets and to create or incur liens on assets. In addition, the
Existing Revolving Credit Facility requires that we meet certain financial
tests. Amounts repaid under both the Existing Revolving Credit Facility and the
Existing 364-day Credit Facility can be reborrowed prior to maturity.
If we enter into the New Credit Facility concurrently with the closing of
the note offering (if completed), we intend to use the net proceeds from the
note offering and borrowings under the New Credit Facility to repay amounts
outstanding under the Existing Revolving Credit Facility and the Existing
364-day Credit Facility, upon which these existing credit facilities would
terminate.
CONVERTIBLE NOTES
We have outstanding $345 million aggregate principal amount of our
Convertible Notes. The Convertible Notes bear interest at a rate of 5% per
annum. Interest on the Convertible Notes is payable semi-annually on June 1 and
December 1. Principal on the Convertible Notes is payable on December 1, 2007.
The Convertible Notes are redeemable in whole or in part at a price, expressed
as a percentage of the principal amount, ranging from 103.5% during the period
beginning December 6, 2000 and ending on November 30, 2001 to 100.5% for the
period beginning December 1, 2006 and ending on November 30, 2007, in each case
plus accrued interest. The Convertible Notes are convertible at the option of
the holder, unless previously redeemed, into our common stock at a conversion
price of $39.60 per share, subject to adjustment in certain events. In the event
of a Fundamental Change (as defined below), each holder of Convertible Notes has
the right, at the holder's option, to require us to redeem all or any part of
the holder's Convertible Notes at a price, expressed as a percentage of the
principal amount, ranging from 103.5% during the period beginning December 6,
2000 and ending on November 30, 2001 to 100.5% for the period beginning
December 1, 2006 and ending on November 30, 2007, in each case plus accrued
interest. Our ability to repurchase the Convertible Notes following a
Fundamental Change is dependent upon our having sufficient funds and may be
limited by the terms of our other indebtedness or the subordination provisions
of the indenture relating to the Convertible Notes.
As defined in the indenture relating to the Convertible Notes, 'Fundamental
Change' means the occurrence of any transaction or event in connection with
which all of our common stock is exchanged for, converted into, is acquired for,
or constitutes in all material respects solely the right to receive,
consideration which is not all or substantially all common stock listed (or upon
consummation of or immediately following such transaction or event which will be
listed) on a United States national securities exchange or approved for
quotation on the Nasdaq National Market or any similar United States system of
automated dissemination of quotations of securities prices (whether by means of
an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise).
The notes offered in the note offering will be senior to the Convertible
Notes.
49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Financial Statements as of and for the three years
ended December 31, 1999
Report of Independent Accountants........................... F-2
Consolidated Statement of Income............................ F-3
Consolidated Balance Sheet.................................. F-4
Consolidated Statement of Cash Flows........................ F-5
Consolidated Statement of Stockholders' Equity.............. F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Interim Financial Statements as of September 30,
2000 and for the three and nine month periods then ended
Consolidated Balance Sheet.................................. F-21
Consolidated Statement of Income............................ F-22
Consolidated Statement of Cash Flows........................ F-23
Notes to Consolidated Financial Statements.................. F-24
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
[PRICEWATERHOUSECOOPERS LOGO]
To the Stockholders and
Board of Directors of Omnicare, Inc.
In our opinion, based on our audits and the reports of other auditors with
respect to 1997, the accompanying consolidated balance sheets and the related
consolidated statements of income and stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Omnicare,
Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 financial
statements of CompScript, Inc., or IBAH, Inc., wholly owned subsidiaries, which
statements reflect combined total revenues of $138,682,000 for the year ended
December 31, 1997. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the 1997 amounts included for CompScript, Inc. and IBAH, Inc.
is based solely on the reports of the other auditors. We conducted our audits of
the consolidated financial statements in accordance with auditing standards
generally accepted in the United States, 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 reports of other auditors provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 4, 2000
F-2
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
Omnicare, Inc. and Subsidiary Companies
(In thousands, except per share data)
For the years ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Sales $1,861,921 $1,517,370 $1,034,384
Cost of sales 1,338,638 1,058,743 725,923
- ----------------------------------------------------------------------------------------------------------
Gross profit 523,283 458,627 308,461
Selling, general and administrative expenses 351,639 283,438 199,050
Acquisition expenses, pooling-of-interests (Note 2) (55) 15,441 4,321
Restructuring and other related charges (Note 12) 35,394 3,627 1,208
Other expenses (Note 13) -- -- 6,313
- ----------------------------------------------------------------------------------------------------------
Operating income 136,305 156,121 97,569
Investment income 1,532 3,356 5,720
Interest expense (46,166) (23,611) (6,556)
Other expenses (Note 13) -- -- (800)
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 91,671 135,866 95,933
Income taxes 33,950 55,487 41,828
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations 57,721 80,379 54,105
Loss from discontinued operations (Note 14) -- -- (2,154)
- ----------------------------------------------------------------------------------------------------------
Net income $ 57,721 $ 80,379 $ 51,951
==========================================================================================================
Earnings (loss) per share - Basic:
Continuing operations $ 0.63 $ 0.90 $ 0.63
Discontinued operations -- -- (0.02)
- ----------------------------------------------------------------------------------------------------------
Net income $ 0.63 $ 0.90 $ 0.61
==========================================================================================================
Earnings (loss) per share - Diluted:
Continuing operations $ 0.63 $ 0.90 $ 0.62
Discontinued operations -- -- (0.02)
- ----------------------------------------------------------------------------------------------------------
Net income $ 0.63 $ 0.90 $ 0.60
==========================================================================================================
Weighted average number of common shares outstanding:
Basic 90,999 89,081 85,692
==========================================================================================================
Diluted 91,238 89,786 86,710
==========================================================================================================
Comprehensive income $ 56,673 $ 80,431 $ 51,613
==========================================================================================================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-3
CONSOLIDATED BALANCE SHEET
Omnicare, Inc. and Subsidiary Companies
(In thousands, except share data)
December 31,
1999 1998
- ------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 97,267 $ 54,312
Accounts receivable, less allowances of $36,883 (1998-$31,417) 422,283 363,796
Unbilled receivables 18,450 15,828
Inventories 120,280 117,936
Deferred income tax benefits 17,336 12,348
Other current assets 76,729 39,078
- ------------------------------------------------------------------------------------------------
Total current assets 752,345 603,298
Properties and equipment, at cost less accumulated depreciation
of $106,022 (1998-$76,854) 162,133 136,371
Goodwill, less accumulated amortization of $83,243 (1998-$51,861) 1,188,941 1,110,254
Other assets 64,554 53,906
- ------------------------------------------------------------------------------------------------
Total assets $2,167,973 $1,903,829
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 108,189 $ 82,029
Amounts payable pursuant to acquisition agreements 9,053 10,230
Current portion of long-term debt 77,413 2,844
Accrued employee compensation 50,498 48,073
Deferred revenue 24,321 19,043
Other current liabilities 52,769 71,330
- ------------------------------------------------------------------------------------------------
Total current liabilities 322,243 233,549
Long-term debt 736,944 651,556
Deferred income taxes 37,360 16,230
Amounts payable pursuant to acquisition agreements 13,878 13,564
Other noncurrent liabilities 29,168 25,459
- ------------------------------------------------------------------------------------------------
Total liabilities 1,139,593 940,358
Stockholders' equity:
Preferred stock-authorized 1,000,000 shares without
par value; none issued
Common stock-authorized 200,000,000
shares $1 par; 91,611,800 shares issued (1998-90,459,800
shares issued) 91,612 90,460
Paid-in capital 684,419 664,225
Retained earnings 275,114 225,937
- ------------------------------------------------------------------------------------------------
1,051,145 980,622
Treasury stock, at cost-325,500 shares (1998-194,900 shares) (6,950) (4,166)
Deferred compensation (14,098) (12,932)
Cumulative translation adjustment (1,717) (53)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 1,028,380 963,471
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,167,973 $1,903,829
================================================================================================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-4
CONSOLIDATED STATEMENT OF CASH FLOWS
Omnicare, Inc. and Subsidiary Companies
(In thousands)
For the years ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 57,721 $ 80,379 $ 51,951
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 69,364 47,636 31,105
Provision for doubtful accounts 22,056 12,405 8,370
Deferred tax provision 23,073 7,579 10,395
Non-cash portion of restructuring costs 4,198 1,948 170
Discontinued operations -- -- 2,154
Loss on note receivable -- -- 800
Changes in assets and liabilities, net of effects
from acquisition/disposal of businesses:
Accounts receivable and unbilled receivables (83,959) (84,276) (84,278)
Inventories 1,146 (18,786) (29,250)
Current and noncurrent assets (43,837) (15,466) (7,009)
Payables and accrued liabilities 25,886 28,972 15,343
Accrued employee compensation 15,202 3,999 4,294
Deferred revenue 5,278 (3,190) (951)
Current and noncurrent liabilities 4,986 28,307 7,141
- --------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 101,114 89,507 10,235
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of businesses (144,079) (398,686) (409,348)
Capital expenditures (58,749) (53,179) (41,278)
Marketable securities -- 2,084 905
Other (689) 63 (1,066)
- --------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (203,517) (449,718) (450,787)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings on line of credit facilities 170,000 305,000 8,341
Payments on line of credit facilities (10,000) -- --
Proceeds from long-term borrowings -- -- 354,951
Principal payments on long-term obligations (3,502) (22,796) (7,909)
Fees paid for financing arrangements (641) (1,761) (7,763)
(Payments) for and proceeds from exercise of stock options
and warrants, net of stock tendered in payment (2,152) 3,050 4,080
Dividends paid (8,203) (6,841) (5,596)
Effect of exchange rate changes on cash and other (144) (191) (451)
- --------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 145,358 276,461 345,653
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 42,955 (83,750) (94,899)
Cash and cash equivalents at beginning of period 54,312 138,062 232,961
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 97,267 $ 54,312 $ 138,062
========================================================================================================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Omnicare, Inc. and Subsidiary Companies
(In thousands, except per share data)
Unallocated Cumulative Total
Common Paid-in Retained Treasury Deferred Stock of Translation Stockholders'
Stock Capital Earnings Stock Compensation ESOP Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $82,754 $510,835 $106,560 $ -- $ (9,503) $(1,660) $ 233 $ 689,219
Pooling-of-interests (Note 2) 1,221 660 (1,620) -- -- -- -- 261
Net income -- -- 51,951 -- -- -- -- 51,951
Dividends paid ($0.07 per share) -- -- (5,596) -- -- -- -- (5,596)
Stock and warrants issued in
connection with acquisitions 2,807 74,155 129 -- -- -- -- 77,091
Exercise of warrants 758 10,456 -- 42 -- -- -- 11,256
Exercise of stock options 294 701 -- (346) -- -- -- 649
Stock awards, net of amortization 421 11,539 -- (2,379) (5,304) -- -- 4,277
Decrease in unallocated stock of
ESOP -- -- -- -- -- 720 -- 720
Other 6 771 (271) (243) -- -- (338) (75)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 88,261 609,117 151,153 (2,926) (14,807) (940) (105) 829,753
Pooling-of-interests (Note 2) 549 803 1,245 -- -- -- -- 2,597
Net income -- -- 80,379 -- -- -- -- 80,379
Dividends paid ($0.08 per share) -- -- (6,841) -- -- -- -- (6,841)
Stock and warrants issued in
connection with acquisitions 868 39,312 -- (4,107) -- -- -- 36,073
Exercise of warrants 175 1,965 -- 518 -- -- -- 2,658
Exercise of stock options 232 894 -- 3,669 -- -- -- 4,795
Stock awards, net of amortization 375 12,134 -- (1,320) 1,875 -- -- 13,064
Decrease in unallocated stock of
ESOP -- -- -- -- -- 940 -- 940
Other -- -- 1 -- -- -- 52 53
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 90,460 664,225 225,937 (4,166) (12,932) -- (53) 963,471
Pooling-of-interests (Note 2) 333 326 (297) -- -- -- -- 362
Net income -- -- 57,721 -- -- -- -- 57,721
Dividends paid ($0.09 per share) -- -- (8,203) -- -- -- -- (8,203)
Stock and warrants issued in
connection with acquisitions 151 3,799 -- (3) -- -- -- 3,947
Stock acquired for benefit plans -- -- -- (1,092) -- -- -- (1,092)
Exercise of warrants 52 697 -- -- -- -- -- 749
Exercise of stock options 14 (437) -- 806 -- -- -- 383
Stock awards, net of amortization 602 15,809 -- (2,495) (1,166) -- -- 12,750
Other -- -- (44) -- -- -- (1,664) (1,708)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $91,612 $684,419 $275,114 $(6,950) $(14,098) $ -- $(1,717) $1,028,380
==============================================================================================================================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of Omnicare, Inc. include the
accounts of all wholly owned subsidiaries ("Omnicare" or the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Translation of Foreign Financial Statements
Assets and liabilities of the Company's foreign operations are
translated at the year-end rate of exchange, and the income statements are
translated at the average rate of exchange for the year. Gains or losses from
translating foreign currency financial statements are accumulated in a separate
component of stockholders' equity.
Cash Equivalents
Cash equivalents include all investments in highly liquid instruments
with original maturities of three months or less.
Inventories
Inventories consist primarily of purchased pharmaceuticals and medical
supplies held for sale to customers and are stated at the lower of cost or
market. Cost is determined using the first-in, first-out ("FIFO") method.
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 as incurred. Depreciation
of properties and equipment is computed using the straight-line method over the
estimated useful lives of the assets, ranging from three to forty years.
Leasehold improvements are amortized over the lesser of the lease terms,
including renewal options, or their useful lives.
Leases
Leases that substantially transfer all of the benefits and risks of
ownership of property to Omnicare or otherwise meet the criteria for
capitalizing a lease under generally accepted accounting principles are
accounted for as capital leases. An asset is recorded at the time a capital
lease is entered into together with its related long-term obligation to reflect
its purchase and financing. Property and equipment recorded under capital leases
are depreciated on the same basis as previously described. Rental payments under
operating leases are expensed as incurred.
Goodwill, Intangibles and Other Assets
Intangible assets, comprised primarily of goodwill arising from
business combinations accounted for as purchase transactions, are amortized
using the straight-line method over forty years.
At each balance sheet date, the Company reviews the recoverability of
goodwill. The measurement of possible impairment is based primarily on the
ability to recover the balance of the goodwill from expected future operating
cash flows on an undiscounted basis. In management's opinion, no such impairment
exists as of December 31, 1999 or 1998.
Debt issuance costs as of December 31, 1999 and 1998 are included in
other assets and are amortized using the straight-line method over the life of
the related debt.
Fair Value of Financial Instruments
The fair value of all financial instruments of the Company approximates
the amounts presented on the Consolidated Balance Sheet.
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.
Additionally, a portion of the Company's revenues are earned by
performing services under contracts with various pharmaceutical, biotechnology,
medical device and diagnostics companies, based on contract terms. Most of the
contracts provide for services to be performed on a units of service basis.
These contracts specifically identify the units of service and unit pricing.
Under these contracts, revenue is generally recognized upon completion of the
units of service, unless the units of service are performed over an extended
period of time. For extended units of service, revenue is recognized based on
labor hours expended as a percentage of total labor hours expected to be
expended. For time-and-materials contracts, revenue is recognized at contractual
hourly rates, and for fixed-price contracts revenue is recognized using a method
similar to that used for extended units of service. The Company's contracts
provide for price renegotiations upon scope of work changes. The Company
recognizes revenue related to these scope changes when underlying services are
performed and realization is assured. In a number of cases, clients are required
to make termination payments
F-7
in addition to payments for services already rendered. Any anticipated losses
resulting from contract performance are charged to earnings in the period
identified. Billings and payments are specified in each contract. Revenue
recognized in excess of billings is classified as unbilled receivables, while
billings in excess of revenue are classified as deferred revenue on the
accompanying balance sheets.
Income Taxes
The Company accounts for income taxes using the asset and liability
method under which deferred income taxes are recognized for the tax consequences
of temporary differences by applying enacted statutory tax rates to differences
between the tax bases of assets and liabilities and their reported amounts in
the consolidated financial statements.
Earnings Per Share Data
Basic earnings per share are computed based on the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share include the dilutive effect of stock options and warrants. The 5.0%
Convertible Subordinated Notes due 2007 (issued in December 1997) were not
included in the 1999, 1998 and 1997 diluted earnings per share calculations
since the impact was antidilutive.
Comprehensive Income
Comprehensive income of the Company differs from net income due to
foreign currency translation adjustments.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires recognition of all derivatives as either assets or
liabilities measured at fair value. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the resulting
designation. SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of the FASB Statement No. 133,"
amended Statement No. 133 to be effective for all fiscal years beginning after
June 15, 2000. The adoption of SFAS No. 133 is not expected to have a material
effect on the Company's consolidated financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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 products and related pharmacy management services
and medical supplies to long-term care facilities and their residents. The
Company's strategy includes acquisitions of freestanding institutional pharmacy
businesses as well as other assets, generally insignificant in size, which are
combined with existing pharmacy operations to augment their internal growth.
From time to time, the Company may acquire other businesses such as long-term
care software companies, contract research organizations, pharmacy consulting
companies and medical supply companies, which complement the Company's core
business.
During the year ended December 31, 1999, the Company completed five
acquisitions (excluding insignificant acquisitions), all of which were
institutional pharmacy businesses. Four of the acquisitions were accounted for
as purchases and one as a pooling-of-interests. The impact of the
pooling-of-interests transaction on the Company's historical consolidated
financial statements was not material. Consequently, prior period and current
year financial statements were not restated for this transaction.
During the year ended December 31, 1998, the Company completed 15
acquisitions (excluding insignificant acquisitions), including 12 institutional
pharmacy businesses, a long-term care software company and two contract research
organizations. Eleven of the acquisitions were accounted for as purchases and
four as poolings-of-interests. The impact of the CompScript, Inc. ("CompScript")
and IBAH, Inc. ("IBAH") pooling-of-interests transactions, discussed below in
the "Pooling-of-Interests" section, on the Company's historical consolidated
financial statements was material. Consequently, Omnicare's financial statements
were restated to include the accounts and results of operations of CompScript
and IBAH for all periods presented. The impact of the other two
pooling-of-interests transactions completed by Omnicare on the Company's
historical consolidated financial statements was not material. Consequently,
prior period and current year financial statements were not restated for these
transactions.
During the year ended December 31, 1997, the Company completed 25
acquisitions (excluding insignificant acquisitions), including 21 institutional
pharmacy businesses, a long-term care software company, two contract research
organizations and a health economics consulting business (completed by IBAH).
Eighteen of the acquisitions were accounted for as purchases and seven as
poolings-of-interests. The
F-8
impact of four of the pooling-of-interests transactions on the Company's
historical consolidated financial statements was not material. Consequently,
prior period and current year financial statements were not restated for these
transactions. The remaining three pooling-of-interests transactions were
completed by CompScript and the accounts and results of operations of these
entities were included in the CompScript financial statements used to prepare
Omnicare's restated financial statements.
Purchases
For all acquisitions accounted for as purchases, including
insignificant acquisitions, the purchase price paid for each has been allocated
to the fair value of the assets acquired and liabilities assumed. Purchase price
allocations are subject to final determination within one year after the
acquisition date.
On June 2, 1999, Omnicare announced the completion of the acquisition
of the institutional pharmacy operations of Life Care Pharmacy Services, Inc.
("Life Care"), an affiliate of Life Care Centers of America, for $63 million in
cash and 300,000 warrants to purchase Omnicare common stock at $29.70 per share.
The warrants have a seven-year term and are first exercisable in June 2002. Life
Care had, at the time of the acquisition, contracts to provide comprehensive
pharmacy and related consulting services to approximately 17,000 residents in
twelve states.
On September 17, 1998, Omnicare announced the completion of the
acquisition of the institutional pharmacy operations of Extendicare Health
Services, Inc. ("EHSI"), a wholly owned subsidiary of Extendicare Inc., for $250
million in cash, 125,000 shares of Omnicare common stock and 1.5 million
warrants to purchase Omnicare common stock at $48.00 per share. The warrants
have a seven-year term and are first exercisable in September 2001. Based in
Milwaukee, Wisconsin, the pharmacy business of EHSI, operating under the name
United Professional Companies, Inc., had, at the time of the acquisition,
contracts to provide comprehensive pharmacy, related consulting and infusion
therapy services to approximately 55,000 residents in more than 550 facilities
in 12 states.
On September 16, 1997, Omnicare completed the acquisition of all
outstanding shares of American Medserve Corporation ("AMC"). At the time of the
acquisition, AMC was providing comprehensive pharmacy and related services to
approximately 51,400 residents in 720 long-term care facilities in 11 states.
The cash purchase price of AMC was approximately $239.7 million, including bank
debt totaling $16.7 million, which was retired immediately following the
acquisition.
The following table summarizes the aggregate purchase price for all
businesses acquired which have been accounted for as purchases (in thousands):
Businesses acquired in
1999 1998 1997
- -----------------------------------------------------------------------------
Cash $ 95,058 $342,460 $392,906
Amounts payable in
the future 8,805 13,749 14,234
Common stock 2,482 22,314 75,244
Warrants 1,644 10,509 287
Assumption of indebtedness -- -- 2,520
- -----------------------------------------------------------------------------
$107,989 $389,032 $485,191
=============================================================================
Cash in the above table represents payments made in the year of
acquisition, including retirement of indebtedness. This amount differs from cash
paid for acquisition of businesses in the Consolidated Statement of Cash Flows
due primarily to purchase price payments made during the year pursuant to
acquisition agreements entered into in prior years.
Warrants outstanding issued in connection with acquisitions as of
December 31, 1999 represent the right to purchase 2.1 million shares of Omnicare
common stock. These warrants can be exercised at any time through 2006 at prices
ranging from $14.25 to $48.00 per share. Warrants to purchase 52,000 shares of
common stock, issued in prior years, were exercised in 1999.
The purchase agreements for acquisitions generally include provisions
whereby the seller will or may be paid additional consideration at a future date
depending on the passage of time and/or whether certain future events occur. The
agreements also include a number of representations and covenants by the seller
and provide that if those covenants are violated or found not to have been true,
Omnicare may offset any payments required to be made at a future date against
any claims it may have under the agreement caused by the covenant and
representation violations. There are no significant anticipated future offsets
against indemnity provisions or related accruals as of December 31, 1999 and
1998. Amounts contingently payable through 2001 totaled $18,575,000 as of
December 31, 1999 and, if paid, will be recorded as additional purchase price,
serving to increase goodwill in the period in which the contingencies are
resolved.
The results of operations of the companies acquired in purchase
transactions have been included in the consolidated results of operations of the
Company from the dates of acquisition.
Unaudited pro forma combined results of operations of the Company for
the years ended December 31, 1999
F-9
and 1998, are presented below. Such pro forma presentation has been prepared
assuming that the acquisitions had been made as of January 1, 1998 and includes
pooling-of-interests expenses and restructuring and other related charges (in
thousands, except per share data).
For the years ended December 31,
1999 1998
- -----------------------------------------------------------------------------
Pro Forma
Sales $1,883,987 $1,715,515
Net income 57,522 82,538
Earnings per share:
Basic $ 0.63 $ 0.92
Diluted $ 0.63 $ 0.92
- -----------------------------------------------------------------------------
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. The primary pro forma adjustments reflect amortization of goodwill
acquired on a straight-line basis over 40 years and interest costs. The pro
forma information does not give effect to any synergies anticipated by the
Company's management as a result of the acquisitions, in particular improvements
in gross margin attributable to the Company's purchasing leverage associated
with purchases of pharmaceuticals and the elimination of duplicate payroll and
other operating expenses.
Pooling-of-Interests
On June 26, 1998, the Company completed the acquisition of CompScript,
Inc. in a pooling-of-interests transaction. Pursuant to the terms of the merger
agreement, CompScript stockholders received .12947 of a share of Omnicare common
stock for each share owned of CompScript common stock. Omnicare issued
approximately 1.8 million shares of its common stock with a value of
approximately $67 million in this transaction.
CompScript is a Boca Raton, Florida-based provider of comprehensive
pharmacy management, infusion therapy and related consulting services to the
long-term care, alternate care and managed care markets. At the time of the
acquisition, CompScript served approximately 20,000 residents in 137 long-term
care facilities in five states.
On June 29, 1998, the Company completed the acquisition of IBAH, Inc.
in a pooling-of-interests transaction. Pursuant to the terms of the merger
agreement, IBAH stockholders received .1638 of a share of Omnicare common stock
for each share owned of IBAH common stock. Omnicare issued approximately 4.3
million shares of its common stock with a value of approximately $159 million in
this transaction.
IBAH, headquartered in Blue Bell, Pennsylvania, is an international
provider of comprehensive product development services to client companies in
the pharmaceutical, biotechnology, medical device and diagnostics industries.
IBAH offers services for all stages of drug development that are intended to
help client companies to accelerate products from discovery through development
and commercialization more cost effectively.
Net sales and net income (including pooling-of-interests expenses,
restructuring and other related charges, other expenses and discontinued
operations) for Omnicare, CompScript and IBAH for the periods prior to the
transactions are as follows (in thousands):
Omnicare CompScript IBAH Total
- -------------------------------------------------------------------------------
Six months ended
June 30, 1998
Sales $616,453 $28,237 $53,762 $ 698,452
Net income (loss) 35,085 (2,147) (4,426) 28,512
Year ended
December 31, 1997
Sales $895,702 $50,631 $88,051 $1,034,384
Net income (loss) 55,705 (2,357) (1,397) 51,951
In connection with the CompScript and IBAH mergers, in the second
quarter of 1998, Omnicare recorded a charge to operating expenses of $17,723,000
($15,391,000 after taxes) for direct and other merger-related costs pertaining
to the merger transactions and certain related restructuring actions.
Merger transaction costs consisted primarily of fees for investment
bankers, attorneys, accountants, financial printing and other related charges.
Restructuring costs include severance and exit costs. Details of these costs
follow (in thousands):
Balance at Balance at
Initial 1998 December 31, 1999 December 31,
Provision Activity 1998 Activity 1999
- --------------------------------------------------------------------------------
Merger
transaction
costs $14,096 $(7,536) $6,560 $(6,560) $ --
Restructuring
costs:
Employee
severance 1,413 (395) 1,018 (1,018) --
Exit costs 2,214 (1,502) 712 (712) --
- --------------------------------------------------------------------------------
Total $17,723 $(9,433) $8,290 $(8,290) $ --
================================================================================
Restructuring costs include the costs of restructuring the CompScript
mail order pharmacy business and the cancellation of certain of its vendor
agreements along with severance and exit costs associated with the consolidation
of certain IBAH facilities and the restructuring of its pharmaceutics business.
These actions resulted in the reduction of
F-10
approximately 20 employees. Included in the exit costs were $1,948,000 of
non-cash items. At December 31, 1999, all actions relating to these
restructuring activities were substantially complete.
In accordance with accounting rules for pooling-of-interests
transactions, charges to operating income for acquisition-related expenses were
recorded upon completion of the pooling acquisitions. These acquisition-related
expenses totaled $822,000 ($586,000 aftertax) for the 1999 transaction,
$15,441,000 ($13,869,000 aftertax) for the 1998 transactions, and $4,321,000
($3,935,000 aftertax) for the 1997 transactions. During 1999, the Company
recorded income of $877,000 ($962,000 aftertax) relating to the net reversal of
estimated CompScript and IBAH acquisition-related expenses resulting from the
finalization of those costs.
Note 3 - Cash and Cash Equivalents
A summary of cash and cash equivalents follows (in thousands):
December 31,
1999 1998
- -----------------------------------------------------------------
Cash $37,115 $27,087
Money market funds 8,658 1,660
U.S. Treasury-backed
repurchase agreements 51,494 20,308
Commercial paper -- 3,769
U.S. government securities -- 884
Corporate bonds -- 604
- -----------------------------------------------------------------
$97,267 $54,312
=================================================================
Repurchase agreements represent investments in U.S. Treasury bills
under agreements to resell the securities to the counterparty, usually
overnight, but in no case longer than 30 days. The Company has a collateralized
interest in the underlying securities of repurchase agreements, which are
segregated in the accounts of the bank counterparty.
Note 4 - Properties and Equipment
A summary of properties and equipment follows (in thousands):
December 31,
1999 1998
- -----------------------------------------------------------------
Land $ 1,553 $ 1,456
Buildings 6,246 4,042
Computer hardware and software 103,164 68,083
Machinery and equipment 92,925 77,393
Furniture, fixtures and
leasehold improvements 64,267 62,251
- -----------------------------------------------------------------
268,155 213,225
Accumulated depreciation (106,022) (76,854)
- -----------------------------------------------------------------
$162,133 $136,371
=================================================================
Note 5 - Leasing Arrangements
The Company has operating leases that 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
significant contingent rentals in the Company's operating leases.
The following is a schedule of future minimum rental payments required
under operating leases that have initial or remaining noncancellable terms in
excess of one year as of December 31, 1999 (in thousands):
2000 $ 19,925
2001 18,241
2002 14,252
2003 11,282
2004 9,319
Later years 46,652
-------------------------------------------------------
Total minimum payments required $119,671
=======================================================
Total rent expense under operating leases for the years ended December
31, 1999, 1998 and 1997 were $25,307,000, $20,515,000 and
$13,345,000,respectively.
Note 6 - Long-Term Debt
A summary of long-term debt follows (in thousands):
December 31,
1999 1998
- -----------------------------------------------------------------------
Revolving line-of-credit facilities $465,000 $305,000
Convertible Subordinated Notes due 2007 345,000 345,000
Capitalized lease obligations 4,357 4,400
- -----------------------------------------------------------------------
814,357 654,400
Less current portion (77,413) (2,844)
- -----------------------------------------------------------------------
$736,944 $651,556
=======================================================================
The following is a schedule by year of required long-term debt payments
as of December 31, 1999 (in thousands):
2000 $ 77,413
2001 391,574
2002 285
2003 69
2004 10
Later years 345,006
-------------------------------------------------------
$814,357
=======================================================
Total interest payments made for the years ended December 31, 1999,
1998 and 1997 were $46,202,000, $22,079,000 and $4,986,000, respectively.
F-11
Convertible Subordinated Notes
On December 10, 1997, the Company issued $345,000,000 principal amount
of 5.0% Convertible Subordinated Notes ("1997 Notes") due 2007. The 1997 Notes
are convertible into common stock at any time after March 4, 1998 at the option
of the holder at a price of $39.60 per share. In connection with the issuance of
the 1997 Notes, the Company deferred $8.5 million in debt issuance costs. The
Company amortized $850,000 of deferred debt issuance costs relating to the 1997
Notes in each of the two years ended December 31, 1999.
ESOP Loan Guarantee
In 1988, the Company established an Employee Stock Ownership Plan
("ESOP") which covers certain acquired entities' employees and corporate
headquarter's employees. The ESOP used proceeds from a $4 million bank loan to
purchase 1,973,748 shares of the Company's common stock on the open market at
prices ranging from $1.94 to $2.13 per share. Inasmuch as the Company guaranteed
the repayment of this obligation, it recorded the ESOP's bank debt as long-term
debt and also as a reduction of stockholders' equity in the consolidated balance
sheet. The final installment payment on this obligation was made in 1998.
The ESOP serviced its debt with Company contributions, which were
previously made to the Company's Employee Savings and Investment Plan, and
dividends received on shares held by the ESOP. Principal and interest payments
on the bank debt were made in increasing quarterly installments over a ten-year
period. The loan bore interest at the per annum rate of 7% and was secured by
the unallocated shares of common stock held by the ESOP trust. There were no
unallocated shares at December 31, 1999 and 1998.
The Company funded ESOP expense as accrued. The components of total
ESOP expense are as follows (in thousands):
For the years ended December 31,
1998 1997
- ---------------------------------------------------------------------
Interest expense $ 30 $ 90
Principal payments 940 720
Dividends on ESOP stock (102) (100)
- ---------------------------------------------------------------------
$ 868 $ 710
=====================================================================
Revolving Credit Facilities
In 1996, the Company negotiated a five-year, $400 million line of
credit agreement with a consortium of sixteen banks. Borrowings under this
agreement bear interest based upon LIBOR plus a spread of 25 to 60 basis points,
dependent upon the Company's fixed charge coverage ratio, or other rates
negotiated with the banks. Additionally, a commitment fee on the unused portion
of the facility ranges from 9 to 20 basis points, and is also based on the
Company's fixed charge coverage ratio. The agreement contains debt covenants
which include the fixed charge coverage ratio and minimum consolidated net
worth.
In 1998, the Company amended its five-year, $400 million line of credit
to permit an additional 364-day, $400 million line of credit, which is
convertible at maturity into a one-year term loan. During 1999, Omnicare renewed
this 364-day, $400 million revolving line of credit through September 2, 2000,
with no change in pricing or terms. Borrowings under the amended five-year, $400
million agreement bear interest based on LIBOR plus a spread of 90 to 125 basis
points, dependent upon the Company's fixed charge coverage ratio. A commitment
fee on the unused portion of the facility ranges from 20 to 35 basis points,
also dependent upon the Company's fixed charge coverage ratio. A utilization fee
has been added to this amended agreement which requires an additional spread of
10 to 25 basis points whenever borrowings exceed 50% of the $400 million line of
credit. The amended agreement contains debt covenants which include the fixed
charge coverage ratio and minimum consolidated net worth. The Company is in
compliance with the covenants of the amended five-year agreement. The total
amount outstanding under the amended five-year agreement as of December 31, 1999
was $390,000,000.
Borrowings under the 364-day, $400 million line of credit bear interest
based on LIBOR plus a spread of 75 to 162.5 basis points, dependent on the
Company's debt ratings from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group. A commitment fee on the unused portion of the facility
ranges from 10 to 25 basis points, and is also based on the Company's debt
ratings from Moody's and Standard & Poor's. The agreement contains debt
covenants which include a fixed charge coverage ratio and minimum consolidated
net worth levels. The Company is in compliance with these covenants. The total
amount outstanding under the 364-day credit facility as of December 31, 1999 was
$75,000,000. In connection with the amended five-year agreement and the 364-day,
$400 million line of credit, the Company deferred $2.8 million in debt issuance
costs in late 1998 which is being amortized over the life of the agreements.
The Company amortized $877,000 of deferred debt issuance costs relating
to the revolving credit facilities in 1999 and none in 1998.
Note 7 - Stock Incentive Plans
The Company has three stock incentive plans under which it may grant
stock-based incentives to key employees.
Under the 1992 Long-Term Stock Incentive Plan, the Company may grant
stock awards, and stock options may be granted at a price equal to the fair
market value at the date of grant. Under this plan, stock options
F-12
generally become exercisable beginning one year following the date of grant in
four equal annual installments. As of December 31, 1999, 1,720,000 shares were
available for grant under this plan.
During 1995, the Company's Board of Directors and stockholders approved
the 1995 Premium-Priced Stock Option Plan, providing options to purchase
2,520,000 shares of Company common stock available for grant at an exercise
price of 125% of the stock's fair market value at the date of grant. As of
December 31, 1999, 5,000 shares were available for grant under this plan.
During 1998, the Company's Board of Directors approved the 1998
Long-Term Employee Incentive Plan, under which the Company may grant stock-based
incentives to employees (excluding officers and directors of the Company) in an
aggregate amount up to 1,000,000 shares of Company common stock for
non-qualified options, stock awards and stock appreciation rights. As of
December 31, 1999, 328,000 shares were available for grant under this plan.
In connection with the 1998 pooling-of-interests business combinations
described in Note 2, the Company converted all outstanding options to purchase
common stock of CompScript, Inc. and IBAH, Inc. into options to acquire
approximately 924,000 shares of the Company's common stock at exercise prices of
$0.73 to $77.24 per share.
Summary information for stock options is presented below (in thousands,
except exercise price data):
1999
- -------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
Options outstanding,
beginning of year 3,137 $23.03
Options granted 3,793 14.59
Options exercised (114) 11.74
Options forfeited (124) 32.72
- -------------------------------------------------------------------------
Options outstanding, end of year 6,692 $18.42
- -------------------------------------------------------------------------
Options exercisable, end of year 2,721 $17.16
=========================================================================
1998
- -------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
- -------------------------------------------------------------------------
Options outstanding,
beginning of year 3,206 $17.85
Options granted 804 36.10
Options exercised (531) 12.66
Options forfeited (342) 26.19
- -------------------------------------------------------------------------
Options outstanding, end of year 3,137 $23.03
- -------------------------------------------------------------------------
Options exercisable, end of year 1,598 $16.13
=========================================================================
1997
- -------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
- -------------------------------------------------------------------------
Options outstanding,
beginning of year 3,151 $14.78
Options granted 1,111 26.91
Options exercised (1,003) 17.11
- -------------------------------------------------------------------------
Options forfeited (53) 31.40
- -------------------------------------------------------------------------
Options outstanding, end of year 3,206 $17.85
- -------------------------------------------------------------------------
Options exercisable, end of year 1,592 $13.01
=========================================================================
The following summarizes information about stock options outstanding
and exercisable as of December 31, 1999 (in thousands, except exercise price
data):
OPTIONS OUTSTANDING
- -----------------------------------------------------------------------
Weighted Average
Number Remaining Weighted
Range of Outstanding Contractual Life Average
Exercise Prices at 12/31/99 (in years) Exercise Price
- -----------------------------------------------------------------------
$ 3.00 - $12.34 2,260 6.73 $10.27
13.35 - 15.26 31 5.42 13.49
15.42 - 15.42 2,515 9.50 15.42
17.55 - 77.24 1,886 7.56 32.28
- -----------------------------------------------------------------------
$ 3.00 - $77.24 6,692 8.00 $18.42
=======================================================================
OPTIONS EXERCISABLE
- -------------------------------------------------
Number Weighted
Range of Exercisable Average
Exercise Prices at 12/31/99 Exercise Price
- -------------------------------------------------
$ 3.00 - $12.34 1,720 $ 9.61
13.35 - 15.26 30 13.47
15.42 - 15.42 -- --
17.55 - 77.24 971 30.65
- -------------------------------------------------
$ 3.00 - $77.24 2,721 $17.16
=================================================
Nonvested stock awards that are granted to key employees at the
discretion of the Compensation and Incentive Committee of the Board of Directors
are restricted as to the transfer of ownership and generally vest over a
seven-year period with a greater proportion vesting in the latter years.
Unrestricted stock awards are granted annually to members of the Board of
Directors. The fair value of a stock award is equal to the fair market value of
a share of Company stock at the grant date.
F-13
Summary information relating to stock award grants is presented below:
For the years ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------
Nonvested shares 596,630 369,651 421,464
Unrestricted shares 5,308 5,600 6,000
Weighted-average grant
date fair value $ 26.63 $ 31.75 $ 27.36
- -------------------------------------------------------------------------------
When granted, the cost of nonvested stock awards is deferred and amortized
over the vesting period. Unrestricted stock awards are expensed during the year
granted. During 1999, 1998 and 1997, the amount of compensation expense related
to stock awards charged against income was $3,787,000, $2,090,000 and
$1,312,000, respectively.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for stock-based incentives granted under these plans
according to Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." As a result, no compensation cost has been recognized for
the stock options granted under the incentive plans. The fair value of each
option at grant date is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1999, 1998
and 1997: risk-free interest rate of 6.75% (5.75% in 1998 and 6% in 1997),
volatility of 41% (36% in 1998 and 35% in 1997), dividend yield of 0.8% (0.2% in
1998 and 1997) and expected life of 4.0 years (4.2 years in 1998 and 1997). The
weighted average fair value at grant date during 1999, 1998 and 1997 was $4.06,
$13.38 and $11.87, respectively.
Pro forma data (including pooling-of-interests expenses, restructuring and
other related charges, other expenses and discontinued operations) as though the
Company had accounted for stock-based compensation cost in accordance with SFAS
No. 123 are as follows (in thousands, except per share data):
For the years ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------
Pro Forma
Net income $53,604 $77,707 $49,923
Earnings per share:
Basic $ 0.59 $ 0.87 $ 0.58
Diluted $ 0.59 $ 0.87 $ 0.58
- ----------------------------------------------------------------------------
The above pro forma information includes only stock options granted in 1995
and thereafter. Because it does not include stock options granted prior to 1995,
the pro forma effects are not representative of effects on net income or
earnings per share for future years.
Note 8 - Related Party Transactions
The Company subleases offices from Chemed Corporation ("Chemed"), a
stockholder, and is charged for the occasional use of Chemed's corporate
aviation department, consulting services pertaining to information systems
development 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 for the years ended December 31, 1999, 1998 and 1997 were
$1,890,000, $2,162,000 and $4,039,000, respectively. Net amounts owed by the
Company to Chemed as of December 31, 1999 and 1998 were $401,000 and $309,000,
respectively.
Note 9 - Employee Benefit Plans
The Company has various defined contribution savings plans under which
eligible employees can participate by contributing a portion of their salary for
investment, at the direction of each employee, in one or more investment funds.
Several of the plans were adopted in connection with certain of the Company's
acquisitions. The plans are tax-deferred arrangements pursuant to Internal
Revenue Code ("IRC") Section 401(k) and are subject to the provisions of the
Employee Retirement Income Security Act ("ERISA"). The Company matches employee
contributions in varying degrees based on the contribution levels of the
employees.
The Company has a non-contributory, defined benefit pension plan covering
certain corporate headquarters employees and the employees of several companies
sold by the Company in 1992, for which benefits ceased accruing upon the sale
(the "Qualified Plan"). Benefits accruing under this plan to corporate
headquarters employees were fully vested and frozen as of January 1, 1994. The
Company also has an excess benefits plan which provides retirement payments to
participants in amounts consistent with what they would have received under the
Qualified Plan if payments to them under the Qualified Plan were not limited by
the IRC and other restrictions. Retirement benefits are based primarily on an
employee's years of service and compensation near retirement. Plan assets are
invested primarily in U.S. Treasury obligations. The Company's policy is to fund
pension costs in accordance with the funding provisions of ERISA.
In addition, the Company also has a supplemental pension plan in which
certain of its executive officers participate. Retirement benefits under the
supplemental pension plan are calculated on the basis of a specified
F-14
percentage of the executive's covered compensation, years of credited service
and a vesting schedule, as specified in the plan document.
Actuarial assumptions used to calculate the benefit obligations and
expenses include a 7.75% interest rate as of December 31, 1999 (6.75% and 7.0%
at December 31, 1998 and 1997, respectively), an expected long-term rate of
return on assets of 8% and a 6% rate of increase in compensation levels.
The aggregate Accumulated Benefit Obligation in excess of aggregate plan
assets ("plan assets") as of December 31, 1999 and 1998 was $1.1 million and
$1.9 million, respectively. The aggregate Projected Benefit Obligation ("PBO")
in excess of plan assets as of December 31, 1999 and 1998 was $6.6 million and
$7.0 million, respectively. The decrease in the net PBO from the prior year
primarily relates to an increase in plan assets of $4.6 million due to employer
contributions, offset in part by plan amendments (supplemental pension plan) of
$1.8 million, interest expense of $1.2 million and service costs of $0.8
million. Plan assets amounted to $13.3 million and $8.7 million at December 31,
1999 and 1998, respectively.
Expense relating to the Company's defined benefit plans for the years ended
December 31, 1999, 1998 and 1997 was $3,447,000, $2,462,000 and $2,552,000,
respectively. Expense relating to the Company's defined contribution
plans (including the ESOP described in Note 6 to the Consolidated Financial
Statements) for the years ended December 31, 1999, 1998 and 1997 was $2,524,000,
$1,648,000 and $741,000, respectively.
Note 10 - Income Taxes
The provision for income taxes for continuing operations is comprised of
the following (in thousands):
For the years ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------
Current:
Federal $ 8,161 $ 44,958 $ 27,155
State and local 2,615 2,940 4,528
Foreign 101 10 --
- ---------------------------------------------------------------------------------
10,877 47,908 31,683
- ---------------------------------------------------------------------------------
Deferred:
Federal 23,134 7,131 8,734
State (61) 448 1,411
- ---------------------------------------------------------------------------------
23,073 7,579 10,145
- ---------------------------------------------------------------------------------
Income taxes $ 33,950 $ 55,487 $ 41,828
=================================================================================
Tax benefits related to the exercise of stock options, stock awards and
stock warrants have been credited to paid-in capital in amounts of $938,000,
$6,392,000 and $7,827,000 for 1999, 1998 and 1997, respectively.
The difference between the Company's reported income tax expense and the
federal income tax expense computed at the statutory rate of 35% is explained in
the following table (in thousands):
For the years ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Federal income
tax at the
statutory
rate $ 32,085 35.0% $ 47,553 35.0% $ 33,560 35.0%
State and local
income taxes,
net of federal
income tax
benefit 1,660 1.8 3,012 2.2 4,115 4.3
Amortization of
nondeductible
intangible
assets 1,998 2.2 1,894 1.4 1,414 1.5
Nondeductible
pooling-of-
interests/merger
expenses (1,197) (1.3) 2,291 1.7 1,079 1.1
Nondeductible
other expenses
(Note 13) -- -- -- -- 1,855 1.9
Effect of foreign
losses not
benefited -- -- -- -- 1,466 1.5
NOL carryforward
(utilized) -- -- -- -- (2,694) (2.8)
Other (596) (0.7) 737 0.5 1,033 1.1
- ---------------------------------------------------------------------------------------------------
Total income
taxes $ 33,950 37.0% $ 55,487 40.8% $ 41,828 43.6%
===================================================================================================
Income tax payments (net) made in 1999, 1998 and 1997 amounted to
$18,629,000, $27,252,000 and $22,824,000, respectively.
A summary of deferred tax assets and liabilities follows (in thousands):
December 31,
1999 1998
- ---------------------------------------------------------------------------------
Accounts receivable reserves $ 5,387 $ 2,715
Accrued liabilities 34,086 28,982
Other 1,118 816
- ---------------------------------------------------------------------------------
Gross deferred tax assets $40,591 $32,513
=================================================================================
Fixed assets and depreciation methods $17,004 $ 5,541
Amortization of intangibles 38,187 25,858
Other current and noncurrent assets 5,361 4,570
Other 63 426
- ---------------------------------------------------------------------------------
Gross deferred tax liabilities $60,615 $36,395
=================================================================================
F-15
Note 11 - Earnings Per Share Data
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share ("EPS") computations (in thousands,
except per share data):
For the year ended December 31, 1999
Income Shares Per Share
(Numerator) (Denominator) Amounts
- -----------------------------------------------------------------------------
Basic EPS
Net income $57,721 90,999 $0.63
=====
Effect of Dilutive Securities
Stock options
and stock warrants -- 239
- --------------------------------------------------------------
Diluted EPS
Net income plus
assumed conversions $57,721 91,238 $0.63
============================================================== =====
For the year ended December 31, 1998
Income Shares Per Share
(Numerator) (Denominator) Amounts
- -----------------------------------------------------------------------------
Basic EPS
Net income $80,379 89,081 $0.90
=====
Effect of Dilutive Securities
Stock options and
stock warrants -- 705
- --------------------------------------------------------------
Diluted EPS
Net income plus
assumed conversions $80,379 89,786 $0.90
============================================================== =====
For the year ended December 31, 1997
Income Shares Per Share
(Numerator) (Denominator) Amounts
- -----------------------------------------------------------------------------
Basic EPS
Income from continuing
operations $54,105 85,692 $0.63
=====
Effect of Dilutive Securities
Stock options and
stock warrants -- 1,018
- --------------------------------------------------------------
Diluted EPS
Income from continuing
operations plus
assumed conversions $54,105 86,710 $0.62
============================================================== =====
The $345,000,000 of 5.0% Convertible Subordinated Notes due 2007 that
are convertible into 8,712,121 shares at $39.60 per share were outstanding
during 1999, 1998 and December 1997, but were not included in the computation of
diluted EPS because the impact during these periods was anti-dilutive.
Note 12 - Restructuring and
Other Related Charges
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 will complement
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
consolidations/relocations of approximately 44 facilities, the closing of
approximately 20 sites and the creation of nine new sites. These strategic
measures are designed to lead to the net reduction of approximately 1,700 full-
and part-time positions upon completion of the plan.
In connection with this program, Omnicare recorded charges to operating
expenses totaling $35,394,000 ($22,698,000 after taxes) for restructuring and
other related charges for the year ended December 31, 1999. Additional charges
of this nature are expected to be incurred and expensed in 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 lease obligations, the write-off
of other assets (representing $4,198,000 of non-cash items) 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
F-16
program follow (in thousands):
Utilized as of Balance at
1999 December 31, December 31,
Provision 1999 1999
- -----------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Restructuring
charges 32,840 $(14,845) $17,995
======================
Other related charges 2,554
- --------------------------------------------------
Total-restructuring
and other related
charges $35,394
==================================================
As of December 31, 1999, the Company had incurred approximately $7.1
million of severance and other employee-related costs relating to the reduction
of approximately 673 employees. All remaining liabilities recorded at December
31, 1999 were classified as current liabilities since the Company expects that
the overall restructuring program will be completed in 2000.
In connection with the 1998 pooling-of-interests transactions with
CompScript and IBAH, the Company recorded a restructuring charge of $3,627,000
before taxes ($2,689,000 after taxes), as further discussed at Note 2 to the
Consolidated Financial Statements.
During 1997, IBAH implemented a restructuring plan for its
International Division and recorded restructuring charges of $1,208,000
($1,208,000 after taxes), consisting primarily of termination benefits for 14
employees and an accrual for lease-related charges. As of December 31, 1999, the
plan has been completed. Resultantly, all of the employee terminations have
occurred and $636,000 of termination benefits have been paid. In addition,
lease-related costs of $572,000 have been paid.
Note 13 - Other Expenses
On April 17, 1998, Omnicare concluded the previously announced
tentative settlement with the U.S. Attorney's office in the Southern District of
Illinois regarding the government's investigation of its Belleville, Illinois
subsidiary, Home Pharmacy Services, Inc. In accordance with the terms of the
tentative settlement, in the third quarter of 1997, Omnicare recorded an unusual
charge of $6,313,000 ($5,958,000 after taxes) for the estimated costs, and legal
and other expenses, associated with resolving the investigation. The $6,313,000
consisted of anticipated payments to the government agencies of $5,300,000, and
estimated legal and other professional fees directly attributable to the
investigation of $1,013,000. The reserve was adequate to cover the final
settlement. The settlement did not result in any criminal charges against Home
Pharmacy Services. Additionally, Home Pharmacy Services continues to participate
in government reimbursement programs under the terms of the settlement. Home
Pharmacy Services, which was acquired by Omnicare in 1992, has continued to
provide complete pharmacy services to nursing facility residents in its market
area without interruption. The pharmacy operation accounted for less than 2% of
Omnicare's total sales and net income for the year ended December 31, 1999.
In March 1997, CompScript recorded an $800,000 charge ($499,000 after
taxes) relating to the write-down of a note receivable from a former affiliate
of CompScript.
Note 14 - Discontinued Operations
On June 30, 1997, IBAH closed the software commercialization unit of
RBI. Accordingly, all operating results of this unit were reclassified from
continuing operations to discontinued operations. This unit recorded a net loss
of $607,000 for the six months ended June 30, 1997. In addition, a loss on the
disposal of this unit of $1,547,000 was reflected in the 1997 consolidated
statement of income. IBAH did not record an income tax benefit on the loss from
discontinued operations, as the realization of a corresponding deferred tax
asset was uncertain. The loss on disposal was comprised mainly of severance,
software asset write-offs, contract completion costs and future rent related to
abandoned office space. There were no remaining liabilities related to the loss
on disposal at December 31, 1999.
Note 15 - Segment Information
Based on the "management approach" as defined by 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.
F-17
The table below presents information about the reportable segments as of
and for the years ended December 31, 1999, 1998 and 1997 (in thousands):
Corporate
Pharmacy CRO and Consolidated
1999: Services Services Consolidating Totals
- ----------------------------------------------------------------------------------------------------------------------------
Sales $1,728,055 $133,866 $ -- $1,861,921
Depreciation and amortization 62,589 5,734 1,041 69,364
Operating income (expense), excluding acquisition
expenses and restructuring and other related charges 181,087 16,550 (25,993) 171,644
Acquisition (expenses)/income 352 (297) -- 55
Restructuring and other related charges (32,216) (3,178) -- (35,394)
Operating income (expense) 149,223 13,075 (25,993) 136,305
Total assets 1,889,763 125,122 153,088 2,167,973
Expenditures for additions to long-lived assets 52,560 3,113 3,076 58,749
- ----------------------------------------------------------------------------------------------------------------------------
1998:
- ----------------------------------------------------------------------------------------------------------------------------
Sales $1,394,768 $122,602 $ -- $1,517,370
Depreciation and amortization 41,994 5,091 551 47,636
Operating income (expense), excluding acquisition
expenses and restructuring and other related charges 185,305 12,725 (22,841) 175,189
Acquisition expenses (10,172) (5,269) -- (15,441)
Restructuring and other related charges (1,245) (2,382) -- (3,627)
Operating income (expense) 173,888 5,074 (22,841) 156,121
Total assets 1,686,643 120,693 96,493 1,903,829
Expenditures for additions to long-lived assets 45,789 5,306 2,084 53,179
- ----------------------------------------------------------------------------------------------------------------------------
1997:
- ----------------------------------------------------------------------------------------------------------------------------
Sales $ 946,333 $ 88,051 $ -- $1,034,384
Depreciation and amortization 26,211 4,660 234 31,105
Operating income (expense), excluding acquisition
expenses, restructuring and other related
charges, and other expenses 125,822 2,925 (19,336) 109,411
Acquisition expenses (2,359) (1,962) -- (4,321)
Restructuring and other related charges -- (1,208) -- (1,208)
Other expenses (Note 13) (6,313) -- -- (6,313)
Operating income (expense) 117,150 (245) (19,336) 97,569
Total assets 1,141,298 104,569 166,279 1,412,146
Expenditures for additions to long-lived assets 30,796 9,229 1,253 41,278
- ----------------------------------------------------------------------------------------------------------------------------
The following summarizes sales and long-lived assets by geographic area as
of and for the years ended December 31, 1999, 1998 and 1997 (in thousands):
Sales Long-Lived Assets
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
United States $1,821,083 $1,483,443 $1,012,988 $159,530 $133,173 $ 98,541
Foreign 40,838 33,927 21,396 2,603 3,198 3,121
- -----------------------------------------------------------------------------------------------------------------------------
Total $1,861,921 $1,517,370 $1,034,384 $162,133 $136,371 $101,662
- -----------------------------------------------------------------------------------------------------------------------------
Foreign sales are based on the country in which the sales originate. No
individual foreign country's sales were material to the consolidated sales of
Omnicare.
F-18
Note 16 - Summary of Quarterly Results (Unaudited)
The following table presents the Company's quarterly financial information
for 1999 and 1998 (in thousands, except per share data):
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------------------------
1999(a)
Sales $445,688 $454,645 $474,007 $487,581 $1,861,921
Cost of sales 309,893 322,607 348,007 358,131 1,338,638
- -------------------------------------------------------------------------------------------------------------------
Gross profit 135,795 132,038 126,000 129,450 523,283
Selling, general and
administrative expenses 81,983 85,546 90,888 93,222 351,639
Acquisition expenses,
pooling-of-interests -- 822 (877) -- (55)
Restructuring and other related charges -- 26,713 2,144 6,537 35,394
- -------------------------------------------------------------------------------------------------------------------
Operating income 53,812 18,957 33,845 29,691 136,305
Investment income 282 367 266 617 1,532
Interest expense (9,981) (10,848) (12,629) (12,708) (46,166)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 44,113 8,476 21,482 17,600 91,671
Income taxes 16,306 3,598 7,538 6,508 33,950
- -------------------------------------------------------------------------------------------------------------------
Net income $ 27,807 $ 4,878 $ 13,944 $ 11,092 $ 57,721
===================================================================================================================
Earnings per share:
Basic $ 0.31 $ 0.05 $ 0.15 $ 0.12 $ 0.63
===================================================================================================================
Diluted $ 0.31 $ 0.05 $ 0.15 $ 0.12 $ 0.63
===================================================================================================================
Weighted average number of common shares outstanding:
Basic 90,526 90,890 91,276 91,292 90,999
===================================================================================================================
Diluted 90,881 91,073 91,276 91,292 91,238
===================================================================================================================
Comprehensive income $ 27,303 $ 4,524 $ 14,083 $ 10,763 $ 56,673
===================================================================================================================
F-19
Note 16 - Summary of Quarterly Results (Unaudited)
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------------------
1998(a)
Sales $340,258 $358,194 $383,647 $435,271 $1,517,370
Cost of sales 238,936 249,615 267,168 303,024 1,058,743
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 101,322 108,579 116,479 132,247 458,627
Selling, general and administrative expenses 63,536 67,408 71,708 80,786 283,438
Acquisition expenses, pooling-of-interests 491 14,096 -- 854 15,441
Restructuring and other related charges -- 3,627 -- -- 3,627
- ---------------------------------------------------------------------------------------------------------------------
Operating income 37,295 23,448 44,771 50,607 156,121
Investment income 1,446 977 623 310 3,356
Interest expense (4,771) (4,435) (5,301) (9,104) (23,611)
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,970 19,990 40,093 41,813 135,866
Income taxes 13,564 11,884 14,353 15,686 55,487
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 20,406 $ 8,106 $ 25,740 $ 26,127 $ 80,379
=====================================================================================================================
Earnings per share:
Basic $ 0.23 $ 0.09 $ 0.29 $ 0.29 $ 0.90
=====================================================================================================================
Diluted $ 0.23 $ 0.09 $ 0.29 $ 0.29 $ 0.90
=====================================================================================================================
Weighted average number of common
shares outstanding:
Basic 88,114 88,824 89,493 89,868 89,081
=====================================================================================================================
Diluted 89,085 89,918 90,054 90,197 89,786
=====================================================================================================================
Comprehensive income $ 20,455 $ 8,235 $ 25,527 $ 26,214 $ 80,431
=====================================================================================================================
(a) Included in the 1999 and 1998 net income amounts are the following aftertax
pooling-of-interests expenses and restructuring and other related charges (in
thousands):
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------------------
1999
Acquisition expenses, pooling-of-interests (Note 2) $ -- $ 586 $ (962) $ -- $ (376)
Restructuring and other related charges (Note 12) -- 17,229 1,351 4,118 22,698
- ---------------------------------------------------------------------------------------------------------------------
Total $ -- $ 17,815 $ 389 $ 4,118 $ 22,322
=====================================================================================================================
1998
Acquisition expenses, pooling-of-interests (Note 2) $ 415 $ 12,702 $ -- $ 752 $ 13,869
Restructuring and other related charges (Note 12) -- 2,689 -- -- 2,689
- ---------------------------------------------------------------------------------------------------------------------
Total $ 415 $ 15,391 $ -- $ 752 $ 16,558
=====================================================================================================================
F-20
CONSOLIDATED BALANCE SHEET
Omnicare, Inc. and Subsidiary Companies
(In thousands, except share data)
Unaudited Audited
September 30, December 31,
2000 1999
- ------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------
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
==========================================================================================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-21
CONSOLIDATED STATEMENT OF INCOME
Omnicare, Inc. and Subsidiary Companies
(In thousands, except per share data)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------
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
===========================================================================================================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-22
CONSOLIDATED STATEMENT OF CASH FLOWS
Omnicare, Inc. and Subsidiary Companies
(In thousands)
Unaudited
Nine Months Ended
September 30,
2000 1999
- -------------------------------------------------------------------------------------
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.
F-23
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):
Three Months Ended September 30,
-----------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2000: Services Services Consolidating Totals
- -----------------------------------------------------------------------------------------------------------------
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
=================================================================================================================
F-24
Nine Months Ended September 30,
- ----------------------------------------------------------------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
2000: Services Services Consolidating Totals
- ----------------------------------------------------------------------------------------------------------------
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
================================================================================================================
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 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):
F-25
Utilized as of Balance at
1999 December 31, December 31,
Provision 1999 1999
- --------------------------------------------------------------------------
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
==========================================
Nine Months Utilized During
Ended Nine Months
September 30, Ended Balance at
2000 September 30, September 30,
Provision 2000 2000
- --------------------------------------------------------------------------
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
==========================================
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.
F-26
ANNEX A
SUPPLEMENTAL FINANCIAL INFORMATION
OMNICARE, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEET
(000S)
UNAUDITED UNAUDITED AUDITED
ACTUAL PRO FORMA ACTUAL
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2000(a) 1999
---- ------- ----
ASSETS
Cash and cash equivalents............................... $ 111,607 $ 111,607 $ 97,267
Restricted cash......................................... 2,300 2,300 --
Accounts receivable, net................................ 440,785 440,785 422,283
Unbilled receivables.................................... 18,933 18,933 18,450
Inventories............................................. 129,404 129,404 120,280
Other current assets.................................... 114,709 114,709 94,065
---------- ---------- ----------
Total current assets................................ 817,738 817,738 752,345
---------- ---------- ----------
Properties and equipment, net........................... 158,535 158,535 162,133
Goodwill, net........................................... 1,168,151 1,168,151 1,188,941
Other noncurrent assets................................. 65,794 65,794 64,554
---------- ---------- ----------
Total assets........................................ $2,210,218 $2,210,218 $2,167,973
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................ $ 118,941 $ 118,941 $ 108,189
Amounts payable pursuant to acquisition agreements...... 4,372 4,372 9,053
Deferred revenue........................................ 28,333 28,333 24,321
Current debt............................................ 436,619 1,619 77,413
Other current liabilities............................... 103,744 103,744 103,267
---------- ---------- ----------
Total current liabilities........................... 692,009 257,009 322,243
---------- ---------- ----------
Long-term debt.......................................... 706 435,706 391,944
5% convertible subordinated notes due 2007.............. 345,000 345,000 345,000
Amounts payable pursuant to acquisition agreements...... 12,675 12,675 13,878
Deferred income taxes and other noncurrent
liabilities........................................... 91,405 91,405 66,528
Stockholders' equity.................................... 1,068,423 1,068,423 1,028,380
---------- ---------- ----------
Total liabilities and stockholders' equity.......... $2,210,218 $2,210,218 $2,167,973
========== ========== ==========
Footnote:
(a) Assumes completion of the refinancing of our credit facilities by March 31,
2001. Does not give effect to the note offering.
A-1
OMNICARE, INC. AND SUBSIDIARY COMPANIES
SUMMARY CONSOLIDATED STATEMENT OF INCOME
(000S, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- ---------------------------
UNAUDITED UNAUDITED UNAUDITED AUDITED
2000 1999 2000 1999
---- ---- ---- ----
Sales..................................... $506,550 $487,581 $1,971,348 $1,861,921
Cost of sales............................. 370,689 358,131 1,445,955 1,338,638
-------- -------- ---------- ----------
Gross profit.............................. 135,861 129,450 525,393 523,283
Selling, general and administrative
expenses................................ 93,628 93,222 367,507 351,639
Acquisition expenses,
pooling-of-interests.................... -- -- -- (55)(a)
Restructuring and other related charges... 12,508 (b) 6,537 (b) 27,199 (b) 35,394 (b)
-------- -------- ---------- ----------
Operating income.......................... 29,725 29,691 130,687 136,305
Investment income......................... 622 617 1,910 1,532
Interest expense.......................... (14,071) (12,708) (55,074) (46,166)
-------- -------- ---------- ----------
Income before income taxes................ 16,276 17,600 77,523 91,671
Income taxes.............................. 6,037 6,508 28,706 33,950
-------- -------- ---------- ----------
Net income................................ $ 10,239 (b) $ 11,092 (b) $ 48,817 (b) $ 57,721 (a)(b)
======== ======== ========== ==========
Earnings per share: (c)
Basic............................. $ 0.11 (b) $ 0.12 (b) $ 0.53 (b) $ 0.63 (a)(b)
======== ======== ========== ==========
Diluted........................... $ 0.11 (b) $ 0.12 (b) $ 0.53 (b) $ 0.63 (a)(b)
======== ======== ========== ==========
Weighted average number of common shares
outstanding:
Basic............................. 92,132 91,292 92,012 90,999
======== ======== ========== ==========
Diluted........................... 92,587 91,292 92,012 91,238
======== ======== ========== ==========
SUPPLEMENTAL PRO FORMA DATA:
Net income, as reported................... $ 10,239 $ 11,092 $ 48,817 $ 57,721
Pro forma adjustments (net of taxes):
Acquisition expenses,
pooling-of-interests................ -- -- -- (376)(a)
Restructuring and other related
charges............................. 7,880 (b) 4,118 (b) 17,135 (b) 22,698 (b)
-------- -------- ---------- ----------
Pro forma net income...................... $ 18,119 $ 15,210 $ 65,952 $ 80,043
======== ======== ========== ==========
Pro forma earnings per share: (c)
Basic............................. $ 0.20 $ 0.17 $ 0.72 $ 0.88
======== ======== ========== ==========
Diluted........................... $ 0.20 $ 0.17 $ 0.72 $ 0.88
======== ======== ========== ==========
Footnotes:
(a) The twelve month period ended December 31, 1999 includes income related to
the net reversal of acquisition expenses of $877 before taxes ($962 after
taxes, or $0.01 per diluted share) relating to the finalization of
transaction costs associated with prior year pooling-of-interests
transactions, and pooling-of-interests expenses of $822 before taxes ($586
after taxes, or $0.01 per diluted share).
(b) The three month periods ended December 31, 2000 and 1999 include
restructuring and other related charges of $12,508 and $6,537 before taxes,
respectively ($7,880 and $4,118 after taxes, or $0.09 and $0.05 per diluted
share, respectively). The twelve month periods ended December 31, 2000 and
1999 include restructuring and other related charges of $27,199 and $35,394
before taxes, respectively ($17,135 and $22,698 after taxes, or $0.19 and
$0.25 per diluted share, respectively).
(c) Earnings per share is calculated independently for each quarter and for the
year-to-date periods. The sum of the quarters may not necessarily be equal
to the year-to-date per share amount.
A-2
OMNICARE, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(000s)
UNAUDITED UNAUDITED
THREE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 10,239 $ 48,817
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization........................... 18,019 73,973
Provision for doubtful accounts......................... 7,138 26,729
Deferred tax provision.................................. 13,259 19,767
Non-cash portion of restructuring and other related
charges............................................... 4,944 6,804
Other................................................... 493 493
Changes in assets and liabilities, net of effects from
acquisition of businesses................................. (39,480) (43,882)
-------- --------
Net cash flows from operating activities............ 14,612 132,701
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses................................... (9,691) (41,664)
Capital expenditures........................................ (7,651) (32,423)
Other....................................................... 2,768 (2,029)
-------- --------
Net cash flows from investing activities............ (14,574) (76,116)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit facilities....................... (10,000) (30,000)
Principal payments on long-term obligations................. (121) (1,838)
Payments for exercise of stock options, net of stock
tendered in payment....................................... (289) (1,011)
Dividends paid.............................................. (2,072) (8,293)
Other....................................................... (6) (635)
-------- --------
Net cash flows from financing activities............ (12,488) (41,777)
-------- --------
Effect of exchange rate changes on cash..................... (311) (468)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... (12,761) 14,340
Cash and cash equivalents at beginning of
period -- unrestricted.................................... 124,368 97,267
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD --UNRESTRICTED... $111,607 $111,607
======== ========
A-3