FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended September 30, 1999
Commission File Number 1-8269
OMNICARE, INC.
--------------
Incorporated under the laws of the I.R.S. Employer Identification
State of Delaware No. 31-1001351
100 East RiverCenter Boulevard, Covington, Kentucky 41011
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (606) 392-3300
Indicate by check mark whether the registrant:
1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports) and
2) has been subject to such filing requirement for the past 90 days.
Yes x No
--- ---
COMMON STOCK OUTSTANDING
- ------------------------
Number of
Shares Date
------ ----
Common Stock, $1 par value 91,295,522 September 30, 1999
OMNICARE, INC. AND
------------------
SUBSIDIARY COMPANIES
--------------------
INDEX
PAGE
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998 3
Consolidated Statement of Income -
Three and nine months ended -
September 30, 1999 and 1998 4
Consolidated Statement of Cash Flows -
Nine months ended -
September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 18
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet
UNAUDITED
(In thousands, except share data)
September 30, December 31,
1999 1998
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $93,632 $54,312
Accounts receivable, less allowances of
$34,122 (1998-$31,417) 404,516 363,796
Unbilled receivables 21,272 15,828
Inventories 135,081 117,936
Deferred income tax benefits 23,006 12,348
Other current assets 65,251 39,078
--------------- ---------------
Total current assets 742,758 603,298
Properties and equipment, at cost less accumulated
depreciation of $98,064 (1998-$76,854) 160,564 136,371
Goodwill, less accumulated amortization
of $74,825 (1998-$51,861) 1,195,146 1,110,254
Other assets 65,771 53,906
-------------- ---------------
Total assets $2,164,239 $1,903,829
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $98,479 $82,029
Amounts payable pursuant to acquisition agreements 11,677 10,230
Current bank debt 87,953 2,844
Accrued employee compensation 55,407 48,073
Deferred revenue 19,439 19,043
Other current liabilities 60,966 71,330
--------------- ---------------
Total current liabilities 333,921 233,549
Long-term bank debt 391,976 306,556
5% convertible subordinated notes, due 2007 345,000 345,000
Deferred income taxes 30,928 16,230
Amounts payable pursuant to acquisition agreements 14,228 13,564
Other noncurrent liabilities 28,924 25,459
--------------- ---------------
Total liabilities 1,144,977 940,358
Stockholders' equity:
Preferred stock-authorized 1,000,000 shares
without par value; none issued
Common stock-authorized 200,000,000 shares $1 par; 91,612,000 shares
issued (1998-90,459,800 shares issued) 91,612 90,460
Paid-in capital 684,436 664,225
Retained earnings 265,885 225,937
--------------- ---------------
1,041,933 980,622
Treasury stock, at cost - 316,000 shares (1998-194,900 shares) (6,676) (4,166)
Deferred compensation (14,801) (12,932)
Cumulative translation adjustment (1,194) (53)
--------------- ---------------
Total stockholders' equity 1,019,262 963,471
--------------- ---------------
Total liabilities and stockholders' equity $2,164,239 $1,903,829
=============== ===============
The Notes to Consolidated Financial Statements are an integral part of
this statement.
3
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Statement of Income
UNAUDITED
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------------
1999 1998 1999 1998
--------------- --------------- ------------------ ------------------
Sales $474,007 $383,647 $1,374,340 $1,082,099
Cost of sales 348,007 267,168 980,507 755,719
--------------- --------------- ------------------ ------------------
Gross profit 126,000 116,479 393,833 326,380
Selling, general and administrative expenses 90,888 71,708 258,417 202,652
Acquisition expenses, pooling-of-interests (877) - (55) 14,587
Restructuring costs 2,144 - 28,857 3,627
--------------- --------------- ------------------ ------------------
Operating income 33,845 44,771 106,614 105,514
Investment income 266 623 915 3,046
Interest expense (12,629) (5,301) (33,458) (14,507)
--------------- --------------- ------------------ ------------------
Income before income taxes 21,482 40,093 74,071 94,053
Income taxes 7,538 14,353 27,442 39,801
--------------- --------------- ------------------ ------------------
Net income $ 13,944 $ 25,740 $ 46,629 $ 54,252
=============== =============== ================== ==================
Earnings per share:
Basic $ 0.15 $ 0.29 $ 0.51 $ 0.61
=============== =============== ================== ==================
Diluted $ 0.15 $ 0.29 $ 0.51 $ 0.61
=============== =============== ================== ==================
Weighted average number of
common shares outstanding:
Basic 91,276 89,493 90,900 88,815
=============== =============== ================== ==================
Diluted 91,276 90,054 91,175 89,647
=============== =============== ================== ==================
Comprehensive income $ 14,083 $ 25,527 $ 45,910 $ 54,217
=============== =============== ================== ==================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
4
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Statement of Cash Flows
UNAUDITED
(In thousands)
Nine Months Ended
September 30,
--------------------------------
1999 1998
--------------- ---------------
Cash flows from operating activities:
Net income $ 46,629 $ 54,252
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 50,990 34,176
Provision for doubtful accounts 15,581 8,357
Deferred tax provision 14,598 7,061
Non-cash portion of restructuring costs 3,489 1,948
Changes in assets and liabilities, net of effects
from acquisition of businesses:
Accounts receivable and unbilled receivables (57,593) (50,199)
Inventories (13,076) (2,560)
Current and noncurrent assets (36,557) (11,953)
Payables and accrued liabilities 17,134 52,103
Accrued employee compensation 18,603 604
Deferred revenue 396 (7,835)
Current and noncurrent liabilities 3,530 1,007
--------------- ---------------
Net cash flows from operating activities 63,724 86,961
--------------- ---------------
Cash flows from investing activities:
Acquisition of businesses (135,652) (366,632)
Capital expenditures (48,369) (38,724)
Other (749) 2,144
--------------- ---------------
Net cash flows from investing activities (184,770) (403,212)
--------------- ---------------
Cash flows from financing activities:
Borrowings on line of credit facilities 170,000 290,000
Principal payments on long-term obligations (1,490) (22,082)
Exercise of stock options and warrants,
net of stock tendered in payment (2,148) (334)
Dividends paid (6,148) (5,056)
Effect of exchange rate changes on cash and other 152 (299)
--------------- ---------------
Net cash flows from financing activities 160,366 262,229
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 39,320 (54,022)
Cash and cash equivalents at beginning of period 54,312 138,062
--------------- ---------------
Cash and cash equivalents at end of period $ 93,632 $ 84,040
=============== ===============
Supplemental disclosures of cash flow information:
Income taxes paid, net $ 17,408 $ 16,328
Interest paid 27,933 9,744
The Notes to Consolidated Financial Statements are an integral part of this
statement.
5
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, except as discussed in Notes 2 and 4)
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"). Certain
reclassifications of prior year amounts have been made to conform with the
current year presentation.
2. The Company has been involved in a program to acquire providers of
pharmaceutical and related pharmacy management services and medical supplies to
long-term care facilities and their residents. 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. The Company may, from time
to time, acquire certain non-pharmaceutical companies which complement the
Company's core business.
Since January 1, 1999, the Company has completed five acquisitions
(excluding insignificant purchases of other assets) of institutional pharmacy
businesses, four of which were accounted for as purchase transactions and one as
a pooling-of-interests transaction. These transactions added approximately $65.5
million in revenues on an annualized basis. For all acquisitions accounted for
as purchases, including insignificant purchases of other assets, the purchase
price paid has been allocated to the fair value of the assets acquired and
liabilities assumed, and the results of operations of the acquired entities have
been included in the consolidated results of the Company from the effective
dates of the acquisitions.
Pooling-of-Interests Transactions
On June 26, 1998, Omnicare completed the acquisition of CompScript, Inc.
("CompScript"). 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, which was accounted for as a pooling-of-interests and a tax free
reorganization.
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. CompScript served
approximately 20,000 residents in 137 long-term care facilities in five states
at the time of the acquisition.
On June 29, 1998, Omnicare completed the acquisition of IBAH, Inc.
("IBAH"). 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
6
approximately 4.3 million shares of common stock with a value of approximately
$159 million in this transaction, which was accounted for as a
pooling-of-interests and a tax free reorganization.
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.
In connection with the CompScript and IBAH mergers, in the 1998 second
quarter, 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. During the
quarter ended September 30, 1999, the Company recorded income of $877,000
($962,000 after taxes) relating to the net reversal of estimated
CompScript and IBAH acquisition related expenses resulting from the finalization
of those costs during the quarter. The aftertax net income impact of these
adjustments exceeds the pretax impact as a result of the CompScript merger
transaction costs reversal, which had no tax effect due to the nature of these
expenses.
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):
Utilized as of Third Quarter Balance at
Initial September 30, 1999 September 30,
Provision 1999 Adjustment 1999
---------- --------------- --------------- -------------
Merger transaction costs $ 14,096 $ (13,219) $ (877) $ -
Restructuring costs:
Employee severance 1,413 (1,218) - 195
Exit costs 2,214 (1,541) - 673
---------- -------------- --------------- -------------
Total $ 17,723 $ (15,978) $ (877) $ 868
========== ============== =============== =============
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 approximately 20 employees. Included in the
exit costs are $1,948,000 of non-cash items. At September 30, 1999, all
remaining liabilities relating to these actions were classified as current
liabilities.
3. 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")
7
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, 1999 and 1998 (in
thousands):
Three Months Ended September 30,
------------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
1999: Services Services Consolidating Totals
- ---------------------------------------------------------------------------------------------------------------------------
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 costs 37,695 3,663 (6,246) 35,112
Acquisition income (expenses) 1,174 (297) - 877
Restructuring (costs) (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
- ---------------------------------------------------------------------------------------------------------------------------
1998:
- ---------------------------------------------------------------------------------------------------------------------------
Sales $ 352,387 $ 31,260 $ - $ 383,647
Depreciation and amortization 10,783 962 159 11,904
Operating income (expense) 46,824 3,724 (5,777) 44,771
Total assets 1,567,180 101,153 160,280 1,828,613
Expenditures for additions to long-lived assets 13,053 1,504 671 15,228
- ---------------------------------------------------------------------------------------------------------------------------
8
Nine Months Ended September 30,
----------------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
1999: Services Services Consolidating Totals
- -------------------------------------------------------------------------------------------------------------------------------
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 costs 141,156 12,818 (18,558) 135,416
Acquisition income (expenses) 352 (297) - 55
Restructuring (costs) (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
- -------------------------------------------------------------------------------------------------------------------------------
1998:
- -------------------------------------------------------------------------------------------------------------------------------
Sales $ 992,661 $ 89,438 $ - $ 1,082,099
Depreciation and amortization 29,884 3,905 387 34,176
Operating income (expense), excluding acquisition expenses
and restructuring costs 132,008 8,738 (17,018) 123,728
Acquisition (expenses) (9,318) (5,269) - (14,587)
Restructuring (costs) (1,245) (2,382) - (3,627)
Operating income (expense) 121,445 1,087 (17,018) 105,514
Total assets 1,567,180 101,153 160,280 1,828,613
Expenditures for additions to long-lived assets 32,078 4,764 1,882 38,724
- -------------------------------------------------------------------------------------------------------------------------------
4. 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 the existing 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 220 pharmacy and other operating locations. Also as part of the
initiative, the roster of pharmacies and other operating locations is being
reconfigured through consolidations, relocations, the creation of nine new
sites, and the closing of approximately 20 sites. These strategic measures are
expected to lead to the net reduction of approximately 1,700 full- and part-time
positions upon completion of the plan.
9
In connection with this program, Omnicare expects to recognize total
restructuring costs of $32,354,000 ($20,783,000 after taxes). During the second
and third quarters of 1999, Omnicare recorded charges to operating expenses
totaling $28,857,000 ($18,580,000 after taxes) for restructuring activities. The
remaining costs will be expensed over the next five quarters, at such time the
amounts are required to be recognized per generally accepted accounting
principles. The restructuring charge includes severance pay, the buy-out of
current employee contract agreements, the buy-out of lease obligations, the
write-off of other assets (representing $3,489,000 of non-cash items) and
facility exit costs. Details of these costs follow (in thousands):
Third Quarter Utilized as of Balance at
Initial 1999 September 30, September 30,
Provision Provision 1999 1999
---------- --------------- --------------- -------------
Productivity and consolidation programs:
Employee severance $ 11,555 $ - $ (1,370) $ 10,185
Employee contract agreement buy-outs 6,445 263 (2,028) 4,680
Lease terminations 5,536 - (447) 5,089
Other assets and facility exit costs 3,177 1,881 (3,250) 1,808
---------- --------------- --------------- -------------
Total $ 26,713 $ 2,144 $ (7,095) $ 21,762
========== =============== =============== =============
As of September 30, 1999, the Company had incurred approximately $3.4
million of severance and other employee-related costs relating to the reduction
of approximately 280 employees. All remaining liabilities recorded at September
30, 1999 were classified as current liabilities since the Company anticipates
that these activities will be finalized within the next year. The Company
expects that the overall restructuring program will be completed by the end of
the year 2000.
10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Quarter Ended September 1999 vs. 1998
Diluted earnings per share for the three months ended September 30, 1999
were $.16 as compared with $.29 earned in the prior year quarter, excluding from
the 1999 period a restructuring charge of $2,144,000 ($1,351,000 after taxes, or
$0.01 per share) relating to the Company's previously announced productivity and
consolidation initiative, and the net reversal of estimated acquisition expenses
relating to the finalization of prior year pooling-of-interests transactions
totaling $877,000 ($962,000 after taxes, or $0.01 per share). The aftertax
net income impact of these adjustments exceeds the pretax impact as a result
of the CompScript merger transaction costs reversal, which had no tax effect
due to the nature of these expenses. Net income for the 1999 quarter, on this
basis, was $14,333,000 versus the $25,740,000 earned in the 1998 quarter.
Revenues for the three months ended September 30, 1999 rose 24% to
$474,007,000 from the $383,647,000 recorded in the comparable prior year period.
The increase in the Company's sales represents the cumulative effect of its
acquisitions of long-term care pharmacy providers, and continued internal growth
of the pharmacy services and contract research organization businesses. The
reduction in earnings primarily reflects the very difficult operating
environment in the long-term care industry. The implementation of the
Prospective Payment System ("PPS") for Medicare residents of skilled nursing
facilities continues to create a very unsettled operating environment. While
Omnicare experienced PPS-related pricing pressure from skilled nursing facility
customers late in 1998 and to a greater extent in 1999, much of this pressure
was offset by the addition of new business, the benefits of increased compliance
with Omnicare's proprietary geriatric formulary, the Omnicare Geriatric
Pharmaceutical Care Guidelines'r', and reduced operating costs. However, the
continued reluctance on the part of skilled nursing facilities to admit Medicare
residents, particularly those requiring complex care, owing to concerns relating
to the adequacy of reimbursement under PPS has caused the continuation of weaker
Medicare census in many areas. Moreover, for many skilled nursing facilities,
the average length of stay for Medicare residents has decreased. These factors
have had the effect of significantly reducing overall occupancy in the
facilities Omnicare serves. Moreover, the mix of residents in skilled nursing
facilities also has adversely affected Omnicare's results as these facilities
have attempted to avoid high acuity patients which impacts overall utilization
of drugs. Reimbursement concerns have increasingly driven many nursing
facilities to admit residents funded by payors other than Medicare. These trends
continued during the third quarter and had an unfavorable impact on sales,
profit margins and net income.
Despite the operating environment, Omnicare continued to see solid revenue
growth, reflecting the impact of prior-period acquisitions as well as internal
growth. The number of residents served at September 30, 1999 was 628,000, up 11%
over the number served one year earlier. This addition of new accounts is net of
the elimination of certain uneconomic PPS contracts and those client facilities
from which Omnicare has withdrawn due to the deterioration in their financial
condition.
Internal growth resulted primarily from the efforts of the Company's
National Sales and Marketing Group and pharmacy staff in developing new pharmacy
contracts, drug price inflation and changes in sales mix.
11
Omnicare's CRO Services segment experienced modest revenue growth during
the quarter and operating profit which, while up significantly on a
year-to-date basis, was essentially even with the comparable prior year quarter,
excluding acquisition expenses and restructuring costs. During the quarter, a
slowdown was observed in the commencement rate of several new projects resulting
in a temporary underutilization of resources. A number of these projects have
commenced in the fourth quarter.
Gross profit as a percentage of sales decreased to 26.6% in 1999 from 30.4%
in 1998. The positive impact on gross profit relating to the Company's
purchasing leverage associated with purchases of pharmaceuticals, leveraging
fixed and variable overhead costs at the Company's pharmacies, benefits realized
from the Company's formulary compliance program and productivity and
consolidation initiative, and changes in sales mix 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.
Selling, general and administrative ("operating") expenses for the quarter
ended September 30, 1999 increased 27% to $90,888,000 as compared to 1998 due
primarily to the overall growth of the Company. Operating expenses as a
percentage of sales of 19.2% in 1999 were greater than the 18.7% experienced in
the comparable prior year period due primarily to an increase in the Company's
provision for doubtful accounts due to a deterioration in the financial
condition of several of the Company's Pharmacy Services customers as a result of
the current PPS environment.
Investment income for the three months ended September 30, 1999 was
$266,000, a decrease of $357,000 in comparison to the same period of 1998 due to
a lower average invested cash balance during the third quarter of 1999 than in
the third quarter of 1998. The use of cash is primarily attributable to the
Company's acquisition program and capital expenditures.
Interest expense during the three months ended September 30, 1999 was
$12,629,000, an increase of $7,328,000 versus the comparable prior year period
primarily due to the impact of interest expense associated with the $100 million
and $85 million increases, respectively, in borrowings under the Company's
five-year $400 million and 364-day $400 million line of credit facilities from
September 30, 1998 to September 30, 1999. These increases are primarily
attributable to the Company's acquisition program. Also impacting the quarterly
comparison is the full quarter impact in the third quarter of 1999 of interest
expense associated with a $250 million draw on the Company's five-year $400
million line of credit facility late in the third quarter of 1998 in connection
with the Company's acquisition of the pharmacy business of Extendicare, Inc.
The decrease in the effective tax rate to 35.1% in the third quarter of
1999 from 35.8% in the comparable prior year quarter is primarily attributable
to the favorable tax effect associated with the Company's reversal of estimated
acquisition-related expenses for prior year pooling-of-interests transactions,
based on the finalization of these transaction costs.
12
Year-to-Date September 1999 vs. 1998
Diluted earnings per share for the nine months ended September 30, 1999
were $.71 versus the $.78 per diluted share earned in the same period of 1998,
net of acquisition expenses related to pooling-of-interests transactions and
restructuring charges from both periods. Net income, on this basis, for the
first nine months of 1999 was $64,833,000 as compared to the $70,058,000 earned
in the comparable 1998 period. Revenues of $1,374,340,000 in the first nine
months of 1999 were 27% higher than the $1,082,099,000 recorded in the
comparable prior year period. The first nine months of 1999 include
restructuring charges and net pooling-of-interests expenses, totaling
$28,802,000 before taxes ($18,204,000 after taxes, or $0.20 per diluted share).
The comparable 1998 period includes pooling-of-interests expenses and
restructuring charges totaling $18,214,000 before taxes ($15,806,000 after
taxes, or $0.18 cents per diluted share).
The increase in sales represents the cumulative effect of the Company's
acquisitions of long-term care pharmacy providers, and continued internal growth
of the pharmacy services and contract research organization businesses. The
favorable impact of these factors on sales was partially offset by the
aforementioned unfavorable impact of PPS, which is also responsible for the
decline in gross profit as a percentage of sales and net income in comparison to
the prior year.
During the first three quarters of 1999, the Company acquired five
institutional pharmacy providers (excluding insignificant purchases of other
assets) which, when combined with internal growth, brought the total number of
nursing facility residents served to 628,000 at September 30, 1999. These
transactions added approximately $65.5 million in revenues on an annualized
basis.
Internal growth resulted from the efforts of the Company's National Sales
and Marketing Group and pharmacy staff in developing new pharmacy contracts,
drug price inflation, significant growth in other complementary
non-pharmaceutical service businesses (primarily the CRO Services segment, as
previously discussed) and other changes in sales mix.
Gross profit as a percentage of sales decreased to 28.7% in 1999 from 30.2%
in 1998. The positive impact on gross profit relating to the Company's
purchasing leverage associated with purchases of pharmaceuticals, leveraging
fixed and variable overhead costs at the Company's pharmacies, benefits realized
from the Company's formulary compliance program and productivity and
consolidation initiative, and changes in sales mix including increased sales
from contract research organizations were more than offset by the aforementioned
unfavorable impact of PPS on the Pharmacy Services segment.
Operating expenses for the nine months ended September 30, 1999 increased
28% to $258,417,000 as compared to 1998 due primarily to the overall growth of
the Company. Operating expenses as a percentage of sales of 18.8% in 1999 were
relatively consistent with the 18.7% experienced in the prior year.
Investment income for the nine months ended September 30, 1999 was
$915,000, a decrease of $2,131,000 in comparison to the same period of 1998 due
to a lower average invested cash balance during the first three quarters of 1999
as compared to 1998. The use of
13
cash is primarily attributable to the Company's acquisition program and, to
a lesser extent, capital expenditures.
Interest expense during the nine months ended September 30, 1999 was
$33,458,000, an increase of $18,951,000 versus the comparable prior year period
primarily due to the impact of interest expense associated with the $100 million
and $85 million increases, respectively, in borrowings under the Company's
five-year $400 million and 364-day $400 million line of credit facilities from
September 30, 1998 to September 30, 1999. These increases are primarily
attributable to the Company's acquisition program. Also impacting the
period-to-period comparison is the nine month effect in 1999 of interest expense
associated with a $250 million draw on the Company's five-year $400 million line
of credit facility late in the third quarter of 1998 in connection with the
Company's acquisition of the pharmacy business of Extendicare, Inc.
The decrease in the effective tax rate to 37.0% during the first three
quarters of 1999 from 42.3% in the comparable prior year period is primarily
attributable to a reduction in nondeductible acquisition expenses relating to
the 1999 pooling-of-interests transaction as compared to the 1998
pooling-of-interests transactions, and a decrease in state and local income
taxes in 1999 due to the Company's state tax planning programs. The Company
expects the benefit realized from the state tax planning programs to continue.
The effective tax rates in the 1999 and 1998 periods are higher than the
statutory rate primarily due to state and local income taxes and various
nondeductible expenses (e.g., acquisition costs, etc.).
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 1999 were $93.6 million versus
$54.3 million at December 31, 1998. Acquisitions of businesses through September
30, 1999 required $135.7 million of cash payments (including amounts payable
pursuant to acquisition agreements relating to pre-1999 acquisitions) which were
primarily funded by borrowings from the Company's revolving credit facilities
during the first half of 1999. 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 2001. In December 1998, the Company
amended this 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 the third quarter of 1999, Omnicare renewed this
364-day $400 million revolving line of credit through September 2, 2000, with
no change in pricing or terms. 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 the line of credit. The total amount outstanding under this
facility as of September 30, 1999 was $390 million. Interest rates and
commitment fees under the 364-day $400 million line of credit are based on the
Company's debt ratings. The amount outstanding at September 30, 1999 under the
364-day facility was $85 million. The Company generated positive net cash flows
from operating activities of $63.7 million during the nine months ended
September 30, 1999, $33.0 million of which was generated in the third quarter.
Improved management of working capital significantly contributed to the
favorable third quarter 1999 operating cash flow results.
14
The Company's capital requirements are primarily related to its acquisition
program and, to a lesser extent, capital expenditures, including those related
to investments in the Company's information technology systems such as its Year
2000 compliance initiative. During the nine months ended September 30, 1999, the
Company made five acquisitions (excluding insignificant purchases of other
assets), as well as payments relating to individually insignificant purchases of
other assets and disbursements relating to amounts payable pursuant to
acquisition agreements relating to pre-1999 acquisitions. Such acquisition
activity was financed from cash and cash equivalents and the issuance of
approximately 483,000 shares of common stock. There are no material commitments
outstanding at September 30, 1999, other than estimated future
acquisition-related payments to be made in accordance with purchase agreements.
The Company's current ratio at September 30, 1999 and December 31, 1998 was
2.2 to 1.0 and 2.6 to 1.0, respectively. The decrease in the current ratio is
primarily attributable to current liabilities recorded relating to the September
2, 2000 maturity date for the $85 million borrowed under the 364-day $400
million line of credit, as well as the remaining reserve of approximately $22
million recorded in connection with the Company's aforementioned productivity
and consolidation initiative.
On February 3, 1999, the Company's Board of Directors increased the
quarterly cash dividend by 13% to 2.25 cents per share for an indicated annual
rate of 9 cents per share in 1999. Dividends of $ 6.1 million were paid during
the nine months ended September 30, 1999 versus the $5.1 million paid in the
comparable prior year period.
The Company believes its sources of liquidity and capital are adequate for
its ongoing operating needs. If needed, other external sources of financing are
readily available to the Company.
Impact of Year 2000
The Company utilizes information systems throughout its business to carry
out its day-to-day operations. Further, the Company has and will continue to
invest in financial and operational systems to support its growth strategy.
Incorporated in this process is the continuing assessment of the Company's Year
2000 compliance. The Company currently considers its internal information
technology ("IT") systems to be substantially Year 2000 compliant. For those
systems that are not Year 2000 compliant, Omnicare is currently correcting,
upgrading or replacing those systems with, among other systems, its new
proprietary information system, which is Year 2000 compliant. The Company
believes it will be able to modify or replace its affected systems in time to
avoid any interruptions in its operations and anticipates that such remediation
will be completed during the latter part of 1999. The system remediation is
being completed using both internal resources and external consultants. The
Company estimates that the total costs associated with this project will range
from approximately $7.7 million to $8.4 million (with hardware accounting for
approximately 30 percent of these costs and software and implementation
approximating 70 percent of these costs). Approximately $6.5 million has been
spent to date. The cost of this project is being funded from the Company's
operating cash flows. No IT projects with high priority have been significantly
delayed due to the Year 2000 initiatives. The Company does not anticipate any
significant implications with respect to Year 2000 issues relating to non-IT
systems.
15
While the Company believes its plan for Year 2000 compliance will be
completed on a timely basis and within the foregoing estimates, there can be no
assurance that the remedial actions being implemented by the Company will be
completed in a timely manner; nor can assurance be given that any inability to
complete remedial action in a timely manner will not impact adversely operations
or financial results. Moreover, there can be no assurance that the costs
associated with the remediation will not exceed the foregoing estimates.
The failure by third parties with whom the Company has dealings,
particularly the Medicaid and Medicare programs, to adequately address their
Year 2000 issues could adversely affect the Company, and claims to these third
party payors could be unjustifiably denied and/or delayed. As a result, the
Company's accounts receivable balance could increase, unfavorably impacting
operating cash flows. The Company is communicating with each of these programs
to determine the extent to which it may be impacted by any Year 2000 issues not
yet resolved by these programs. The Company has developed a contingency plan
which, if necessary, would call for the submission of reimbursement claims using
universal claim (paper) forms to the programs in the event that computerized
processing is not feasible in the year 2000. While it is management's current
belief that this contingency plan would satisfactorily address the risk
associated with any absence of readiness experienced by these programs, there
can be no assurance that implementation of such plan will mitigate in whole or
in part such risk.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995 Regarding Forward-Looking Information
In addition to historical information, this report contains forward-looking
statements and performance trends that are subject to certain known and unknown
risks, uncertainties, contingencies and other factors that could cause actual
results, performance or achievements to differ materially from those stated.
Such forward-looking statements and trends include those relating to Omnicare's
acquisition program, internal growth trends, nursing home admission trends,
census and length of stay trends, the expected benefits from the Company's state
tax planning programs, the adequacy and availability of Omnicare's sources of
liquidity and capital, and the impact of the Year 2000 issue. Such risks,
uncertainties, contingencies and other factors, many of which are beyond the
control of Omnicare, include, but are not limited to: overall economic,
financial and business conditions, the continued availability of suitable
acquisition candidates and the successful integration of acquired companies,
whether there will be passage of legislation giving financial relief under PPS,
the effect of new government regulation and/or legislative initiatives including
those relating to reimbursement policies and in the interpretation and
application of such policies, the failure of Omnicare to obtain or maintain
required regulatory approvals or licenses, loss or delay of contracts pertaining
to Omnicare's CRO business for regulatory or other reasons, the ability to
implement the productivity and consolidation program and to realize anticipated
benefits, changes in tax law and regulation, trends for the continued growth of
the businesses of Omnicare, volatility in Omnicare's stock price, the demand for
Omnicare's products and services, pricing and other competitive factors in the
industry, variations in costs or expenses, changes in the scope of Year 2000
initiatives, and delays or problems in the implementation of Year 2000
initiatives by Omnicare and/or its suppliers and customers and other payors.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have any financial instruments held for trading
purposes and does not hedge any of its market risks with derivative instruments.
The Company's primary market risk exposure relates to interest rate risk
exposure through its borrowings. The Company's debt obligations at September 30,
1999 includes $390 million outstanding under its five-year $400 million
variable-rate revolving line of credit facility at an approximate average rate
of 6.4% at September 30, 1999 (a one-hundred basis point change in interest
rates would impact interest expense by approximately $1.0 million per quarter),
$85 million outstanding under its 364-day $400 million variable-rate revolving
line of credit facility at an approximate average rate of 6.4% at September 30,
1999 (a one-hundred basis point change in interest rates would impact interest
expense by approximately $0.2 million per quarter) and $345 million outstanding
under convertible subordinated notes due in 2007, which accrue interest at a
fixed rate of 5%. The fair value of the Company's debt obligations approximates
their carrying value.
17
PART II. -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
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4 Amendment No. 1 to 364-Day $400 Million Credit Agreement
dated as of September 3, 1999
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K - The Company did not file any Reports on
Form 8-K during the quarter ended September 30, 1999.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Omnicare, Inc.
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Registrant
Date November 15, 1999 By: /s/ David W. Froesel, Jr.
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David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
STATEMENT OF DIFFERENCES
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The registered trademark symbol shall be expressed as.................. 'r'