1
Exhibit 99.1
Report of Independent Accountants
---------------------------------
To the Stockholders and
Board of Directors of Omnicare, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Omnicare, Inc. and its subsidiaries
at December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of CompScript, Inc., or
IBAH, Inc., wholly-owned subsidiaries, which statements reflect combined total
assets of $122,517,000 and $106,612,000 at December 31, 1997 and 1996,
respectively, and combined total revenues of $138,682,000, $104,836,000 and
$77,723,000 for the three years ended December 31, 1997, 1996 and 1995,
respectively. These 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 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Cincinnati, Ohio
January 30,1998,
except as to the poolings-of-interests with
CompScript, Inc. and IBAH, Inc. which are as of
June 26, 1998 and June 29, 1998, respectively, and
except for Note 13, which is as of April 17, 1998
2
Report of Independent Certified Public Accountants
The Board of Directors
and Shareholders
CompScript, Inc.
We have audited the accompanying consolidated balance sheet of CompScript, Inc.
and Subsidiaries (the Company) as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CompScript, Inc. and Subsidiaries at December 31, 1997, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
West Palm Beach, Florida
March 6, 1998
2
3
Report of Independent Certified Public Accountants
The Board of Directors
and Shareholders
CompScript, Inc.
We have audited the accompanying supplemental consolidated balance sheet of
CompScript, Inc. and Subsidiaries (the Company) (formed as a result of the
consolidation of CompScript, Inc.; Medical Services Consortium, Inc.; Campo
Medical Pharmacy, Inc.; and Hytree Pharmacy, Inc.) as of December 31, 1996, and
the related supplemental consolidated statements of operations, shareholders'
equity and cash flows for each of the two years in the period ended December
31, 1996. The supplemental consolidated financial statements give retroactive
effect to the mergers of CompScript, Inc. and Medical Services Consortium,
Inc.; Campo Medical Pharmacy, Inc.; and Hytree Pharmacy, Inc. on January 10,
1997, February 28, 1997 and March 26, 1997, respectively, which have been
accounted for using the pooling of interests method as described in the notes
to the supplemental consolidated financial statements. These supplemental
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of CompScript, Inc. and Subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1996, after giving retroactive
effect to the combination of Medical Services Consortium, Inc.; Campo Medical
Pharmacy, Inc.; and Hytree Pharmacy, Inc., as described in the notes to the
supplemental consolidated financial statements, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
West Palm Beach, Florida
June 18, 1997
3
4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IBAH, Inc.:
We have audited the accompanying consolidated balance sheets of IBAH, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IBAH, Inc. and subsidiaries as
of December 31, 1996 and 1997, and the results of their operations and their
cash flow for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As explained in Note 5 to the Consolidated Financial Statements, the Company
has given retroactive effect to the change in accounting for its convertible
security with a beneficial conversion feature.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 5, 1998 (except with respect
to the matter discussed in Note 20
as to which the date is March 30, 1998).
4
5
CONSOLIDATED STATEMENT OF INCOME
Omnicare, Inc. and Subsidiary Companies
(In thousands, except per share data)
For the years ended December 31,
------------------------------------
1997 1996 1995
---------- -------- --------
Sales $1,034,384 $641,440 $477,359
Cost of sales 725,923 448,241 339,679
---------- -------- --------
Gross profit 308,461 193,199 137,680
Selling, general and administrative expenses 199,050 126,596 95,367
Acquisition expenses, pooling-of-interests (Note 2) 4,321 1,624 1,292
Nonrecurring expenses (Note 14) 7,521 510 4,000
---------- -------- --------
Operating income 97,569 64,469 37,021
Investment income 5,720 12,139 3,784
Interest expense (6,556) (4,332) (6,612)
Other expense (Note 15) (800) - -
---------- -------- --------
Income before income taxes 95,933 72,276 34,193
Income taxes 41,828 28,613 16,672
---------- -------- --------
Income from continuing operations 54,105 43,663 17,521
Loss from discontinued operations (Note 16) (2,154) (389) (1,546)
---------- -------- --------
Net income 51,951 43,274 15,975
Deemed dividend on preferred stock (Note 17) - - (2,712)
========== ======== ========
Net income available to common stockholders $ 51,951 $ 43,274 $ 13,263
========== ======== ========
Earnings (loss) per share - Basic:
Continuing operations
available to common stockholders $ .63 $ .62 $ .26
Discontinued operations (.02) - (.02)
---------- -------- --------
Net income available to common stockholders $ .61 $ .62 $ .24
========== ======== ========
Earnings (loss) per share - Diluted:
Continuing operations
available to common stockholders $ .62 $ .57 $ .26
Discontinued operations (.02) - (.02)
========== ======== ========
Net income available to common stockholders $ .60 $ .57 $ .24
========== ======== ========
Weighted average number of common shares outstanding:
Basic 85,692 69,884 56,216
========== ======== ========
Diluted 86,710 81,089 69,406
========== ======== ========
The Notes to Consolidated Financial Statements are an integral part of this
statement.
5
6
CONSOLIDATED BALANCE SHEET
Omnicare, Inc. and Subsidiary Companies
(In thousands, except share data)
December 31,
1997 1996
----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 138,062 $232,961
Accounts receivable, less allowances
of $17,994 (1996-$6,790) 278,525 152,897
Inventories 90,366 46,053
Deferred income tax benefits 10,465 6,116
Other current assets 24,954 13,271
---------- --------
Total current assets 542,372 451,298
Properties and equipment, at cost less accumulated
depreciation of $53,703 (1996-$36,594) 101,662 66,085
Goodwill, less accumulated amortization
of $30,247 (1996-$16,456) 726,696 294,221
Other assets 41,416 16,705
---------- --------
Total assets $1,412,146 $828,309
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 54,840 $ 28,431
Amounts payable pursuant to acquisition agreements 17,073 11,651
Current portion of long-term debt 13,252 4,396
Accrued employee compensation 34,304 17,502
Deferred revenue 22,270 22,812
Other current liabilities 45,808 24,105
---------- --------
Total current liabilities 187,547 108,897
Long-term debt 359,148 5,755
Deferred income taxes 10,517 4,232
Amounts payable pursuant to acquisition agreements 10,404 9,088
Other noncurrent liabilities 14,777 11,118
---------- --------
Total liabilities 582,393 139,090
Stockholders' equity:
Preferred stock-authorized 1,000,000 shares without par value; none issued
Common stock-authorized 110,000,000 shares $1 par;
88,260,600 shares issued (1996-82,753,687 shares issued) 88,261 82,754
Paid-in capital 609,117 510,835
Retained earnings 151,153 106,560
---------- --------
848,531 700,149
Treasury stock, at cost-102,046 shares (1996-0 shares) (2,926) -
Deferred compensation (14,807) (9,503)
Unallocated stock of ESOP (940) (1,660)
Cumulative translation adjustment (105) 233
---------- --------
Total stockholders' equity 829,753 689,219
---------- --------
Contingencies (Note 13)
Total liabilities and stockholders' equity $1,412,146 $828,309
========== ========
The Notes to Consolidated Financial Statements are an integral part of this
statement.
6
7
CONSOLIDATED STATEMENT OF CASH FLOWS
Omnicare, Inc. and Subsidiary Companies
(In thousands)
For the years ended December 31,
------------------------------------------
1997 1996 1995
--------- --------- --------
Cash flows from operating activities:
Net income $ 51,951 $ 43,274 $ 15,975
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 31,105 18,934 13,832
Provision for doubtful accounts 8,370 4,457 3,402
Deferred tax provision 10,395 3,011 1,830
Discontinued operations 2,154 389 1,546
Loss on note receivable 800 - -
Goodwill impairment charge - - 3,636
Other 170 1,188 639
Changes in assets and liabilities, net of effects
from acquisition/disposal of businesses:
Accounts receivable (84,278) (36,488) (26,216)
Inventories (29,250) (8,972) (5,488)
Current and noncurrent assets (7,009) (8,969) (1,543)
Payables and accrued liabilities 19,637 5,536 5,889
Deferred revenue (951) 3,816 5,805
Current and noncurrent liabilities 7,141 4,783 444
--------- --------- --------
Net cash flows from operating activities 10,235 30,959 19,751
--------- --------- --------
Cash flows from investing activities:
Acquisition of businesses (409,348) (108,453) (35,488)
Capital expenditures (41,278) (30,234) (15,860)
Marketable securities 905 (4,411) 46,053
Other (1,066) (301) (680)
--------- --------- --------
Net cash flows from investing activities (450,787) (143,399) (5,975)
--------- --------- --------
Cash flows from financing activities:
Net borrowings (repayments) on line-of-credit 8,341 470 (3,689)
Proceeds from long-term borrowings 354,951 3,098 9,747
Principal payments on long-term obligations (7,909) (4,966) (14,414)
Fees paid for financing arrangements (7,763) - -
Net proceeds from stock offerings - 297,170 7,022
Proceeds from exercise of stock options and warrants,
net of stock tendered in payment 4,080 5,444 249
Dividends paid (5,596) (3,900) (2,581)
Effect of exchange rate changes on cash (451) (166) 191
--------- --------- --------
Net cash flows from financing activities 345,653 297,150 (3,475)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents (94,899) 184,710 10,301
Cash and cash equivalents at beginning of period 232,961 48,251 37,950
--------- --------- --------
Cash and cash equivalents at end of period $ 138,062 $ 232,961 $ 48,251
========= ========= ========
The Notes to Consolidated Financial Statements are an integral part of this
statement.
7
8
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Omnicare, Inc. and Subsidiary Companies
(In thousands, except per share data)
Unallocated Total
Common Paid-in Retained Treasury Deferred Stock of Translation Stockholders'
Stock Capital Earnings Stock Comp ESOP Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994
- as previously reported $15,336 $129,971 $ 71,475 $(33,060) $ (858) $(2,760) $ - $180,104
IBAH pooling 2,332 27,660 (21,214) - - - 104 8,882
CompScript pooling 1,469 4,514 1,118 - - - - 7,101
- ------------------------------------------------------------------------------------------------------------------------------------
- as restated 19,137 162,145 51,379 (33,060) (858) (2,760) 104 196,087
Net income - - 15,975 - - - - 15,975
Dividends paid ($.05 per share) - - (2,581) - - - - (2,581)
Two-for-one stock split 10,429 (45,524) - 35,095 - - - -
Conversion of subordinated debt 4 49 - - - - - 53
Stock and warrants issued in
connection with acquisitions 278 10,685 - - - - - 10,963
Exercise of warrants - 298 - (298) - - - -
Exercise of stock options 107 1,933 - (1,902) - - - 138
Stock awards, net of amortization 52 2,636 - (317) (1,268) - - 1,103
Decrease in unallocated stock of ESOP - - - - - 500 - 500
IBAH sale of convertible preferred stock 491 6,444 - - - - - 6,935
Other 191 (139) (55) - - - 18 15
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 30,689 138,527 64,718 (482) (2,126) (2,260) 122 229,188
Pooling-of-interests (Note 2) 193 (1,673) 2,290 - - - - 810
Net income - - 43,274 - - - - 43,274
Dividends paid ($.06 per share) - - (3,900) - - - - (3,900)
Stock issued in public offering 6,241 290,930 - - - - - 297,171
Two-for-one stock split 32,689 (33,147) - 458 - - - -
Conversion of subordinated debt 10,815 67,423 - - - - - 78,238
Stock and warrants issued in
connection with acquisitions 1,277 33,408 - - - - - 34,685
Exercise of warrants 466 3,557 - 44 - - - 4,067
Exercise of stock options 262 657 - 562 - - - 1,481
Stock awards, net of amortization 192 9,352 - (582) (7,377) - - 1,585
Decrease in unallocated stock of ESOP - - - - - 600 - 600
Other (70) 1,801 178 - - - 111 2,020
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 82,754 510,835 106,560 - (9,503) (1,660) 233 689,219
Pooling-of-interests (Note 2) 1,221 660 (1,620) - - - - 261
Net income - - 51,951 - - - - 51,951
Dividends paid ($.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
- ------------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of this
statement.
8
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Omnicare, Inc. ("Omnicare" or the "Company") primarily operates in one business
segment which includes the distribution of pharmaceuticals, related pharmacy
consulting and data management services and medical supplies to long-term care
institutions and their residents in the United States. The Company also provides
international comprehensive clinical research and drug development services for
the pharmaceutical and biotechnology industries. The consolidated financial
statements include the accounts of the Company and all majority-owned
subsidiaries.
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. Leasehold improvements are amortized over
the lesser of the lease terms, including renewal options, or their useful lives.
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 their estimated useful lives, not in excess of forty
years.
9
10
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, 1997 or 1996.
Debt issuance costs as of December 31, 1997 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 from 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 unit of service is 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 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.
10
11
EARNINGS PER SHARE DATA
The earnings per share data and related average number of shares outstanding
have been restated for all periods presented with the Company's required
adoption of Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings
Per Share."
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, and for the years
ended December 31, 1996 and 1995, assumed the conversion of the 5.75%
Convertible Subordinated Notes due 2003 into common stock. Additionally, for the
years ended December 31, 1996 and 1995, interest expense and amortization of
debt issuance costs arising from these convertible securities were added, net of
related income taxes, to income for the purpose of calculating diluted earnings
per share. The 5.75% Convertible Subordinated Notes were converted on October 3,
1996; accordingly, they had no impact on the diluted earnings per share
calculation subsequent to that date. The 5.0% Convertible Subordinated Notes due
2007 (issued in December 1997) were not included in the 1997 dilutive earnings
per share calculation since the impact was anti-dilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued SFAS Nos. 130 and 131,
"Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information," respectively. Effective January 1, 1998,
the Company will adopt the provisions of these Statements. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses). SFAS No. 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Currently, the Company expects that adoption of SFAS Nos. 130 and 131 will not
have a significant impact on the Company's reporting and disclosures.
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 and disclosures of
contingent 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.
11
12
NOTE 2 - ACQUISITIONS
Since 1989, the Company has been involved in a program to acquire providers of
pharmaceutical and related pharmacy management services and medical supplies to
long-term care facilities and their residents. 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, 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.
On September 16, 1997, Omnicare completed the acquisition of all outstanding
shares of American Medserve Corporation ("AMC"). AMC provided 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.
During the year ended December 31, 1996, the Company completed 22 acquisitions
(excluding insignificant acquisitions), including 19 institutional pharmacy
businesses, two long-term care software companies and a contract research
organization. Nineteen of the acquisitions were accounted for as purchases and
three as poolings-of-interests.
During the year ended December 31, 1995, the Company completed 10 acquisitions
(excluding insignificant acquisitions), including nine institutional pharmacy
businesses and a long-term care software company. Nine of the acquisitions were
accounted for as purchases and one as a pooling-of-interests.
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.
12
13
The following table summarizes the aggregate purchase price for all businesses
acquired which have been accounted for as purchases (in thousands):
Businesses acquired in
--------------------------------------------
1997 1996 1995
-------- -------- -------
Cash $392,906 $ 86,953 $21,309
Amounts payable in the future 14,234 19,026 4,797
Common stock 75,244 14,317 10,856
Warrants 287 696 30
Assumption of indebtedness 2,520 5,296 197
-------- -------- -------
$485,191 $126,288 $37,189
======== ======== =======
Cash in the above table represents payments made in the year of acquisition.
This amount differs from cash paid for the acquisition of the 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,
1997 represent the right to purchase 333,460 shares of common stock. These
warrants can be exercised at any time through 2002 at prices ranging from $11.82
to $29.18 per share. Warrants to purchase 611,540 shares of common stock, issued
in prior years, were exercised in 1997.
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, 1997 and
1996. Amounts contingently payable through 2002 totaled $36,296,000 as of
December 31, 1997 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.
13
14
Unaudited pro forma combined results of operations of the Company for the years
ended December 31, 1997 and 1996, are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions had been made as
of January 1, 1996 (in thousands, except per share data).
For the years ended December 31,
1997 1996
--------------------------------
Pro Forma
- ---------
Sales $1,182,913 $967,493
Net income 43,666 32,859
Earnings per share:
Basic $ .50 $ .45
Diluted $ .50 $ .42
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.
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. (TSE/ME:EXE and EXE.A;
NYSE:EXE.A) 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. ("UPC"), has contracts to provide
comprehensive pharmacy, related consulting and infusion therapy services to
approximately 55,000 residents in more than 550 facilities in 12 states. This
transaction also offers Omnicare the opportunity to provide pharmacy services
to an additional 77 Extendicare facilities with capacity for 9,300 residents in
Canada and the United Kingdom. Based upon the six months ended June 30, 1998,
UPC's pharmacy revenues are running at the annualized rate of approximately
$165 million.
POOLING-OF-INTERESTS
The accompanying consolidated financial statements have been restated for all
periods presented to include the results of operations, cash flows and financial
position of CompScript, Inc. and IBAH, Inc., acquired in June 1998
pooling-of-interests transactions, as discussed below.
On June 26, 1998, the Company completed the acquisition of CompScript, Inc.
("CompScript") 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. CompScript serves approximately
20,000 residents in 137 long-term care facilities in five states. CompScript
operates seven pharmacy locations in the states of Florida, Ohio, Louisiana,
Alabama and Mississippi.
On June 29, 1998, the Company completed the acquisition of IBAH, Inc. ("IBAH")
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 common stock with a value of approximately $159 million in
this transaction.
14
15
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 rapidly and cost-effectively.
CompScript and IBAH completed pooling-of-interests transactions in 1997 and 1996
which were included in their financial statements used to prepare the Omnicare
restated financial statements. The impact of the 1997 and 1996
pooling-of-interests transactions completed by Omnicare on the Company's
historical consolidated financial statements were not material; consequently,
prior period and current year financial statements have not been restated for
these transactions. Net sales and net income for Omnicare, CompScript and IBAH
are as follows (in thousands):
Omnicare Compscript IBAH Total
-------- ---------- ------- ----------
Year ended December 31, 1997
Sales $895,702 $50,631 $88,051 $1,034,384
Net income* 55,705 (2,357) (1,397) 51,951
Year ended December 31, 1996
Sales $536,604 $42,716 $62,120 $ 641,440
Net income* 43,450 (1,156) 980 43,274
Year ended December 31, 1995
Sales $399,636 $34,857 $42,866 $ 477,359
Net income* 24,760 (4,226) (7,271) 13,263
* Net income excluding pooling costs, nonrecurring items, discontinued
operations and a deemed dividend on preferred stock in 1995 was $65,705,
$45,641 and $22,372 for the years ended December 31, 1997, 1996 and 1995,
respectively.
On June 30, 1995, the Company issued 806,370 shares of its common stock for all
of the outstanding common stock of Specialized Pharmacy Services, Inc.
("Specialized"). This acquisition was accounted for as a pooling-of-interests
and, accordingly, the Company's consolidated financial statements have been
restated for all periods prior to the acquisition to include the results of
operations, financial position and cash flows of Specialized. Net sales and net
income for Omnicare and Specialized prior to the Specialized transaction are as
follows (in thousands):
Omnicare Specialized Total
-------- ----------- --------
Six months ended June 30, 1995:
Sales $221,923 $ 16,441 $238,364
Net income 5,971 286 6,257
15
16
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 $4,321,000 ($3,279,000 aftertax) for the 1997 transactions, $1,624,000
($1,468,000 aftertax) for the 1996 transaction and $1,292,000 ($989,000
aftertax) for the Specialized transaction in 1995.
NOTE 3 - CASH AND CASH EQUIVALENTS
A summary of cash and cash equivalents follows (in thousands):
December 31,
1997 1996
-------------------------
Cash and cash equivalents:
Cash $ 37,433 $ 17,850
Money market funds 2,628 4,740
U.S. Treasury bills 94,995 -
U.S. government securities 846 6,313
U.S. Treasury-backed repurchase agreements 2,061 202,322
Commercial paper 99 1,736
-------- --------
$138,062 $232,961
======== ========
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,
1997 1996
-------------------------
Land $ 1,456 1,355
Buildings 2,855 2,459
Machinery and equipment 104,966 72,164
Furniture, fixtures and leasehold improvements 46,088 26,701
-------- --------
155,365 102,679
Accumulated depreciation (53,703) (36,594)
-------- ---------
$101,662 $ 66,085
======== ========
NOTE 5 - LEASING ARRANGEMENTS
The Company has operating leases which cover various real and personal property.
In most cases, the Company expects that these leases will be renewed or replaced
by other leases in the
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17
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, 1997 (in thousands):
1998 $13,330
1999 11,857
2000 8,537
2001 6,612
2002 4,878
Later years 24,954
-------
Total minimum payments required $70,168
=======
Total rent expense under operating leases for the years ended December 31, 1997,
1996 and 1995 were $13,345,000, $9,809,000 and $8,043,000, respectively.
NOTE 6 - LONG-TERM DEBT
A summary of long-term debt follows (in thousands):
December 31,
1997 1996
-------- ------
Convertible Subordinated Notes due 2007 $345,000 $ -
Employee Stock Ownership Plan ("ESOP") Loan Guarantee 940 1,660
Revolving lines-of-credit 6,715 1,636
Term loan with bank, 7.90% to 8.05%, due 2000 - 2002 6,737 -
Other bank debt, LIBOR + 2.75%, due 1998 - 2001 4,820 -
Non-revolving equipment loan 938 1,563
Notes payable to shareholders 75 1,344
Capitalized lease obligations 6,199 2,946
Other 976 1,002
-------- ------
372,400 10,151
Less current portion (13,252) (4,396)
-------- ------
$359,148 $5,755
======== ======
17
18
The following is a schedule by year of required long-term debt payments as of
December 31, 1997 (in thousands):
1998 $ 13,252
1999 3,842
2000 3,065
2001 4,918
2002 360
Later years 346,963
--------
$372,400
========
Total interest payments made for the years ended December 31, 1997, 1996 and
1995 were $4,986,000, $5,591,000 and $6,029,000, respectively.
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 $51,000 of deferred debt issuance costs relating to the 1997
Notes in 1997.
On October 1, 1993, the Company issued $80,500,000 principal amount of 5.75%
Convertible Subordinated Notes ("1993 Notes") due 2003. The 1993 Notes were
convertible into common stock at any time at the option of the holder at a price
of $7.22 per share. The remaining 1993 Notes were converted in October 1996 into
10,201,700 shares of common stock. Prior to the October conversion, a portion of
the 1993 Notes were converted into 613,444 shares of common stock during 1996.
In connection with the 1993 Notes conversions, the Company recorded the $1.9
million in unamortized deferred debt issuance costs against the paid-in capital
balance for the common stock issued. The Company amortized $220,000 of deferred
debt issuance costs relating to the 1993 Notes in 1996 (prior to the final 1993
Notes conversion) and $310,000 in 1995.
ESOP Loan Guarantee
- -------------------
In 1988, the Company established an Employee Stock Ownership Plan ("ESOP") which
currently covers certain acquired entities' employees and corporate headquarters
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 has guaranteed
the repayment of this obligation, it has recorded the ESOP's bank debt as
long-term debt and also as a reduction of stockholders' equity in the
accompanying consolidated balance sheet.
The ESOP services its debt with Company contributions which were previously made
to the Company's Employee Savings and Investment Plan, and dividends received on
shares held by the
18
19
ESOP. Principal and interest payments on the bank debt are made in increasing
quarterly installments over a ten-year period, the final payment being due on
December 31, 1998. The loan bears interest at the per annum rate of 7% and is
secured by the unallocated shares of common stock held by the ESOP trust. These
unallocated shares had a fair market value equal to $9,738,000 and $18,515,000
as of December 31, 1997 and 1996, respectively.
The Company funds ESOP expense as accrued. The components of total ESOP expense
are as follows (in thousands):
For the years ended December 31,
1997 1996 1995
--------------------------------
Interest expense $ 90 $145 $182
Principal payments 720 600 500
Dividends on ESOP stock (100) (90) (76)
----- ---- ----
$ 710 $655 $606
===== ==== ====
Revolving Credit Facilities
- ---------------------------
In October 1996, the Company negotiated a five-year, $400 million line of credit
agreement with a consortium of sixteen banks, which replaced the existing $135
million revolving credit facility. 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 also contains debt covenants which include the Fixed Charge
Coverage Ratio and minimum consolidated net worth. The Company is in compliance
with these covenants. No amounts were outstanding under this agreement as of
December 31, 1997 or 1996.
In May 1995, CompScript entered into a line of credit agreement which permitted
borrowings up to $750,000. On January 3, 1997, CompScript amended its financing
agreement with its primary lender to increase its revolving line of credit
agreement to allow for borrowings up to $5,000,000. On August 25, 1997,
CompScript further amended the financing agreement to allow for borrowings up to
$7,000,000. The line of credit is due upon demand and, in any event, expires
April 30, 1998. Interest is payable monthly at 8.5% with a .125% per annum fee
on the unused portion of the line. Subsequent to December 31, 1997, the line of
credit was repaid in its entirety.
IBAH has a line of credit agreement which permits borrowings up to $5,000,000
minus the outstanding balance on the non-revolving equipment loan, or $4,062,000
at December 31, 1997. Prior to August 1996 (when IBAH negotiated an increase in
its line of credit), the amount of this facility was $2,000,000. The line of
credit is due upon demand and bears interest at the lender's prime rate
effective October 1997 (lender's prime rate plus 0.25% prior to October 1997).
There were no borrowings outstanding on this line of credit at December 31, 1997
and 1996.
19
20
NOTE 7 - PUBLIC OFFERING OF COMMON STOCK
In March 1996, the Company completed a public offering of 5,750,000 shares
(pre-1996 stock split) of common stock resulting in gross proceeds of
$298,281,000 (before underwriting discounts and expenses). In April 1996, IBAH
completed a public offering of its common stock that resulted in gross proceeds
of $19,500,000 (before issuance expenses).
NOTE 8 - STOCK INCENTIVE PLANS
The Company has stock incentive plans under which it may grant stock options or
stock awards to key employees at a price equal to the fair market value at the
date of grant. Under these plans, stock options become exercisable beginning one
year following the date of grant in four equal annual installments. As of
December 31, 1997, 957,581 shares were available for grant.
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 (at December 31, 1997) 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
per share data):
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 3,151 $14.78 2,717 $8.41 1,981 $ 5.30
Options granted 1,111 26.91 902 30.35 1,140 12.64
Options exercised (1,003) 17.11 (436) 6.72 (348) 3.81
Options forfeited (53) 31.40 (32) 23.72 (56) 13.50
- -----------------------------------------------------------------------------------------------------------
Options outstanding, end of year 3,206 $17.85 3,151 $14.78 2,717 $ 8.41
- -----------------------------------------------------------------------------------------------------------
Options exercisable, end of year 1,592 1,563 1,053
- -----------------------------------------------------------------------------------------------------------
20
21
The following summarizes information about stock options outstanding as of
December 31, 1997 (in thousands, except per share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life (in years) Price at 12/31/97 Price
- ----------------------------------------------------------------------------------- ----------------------------
$ .73 - $12.31 1,629 5.58 $ 7.94 1,111 $ 6.01
13.37 - 39.62 1,503 8.64 26.98 448 26.92
39.68 - 77.24 74 6.15 50.58 33 59.89
- ----------------------------------------------------------------------------------- ----------------------------
$ .73 - $77.24 3,206 7.03 $17.85 1,592 $13.01
- ----------------------------------------------------------------------------------- ----------------------------
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. No options have been granted
under this plan.
Nonvested stock awards that are granted to key employees at the discretion of
the Incentive Committee are restricted as to the transfer of ownership and vest
over 2 to 7 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.
Summary information relating to stock award grants is presented below:
For the years ended December 31,
1997 1996 1995
--------------------------------------------
Nonvested shares 421,464 378,092 198,944
Unrestricted shares 6,000 6,400 6,400
Weighted-average grant date fair value $ 27.36 $ 23.99 $ 11.68
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 1997, 1996 and 1995, the amount of compensation expense related
to stock awards charged against income was $1,312,000, $937,000 and $506,000,
respectively.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for stock options and stock awards granted under these plans
according to APB Opinion 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 1997, 1996 and 1995: risk-free
interest rate of 6%, volatility of 35% (32% in 1996 and 1995), dividend yield of
0.2% and expected life of 4.2
21
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years. The weighted average fair value at grant date during 1997, 1996 and 1995
was $11.87, $11.10 and $5.09, respectively.
Unaudited pro forma data 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,
1997 1996 1995
-----------------------------------
Pro Forma
---------
Net income $49,923 $40,044 $12,132
Earnings per share:
Basic $ .58 $ .58 $ .22
Diluted $ .58 $ .53 $ .22
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 9 - RELATED PARTY TRANSACTIONS
The Company contracted with a division of Chemed Corporation ("Chemed"), a 1%
stockholder, to assist in the development of a new information system to
integrate and standardize all operational functions. The Company also subleases
offices from Chemed and is charged for the occasional use of Chemed's corporate
aviation department and other incidental expenses based on Chemed's cost. The
Company believes that the method by which such charges are determined is
reasonable and that the charges are essentially equal to that which would have
been incurred if the Company had operated as an unaffiliated entity. Charges to
the Company for these services for the years ended December 31, 1997, 1996 and
1995 were $4,039,000, $7,139,000 and $4,535,000, respectively. Net amounts owed
by the Company to Chemed as of December 31, 1997 and 1996 were $556,000 and
$946,000, respectively.
During 1997, IBAH performed services for an entity employing a member of IBAH's
Board of Directors. Revenues recognized during the year for these services were
$1,357,000.
CompScript rents two of its facilities from entities controlled by shareholders
under long-term leases expiring in 2001 and 2002, respectively. Included in rent
expense is approximately $212,000 paid in 1997 to these related parties. Future
minimum payments on these two related party rentals, which expire in 2002, are
$987,000.
NOTE 10 - EMPLOYEE BENEFIT PLANS
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.
22
23
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 Internal Revenue Code 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 the Employee Retirement Income
Security Act.
Actuarial assumptions used to calculate the Accumulated Benefit Obligation and
net expenses include a 7% interest rate as of December 31, 1997 (7.25% at
December 31, 1996 and 1995), an expected long-term rate of return on assets of
8% and a 6% rate of increase in compensation levels.
The Accumulated Benefit Obligation in excess of plan assets as of December 31,
1997 and 1996 was $5,008,000 and $7,422,000, respectively. In 1997, the Company
changed the actuarial assumptions used to determine the Accumulated Benefit
Obligation by using the actual compensation history of participants rather than
an estimated compensation history based on current compensation projected
backwards at the assumed rate of increase in compensation levels (6%). The net
expenses relating to the Company's defined contribution and defined benefit
plans (including the ESOP described in Note 6) for the years ended December 31,
1997, 1996 and 1995 were $3,293,000, $1,907,000 and $1,663,000, respectively.
NOTE 11 - INCOME TAXES
The provision for income taxes for continuing operations is comprised of the
following (in thousands):
For the years ended December 31,
1997 1996 1995
--------------------------------------------
Current:
Federal $27,155 $21,762 $13,312
State and local 4,528 3,836 1,493
------- ------- -------
31,683 25,598 14,805
------- ------- -------
Deferred:
Federal 8,734 2,974 1,389
State 1,411 41 478
------- ------- -------
10,145 3,015 1,867
------- ------- -------
Income taxes $41,828 $28,613 $16,672
======= ======= =======
Tax benefits related to the exercise of stock options, stock awards and stock
warrants have been credited to paid-in-capital in amounts of $7,827,000,
$2,243,000 and $1,357,000 for 1997, 1996 and 1995, respectively.
23
24
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,
1997 1996 1995
--------------- -------------- ---------------
Federal income tax at the statutory rate $33,560 35.0% $25,295 35.0% $11,968 35.0%
State and local income taxes, net
of federal income tax benefit 4,115 4.3 2,482 3.4 1,109 3.2
Amortization of nondeductible
intangible assets 1,414 1.5 628 0.9 482 1.4
Nondeductible pooling-of-interest/merger expenses 1,079 1.1 408 0.6 149 0.4
Nondeductible nonrecurring charge (Note 13) 1,855 1.9 - - - -
Effect of foreign losses not benefited 1,466 1.5 484 0.7 - -
NOL carryforward (utilized)/generated (2,694) (2.8) (1,686) (2.3) 1,094 3.2
Goodwill impairment charge nondeductible for tax - - - - 1,368 4.0
Other 1,033 1.1 1,002 1.3 502 1.6
------- ---- ------- ---- ------- ----
Total income taxes $41,828 43.6% $28,613 39.6% $16,672 48.8%
======= ==== ======= ==== ======= ====
Income tax payments made in 1997, 1996 and 1995 amounted to $22,824,000,
$19,749,000 and $14,014,000, respectively.
A summary of deferred tax assets and liabilities follows (in thousands):
December 31,
1997 1996
------- ------
Accounts receivable reserves $ 5,796 $4,353
Accrued liabilities 12,259 4,712
Other 698 -
------- ------
Gross deferred tax assets $18,753 $9,065
======= ======
Fixed assets and depreciation methods $ 3,495 $1,477
Amortization of intangibles 12,129 4,046
Other current and noncurrent assets 2,553 807
Other 628 851
------- ------
Gross deferred tax liabilities $18,805 $7,181
======= ======
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NOTE 12 - 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, 1997
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
Income from continuing operations $54,105
-------
BASIC EPS
Income available to common stockholders 54,105 85,692 $ 0.63
======
EFFECT OF DILUTIVE SECURITIES
Stock options and stock warrants - 1,018
------- ------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $54,105 86,710 $ 0.62
======= ====== ======
For the year ended December 31, 1996
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
Income from continuing operations $43,663
-------
BASIC EPS
Income available to common stockholders 43,663 69,884 $ 0.62
======
EFFECT OF DILUTIVE SECURITIES
Stock options and stock warrants - 3,256
1993 Convertible Subordinated Notes 2,266 7,949
------- ------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $45,929 81,089 $ 0.57
======= ====== ======
For the year ended December 31, 1995
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -----------
Income from continuing operations $17,521
Deemed dividend on preferred stock (2,712)
-------
BASIC EPS
Income available to common stockholders 14,809 56,216 $ 0.26
======
EFFECT OF DILUTIVE SECURITIES
Stock options and stock warrants - 2,042
1993 Convertible Subordinated Notes 3,209 11,148
------- ------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $18,018 69,406 $ 0.26
======= ====== ======
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26
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
December 1997, but were not included in the computation of diluted EPS because
the impact in 1997 was anti-dilutive.
NOTE 13 - CONTINGENCIES
On April 17, 1998, Omnicare announced that 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. ("HPSI"), was concluded.
In accordance with the terms of the tentative settlement, in the third quarter
of 1997, Omnicare recorded a nonrecurring charge of $6,313,000 ($5,958,000
aftertax) 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 earnings from continuing operations for the year
ended December 31, 1997.
NOTE 14 - NONRECURRING EXPENSES
Omnicare recorded a nonrecurring charge of $6,313,000 ($5,958,000 after taxes)
for the estimated costs and legal and other expenses associated with resolving
the investigation discussed at Note 13 above.
In June 1997, IBAH implemented a restructuring plan for its International
Division. IBAH recorded a one-time restructuring charge 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, 1997, 12
employees had been terminated and $296,000 of termination benefits had been
paid. In addition, lease-related costs of $111,000 had been paid. Substantially
all of the termination benefits and lease-related charges will be paid by the
end of 1998.
On July 18, 1996, IBAH purchased all of the outstanding shares of stock of
Resource Biometrics, Inc. ("RBI"). In connection with this acquisition, IBAH
allocated $510,000 ($510,000 after taxes) of the excess of purchase price over
book value on the acquisition date (based on an independent appraisal) to
acquired research and development, which was charged to the statement of income
as a nonrecurring item.
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At December 31, 1995, CompScript recognized a goodwill impairment charge of
approximately $3.6 million, with no associated tax benefit, related to the
pharmacy benefit management ("PBM") component of the Ohio Division of
CompScript. Specifically, based on poor financial results and the failure to
obtain new contracts, CompScript believed that the PBM business would not
generate positive cash flows in the foreseeable future and, accordingly, the
strategy to implement this line of business within the Ohio Division was no
longer a priority of CompScript.
In July 1995, a subsidiary of CompScript entered into a settlement agreement
relating to the early termination of a sales and marketing services contract
with outside business consultants. In connection with the settlement,
approximately $364,000 ($226,000 after taxes) was recorded as contract
termination settlement expense in the statement of income.
NOTE 15 - OTHER EXPENSE
In March 1997, CompScript recorded an $800,000 charge relating to the write down
of a note receivable from a former affiliate of CompScript.
NOTE 16 - 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 $389,000 for 1996 and $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 is uncertain. The loss on disposal is comprised mainly of
severance, software asset write-offs, contract completion costs and future rent
related to abandoned office space. The remaining liabilities related to the loss
on disposal at December 31, 1997 were $417,000 and were included in accrued
employee compensation and other current liabilities on the accompanying
consolidated balance sheet.
On July 28, 1995, IBAH entered into an agreement to sell its Drug Delivery
Services Division, effective July 1, 1995, to a management group from that
division. The Drug Delivery Services Division had recorded a net loss of
$727,000 for the six months ended June 30, 1995. In addition, a loss on disposal
of the division of $819,000, including accruals for severance payments and
future liabilities, was reflected in the consolidated statement of income for
1995.
NOTE 17 - DEEMED DIVIDEND ON PREFERRED STOCK
On August 11, 1995, IBAH completed a private equity placement of 999,554 shares
of convertible preferred stock, par value $.01 per share, at a purchase price of
$7.003125 per share, for a total of $6,935,000, 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 the 1998 acquisition of IBAH by Omnicare.
Since the convertible preferred stock shares were immediately convertible into
common stock, the most beneficial conversion discount was recorded analogous to
a deemed dividend in the 1995 statement of income.
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NOTE 18 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following table presents the Company's quarterly financial information for
1997 and 1996 (in thousands, except per share data):
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- -----------
1997(a)
Sales $ 212,424 $ 236,896 $ 264,112 $ 320,952 $ 1,034,384
Cost of sales 149,128 165,680 185,349 225,766 725,923
--------- --------- --------- --------- -----------
Gross profit 63,296 71,216 78,763 95,186 308,461
Selling, general and
administrative expenses 40,746 46,307 50,209 61,788 199,050
Acquisition expenses, pooling-
of-interests 1,591 (c) 944 (d) -- 1,786 (e) 4,321 (f)
Nonrecurring expenses -- 1,078 (g) 6,313 (h) 130 (i) 7,521 (j)
--------- --------- --------- --------- -----------
Operating income 20,959 (c) 22,887 (d)(g) 22,241 (h) 31,482 (e)(i) 97,569 (f)(j)
Interest (expense), net of
investment income 1,575 1,051 (231) (3,231) (836)
Other expenses (800)(k) -- -- -- (800)(k)
--------- --------- --------- --------- -----------
Income before income taxes 21,734 (c)(k) 23,938 (d)(g) 22,010 (h) 28,251 (e)(i) 95,933 (f)(j)(k)
Income taxes 9,462 10,217 10,614 11,535 41,828
--------- --------- --------- --------- -----------
Income from continuing operations 12,272 (c)(k) 13,721 (d)(g) 11,396 (h) 16,716 (e)(i) 54,105 (f)(j)(k)
Loss from discontinued operations (300)(l) (1,854)(l) -- -- (2,154)(l)
--------- --------- --------- --------- -----------
Net income $ 11,972 (c)(k) $ 11,867 (d)(g) $ 11,396 (h) $ 16,716 (e)(i) $ 51,951 (f)(j)(k)
========= ========= ========= ========= ===========
Earnings (loss) per share - Basic (b)
Continuing operations $ .15 (c)(k) $ .16 (d)(g) $ .13 (h) $ .19 (e)(i) $ .63 (f)(j)(k)
Discontinued operations (.01)(l) (.02)(l) -- -- (.02)(l)
--------- --------- --------- --------- -----------
Net income $ .14 (c)(k) $ .14 (d)(g) $ .13 (h) $ .19 (e)(i) $ .61 (f)(j)(k)
========= ========= ========= ========= ===========
Earnings (loss) per share - Diluted (b)
Continuing operations $ .15 (c)(k) $ .16 (d)(g) $ .13 (h) $ .19 (e)(i) $ .62 (f)(j)(k)
Discontinued operations (.01)(l) (.02)(l) -- -- (.02)(l)
--------- --------- --------- --------- -----------
Net income $ .14 (c)(k) $ .14 (d)(g) $ .13 (h) $ .19 (e)(i) $ .60 (f)(j)(k)
========= ========= ========= ========= ===========
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First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
--------- -------- --------- --------- ---------
1996(a)
Sales $ 140,165 $146,386 $ 166,832 $ 188,057 $ 641,440
Cost of sales 97,912 102,581 116,911 130,837 448,241
--------- -------- --------- --------- ---------
Gross profit 42,253 43,805 49,921 57,220 193,199
Selling, general and
administrative expenses 28,105 28,548 31,928 38,015 126,596
Acquisition expenses, pooling-
of-interests -- 265(m) 669 (n) 690 (o) 1,624 (p)
Nonrecurring expenses -- -- 510 (q) -- 510 (q)
--------- -------- --------- --------- ---------
Operating income 14,148 14,992(m) 16,814 (n)(q) 18,515 (o) 64,469 (p)(q)
Investment income, net of
interest (expense) (841) 2,850 2,566 3,232 7,807
--------- -------- --------- --------- ---------
Income before income taxes 13,307 17,842(m) 19,380 (n)(q) 21,747 (o) 72,276 (p)(q)
Income taxes 5,328 6,901 8,210 8,174 28,613
--------- -------- --------- --------- ---------
Income from continuing operations 7,979 10,941(m) 11,170 (n)(q) 13,573 (o) 43,663 (p)(q)
Loss from discontinued operations -- -- (175)(l) (214)(l) (389)(l)
--------- -------- --------- --------- ---------
Net income $ 7,979 $ 10,941(m) $ 10,995 (n)(q) $ 13,359 (o) $ 43,274 (p)(q)
========= ======== ========= ========= =========
Earnings (loss) per share - Basic (b)
Continuing operations $ .14 $ .16(m) $ .16 (n)(q) $ .17 (o) $ .62 (p)(q)
Discontinued operations -- -- -- (.01)(l) --
--------- -------- --------- --------- ---------
Net income $ .14 $ .16(m) $ .16 (n)(q) $ .16 (o) $ .62 (p)(q)
========= ======== ========= ========= =========
Earnings (loss) per share - Diluted (b)
Continuing operations $ .12 $ .14(m) $ .14 (n)(q) $ .16 (o) $ .57 (p)(q)
Discontinued operations -- -- -- -- --
--------- -------- --------- --------- ---------
Net income $ .12 $ .14(m) $ .14 (n)(q) $ .16 (o) $ .57 (p)(q)
========= ======== ========= ========= =========
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(a) The accompanying consolidated financial statements have been restated for
all periods presented to include the results of operations of CompScript,
Inc. ("CompScript") and IBAH, Inc. ("IBAH"), acquired in June 1998
pooling-of-interests transactions. CompScript and IBAH completed
pooling-of-interests transactions in 1997 and 1996 which were included in
their financial statements used to prepare the Omnicare restated financial
statements. The impact of 1997 and 1996 pooling-of-interests transactions
completed by Omnicare on the Company's historical consolidated financial
statements were not material; consequently, prior period and current year
financial statements have not been restated for these transactions.
(b) Earnings per share is calculated independently for each quarter. The sum of
the quarters may not necessarily be equal to the full year earnings per
share amount. The earnings per share data have been restated with the
Company's required adoption of Statement of Financial Accounting Standard
No. 128, "Earnings per Share."
(c) Includes acquisition-related expenses of $1,591 (Omnicare $978; CompScript
$613) relating to pooling-of-interests transactions. Such expenses, on an
aftertax basis, were $1,467 (Omnicare $854; CompScript $613), or $.02 per
basic and diluted share. First quarter income from continuing operations,
excluding these expenses as well as other expenses of $499 (aftertax)
discussed in note (k) below, was $14,238 ($.17 per basic and diluted
share).
(d) Includes acquisition-related expenses of $944 (Omnicare $693; CompScript
$75; IBAH $176) relating to pooling-of-interests transactions. Such
expenses, on an aftertax basis, were $826 (Omnicare $575; CompScript $75;
IBAH $176), or $.01 per basic and diluted share. Second quarter income from
continuing operations, excluding these expenses as well as the aftertax
nonrecurring charge of $1,078 discussed in (g) below, was $15,625 ($.18 per
basic and diluted share).
(e) Includes Omnicare acquisition-related expenses of $1,786 relating to a
pooling-of-interests transaction. Such expenses, on an aftertax basis, were
$1,642, or $.02 per basic and diluted share. Fourth quarter income from
continuing operations, excluding these expenses as well as the aftertax
nonrecurring charge of $130 discussed in (i) below, was $18,488 ($.21 per
basic and diluted share).
(f) Includes acquisition expenses related to pooling-of-interests transactions
of $4,321 before taxes. Such expenses, on an aftertax basis, were $3,935,
or $.05 per basic and diluted share. For the year ended December 31, 1997,
income from continuing operations, excluding this charge as well as the
nonrecurring charge of $7,166 disclosed in (j) below and the other expenses
of $499 disclosed in (k) below, was $65,705 ($.77 per basic and $.76 per
diluted share).
(g) Includes charges of $1,078 related to a restructuring plan for IBAH's
international unit. Such expenses, on an aftertax basis, were $1,078, or
$.01 per basic and diluted share.
(h) A nonrecurring charge of $6,313 before taxes and $5,958 after taxes, or
$.07 per basic and diluted share, was recorded by Omnicare for the
estimated costs and legal and other expenses associated with the tentative
settlement of the government investigation of Home Pharmacy Services, Inc.,
a wholly-owned subsidiary of Omnicare. Third quarter income from continuing
operations, excluding the nonrecurring charge, was $17,354 ($.20 per basic
and diluted share).
(i) Includes charges of $130 related to a restructuring plan for IBAH's
international unit. Such expenses, on an aftertax basis, were $130, or $.00
per basic and diluted share.
(j) Includes nonrecurring expenses of $1,078, $6,313 and $130 before taxes as
discussed in notes (g), (h) and (i), respectively. These expenses,
in the aggregate, are $7,166 after taxes ($.08 per basic and diluted
share).
(k) Represents a loss on the realization of a CompScript note receivable. Such
loss, on an aftertax basis, was $499, or $.01 per basic and diluted share.
(l) Relates to the discontinued operations of the software commercialization
unit of Research Biometrics, Inc. ("RBI"), a subsidiary of IBAH. All
operating results of this business have been reclassified from continuing
operations to discontinued operations.
(m) Includes acquisition expenses of $265 before taxes related to a CompScript
pooling-of-interests transaction. Such expenses, on an aftertax basis,
were $265, or $.00 per basic and diluted share. Income from continuing
operations, excluding these expenses, was $11,206 for the second quarter,
or $.16 per basic share and $.14 per diluted share.
(n) Includes acquisition-related expenses of $669 relating to a CompScript
pooling-of-interests transaction. Such expenses, on an aftertax basis, were
$669, or $.01 per basic and diluted share. Income from continuing
operations, excluding these expenses as well as the expenses of $510
discussed in (q) below, was $12,349 for the third quarter, or $.17 per
basic share and $.16 per diluted share.
(o) Includes acquisition-related expenses of $690 relating to an Omnicare
pooling-of-interests transaction. Such expenses, on an aftertax basis, were
$534, or $.01 per basic and diluted share. Income from continuing
operations, excluding these expenses, was $14,107 for the fourth quarter,
or $.17 per basic and diluted share.
(p) Includes acquisition expenses related to pooling-of-interests transactions
of $1,624 before taxes. Such expenses, on an aftertax basis, were $1,468
($.02 per basic and diluted share). For the year ended December 31, 1996,
income from continuing operations, excluding these charges as well as the
nonrecurring expenses of $510 discussed in (q) below, was $45,641, or $.65
per basic and $.59 per diluted share.
(q) Includes a charge of $510 relating to the purchase of RBI (a subsidiary of
IBAH), representing the write-off of the portion of the RBI purchase price
allocated to in-process software research and development. Such expenses,
on an aftertax basis, were $510, or $.01 per basic and diluted share.
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