<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 26, 1996
OMNICARE, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
1-8269 31-1001351
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(Commission File Number) (IRS Employer Identification No.)
2800 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio 45202
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (513) 762-6666
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<PAGE> 2
Item 5. Other Events
------------
Omnicare, Inc. (the "Company") hereby files its audited consolidated
financial statements and management's discussion and analysis of operations and
financial condition as of and for the three years in the period ended December
31, 1995.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Omnicare, Inc.
------------------------
(Registrant)
Date: February 26, 1996 By: /s/ Thomas R. Marsh
----------------- ------------------------
Thomas R. Marsh
Vice President,
Controller and Acting
Treasurer
(Principal Financial and
Accounting Officer)
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<PAGE> 4
Report of Independent Accountants
---------------------------------
To the Stockholders and
Board of Directors of Omnicare, Inc.
In our opinion, based on our audits and the report of other auditors with
respect to 1993, the accompanying consolidated balance sheet and the related
consolidated statements of income, cash flow and stockholders' equity present
fairly, in all material respects, the financial position of Omnicare, Inc. and
its subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flow for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the combined financial statements of Evergreen
Pharmaceutical, Inc. and Evergreen Pharmaceutical East, Inc. (collectively,
"Evergreen") for the year ended December 31, 1993, which statements reflect
1993 revenues of $34,130,000. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed
herein, insofar as it relates to the 1993 amounts included for Evergreen, is
based solely on the report of the other auditors. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Cincinnati, Ohio
February 5, 1996
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<PAGE> 5
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Evergreen Pharmaceutical, Inc. and
Evergreen Pharmaceutical East, Inc.
Kirkland, Washington
We have audited the combined balance sheets of Evergreen Pharmaceutical, Inc.
and Evergreen Pharmaceutical East, Inc. as of December 31, 1993, and the
related combined statements of income, shareholders' equity and cash flows for
the year then ended, not presented separately herein. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, not presented separately herein,
present fairly, in all material respects, the combined financial position of
Evergreen Pharmaceutical, Inc. and Evergreen Pharmaceutical East, Inc. as of
December 31, 1993, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Seattle, Washington
July 29, 1994
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<PAGE> 6
CONSOLIDATED STATEMENT OF INCOME
Omnicare, Inc. and Subsidiary Companies
(In thousands except per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Sales $399,636 $307,655 $223,129
Cost of sales 287,715 227,533 165,714
-------- -------- --------
Gross profit 111,921 80,122 57,415
Selling, general and administrative
expenses 66,970 50,111 38,243
Acquisition expenses-pooling
of interests 1,292 2,380 -
-------- -------- --------
Operating income 43,659 27,631 19,172
Investment income 3,475 1,580 635
Interest expense (5,954) (6,533) (2,824)
-------- -------- --------
Income before income taxes and
cumulative effect of accounting change 41,180 22,678 16,983
Income taxes 16,420 9,147 6,013
-------- -------- --------
Income before cumulative effect of
accounting change 24,760 13,531 10,970
Cumulative effect of accounting change - - 280
-------- -------- --------
Net income $ 24,760 $ 13,531 $ 11,250
======== ======== ========
Earnings per share data
Primary:
Income before cumulative effect of
accounting change $ .94 $ .60 $ .52
Cumulative effect of accounting change - - .01
-------- -------- --------
Net income $ .94 $ .60 $ .53
======== ======== ========
Fully diluted:
Income before cumulative effect of
accounting change $ .86 $ .59 $ .52
Cumulative effect of accounting change - - .01
-------- -------- --------
Net income $ .86 $ .59 $ .53
======== ======== ========
Weighted average number of
common shares outstanding:
Primary 26,198 22,479 21,253
======== ======== ========
Fully diluted 32,642 28,429 22,861
======== ======== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
-6-
<PAGE> 7
CONSOLIDATED BALANCE SHEET
Omnicare, Inc. and Subsidiary Companies
<TABLE>
<CAPTION>
(In thousands except share data)
December 31,
ASSETS 1995 1994
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 40,137 $ 34,553
Marketable securities - 45,245
Accounts receivable, less allowances
of $4,761 (1994-$3,681) 80,247 60,083
Inventories 28,841 21,116
Deferred income tax benefits 6,600 5,818
Other current assets 5,247 3,445
-------- --------
Total current assets 161,072 170,260
Properties and equipment, at cost
less accumulated depreciation 32,458 23,452
Goodwill, less accumulated amortization
of $10,448 (1994-$6,832) 157,843 114,376
Other assets 9,463 9,117
-------- --------
Total assets $360,836 $317,205
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,020 $ 17,666
Amounts payable pursuant to acquisition agreements 13,642 4,576
Current portion of long-term debt 1,051 5,549
Accrued employee compensation 5,338 3,230
Liabilities relating to discontinued operations 1,547 2,399
Other current liabilities 11,090 11,290
-------- --------
Total current liabilities 54,688 44,710
Long-term debt 82,692 85,323
Deferred income taxes 2,621 1,616
Amounts payable pursuant to acquisition agreements 1,418 2,910
Other noncurrent liabilities 4,656 2,542
-------- --------
Total liabilities 146,075 137,101
-------- --------
Stockholders' equity:
Preferred stock-authorized 1,000,000 shares
without par value; none issued
Common stock-authorized 44,000,000 shares
$1 par; 26,344,588 shares issued
(1994-15,336,025 pre stock split shares) 26,345 15,336
Paid-in capital 99,686 129,971
Retained earnings 93,598 71,475
-------- --------
219,629 216,782
Treasury stock, at cost-24,268 shares
(1994-2,488,274 pre stock split shares) (482) (33,060)
Deferred compensation (2,126) (858)
Unallocated stock of ESOP (2,260) (2,760)
-------- --------
Total stockholders' equity 214,761 180,104
-------- --------
Total liabilities and stockholders' equity $360,836 $317,205
======== ========
</TABLE>
The Notes to Consolidated Financial Statements
are an integral part of this statement.
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<PAGE> 8
CONSOLIDATED STATEMENT OF CASH FLOW
Omnicare, Inc. and Subsidiary Companies
<TABLE>
<CAPTION>
(In thousands) For the years ended December 31,
1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Income before cumulative effect of accounting change $ 24,760 $ 13,531 $ 10,970
Adjustments to reconcile income before cumulative
effect of accounting change to net cash flow from
operating activities:
Depreciation and amortization 11,117 8,264 5,908
Provision for doubtful accounts 3,086 2,298 2,296
Deferred tax provision 1,750 917 811
Cumulative effect of a change in accounting principle - - 280
Changes in assets and liabilities, net of effects
from acquisition/disposal of businesses:
Accounts receivable (19,286) (14,192) (10,867)
Inventories (4,930) (3,652) 511
Current and noncurrent assets (1,402) (443) (4,126)
Income taxes payable (857) 428 (6,917)
Payables and accrued liabilities 4,335 2,785 2,694
Current and noncurrent liabilities 1,301 2,701 (251)
-------- -------- --------
Net cash flow from operating activities 19,874 12,637 1,309
-------- -------- --------
Cash flow from investing activities:
Acquisition of businesses (35,373) (40,084) (24,656)
Capital expenditures (13,603) (9,659) (5,670)
Marketable securities 45,245 (45,245) -
Proceeds from sales of properties and equipment 261 606 120
Cash flow from discontinued operations (852) (1,370) (11)
-------- -------- --------
Net cash flow from investing activities (4,322) (95,752) (30,217)
-------- -------- --------
Cash flow from financing activities:
Net borrowings on line-of-credit (3,670) (215) 1,789
Proceeds from long-term borrowings 5,343 141 92,290
Principal payments on long-term obligations (9,130) (3,426) (12,086)
Net proceeds from stock offering - 59,211 -
Proceeds from exercise of stock options and warrants,
net of stock tendered in payment 70 1,291 (7)
Dividends paid (2,581) (2,756) (2,928)
-------- -------- --------
Net cash flow from financing activities (9,968) 54,246 79,058
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,584 (28,869) 50,150
Cash and cash equivalents at beginning of period 34,553 63,422 13,272
-------- -------- --------
Cash and cash equivalents at end of period $ 40,137 $ 34,553 $ 63,422
======== ======== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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<PAGE> 9
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Omnicare, Inc. and Subsidiary Companies
<TABLE>
<CAPTION>
(In thousands except per share data)
Total
Common Paid-in Retained Treasury Deferred Unallocated Stockholders'
Stock Capital Earnings Stock Compensation Stock of ESOP Equity
------- ------- -------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992
As previously reported $12,843 $ 63,761 $50,005 $(30,077) $ - $(3,460) $ 93,072
Specialized pooling of interests
(Note 2) 202 (194) 1,253 - - - 1,261
------- -------- ------- -------- ------- ------- --------
Balance as restated 13,045 63,567 51,258 (30,077) - (3,460) 94,333
Net income - - 11,250 - - - 11,250
Dividends paid ($.08 per share) - - (1,472) - - - (1,472)
Dividends to former owners
of Evergreen - - (1,654) - - - (1,654)
Exercise of stock options 51 902 - (1,049) - - (96)
Stock awards 2 87 - - - - 89
Decrease in unallocated stock
of ESOP - - - - - 300 300
-------- -------- ------- -------- ------- ------- --------
Balance at December 31, 1993 13,098 64,556 59,382 (31,126) - (3,160) 102,750
Lo-Med pooling of interests
(Note 2) 371 (341) 1,120 - - - 1,150
Net income - - 13,531 - - - 13,531
Dividends paid ($.09 per share) - - (1,759) - - - (1,759)
Dividends to former owners
of Evergreen - - (397) - - - (397)
Dividends to former owners
of Lo-Med - - (402) - - - (402)
Stock issued in public offering 1,624 57,587 - - - - 59,211
Stock and warrants issued in
connection with acquisitions 75 3,616 - - - - 3,691
Exercise of warrants - 529 - 658 - - 1,187
Exercise of stock options 117 2,432 - (2,592) - - (43)
Stock awards, net of amortization 51 1,592 - - (858) - 785
Decrease in unallocated stock
of ESOP - - - - - 400 400
------- -------- ------- -------- ------- ------- -------
Balance at December 31, 1994 15,336 129,971 71,475 (33,060) (858) (2,760) 180,104
Net income - - 24,760 - - - 24,760
Dividends paid ($.10 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 254 10,632 - - - - 10,886
Exercise of warrants - 298 - (298) - - -
Exercise of stock options 82 1,760 - (1,902) - - (60)
Stock awards, net of amortization 52 2,636 - (317) (1,268) - 1,103
Decrease in unallocated stock
of ESOP - - - - - 500 500
Other 188 (136) (56) - - - (4)
------- -------- ------- -------- ------- ------- -------
Balance at December 31, 1995 $26,345 $ 99,686 $93,598 $ (482) $ (2,126) $(2,260) $214,761
======= ======== ======= ======== ======= ======= ========
The Notes to Consolidated Financial Statements are an integral part of this statement.
</TABLE>
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<PAGE> 10
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Omnicare, Inc. ("Company") operates in one business segment which
includes the distribution of pharmaceuticals, related pharmacy management
services and medical supplies to long-term care institutions and their
residents in the U.S. The consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries as well as 50% of
the accounts of Heartland Healthcare Services, a 50/50 partnership between the
Company and Health Care and Retirement Corporation. All significant
intercompany transactions are eliminated.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all investments in highly liquid instruments with
maturities of three months or less at the date purchased to be cash
equivalents. Investments in cash equivalents are carried at cost which
approximates market value with any associated purchase discount or premium
amortized over the period to maturity.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under these rules, debt securities that the
Company has both the intent and ability to hold to maturity are carried at
amortized cost. Debt securities that the Company does not have the intent and
ability to hold to maturity are classified either as "available-for-sale" or as
"trading" and are carried at fair value. At December 31, 1995 and 1994, the
Company had no investments that qualified as available-for-sale or trading.
Marketable securities at December 31, 1994 consist of U.S. Treasury obligations
which matured in 1995 and are stated at cost, which approximates fair value.
The fair values are based on quoted market prices.
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<PAGE> 11
INVENTORIES
Inventories consist primarily of purchased pharmaceuticals and medical
supplies held for sale to customers and are stated at the lower of cost or
market. Cost is generally determined using the average cost and first-in,
first-out methods.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost. Expenditures for maintenance,
repairs, renewals and betterments that do not materially prolong the useful
lives of the assets are charged to expense. Depreciation of properties and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the lesser of
the lease terms, including renewal options, or their useful lives.
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.
On an annual basis, 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 flow on an
undiscounted basis. In management's opinion, no such impairment exists at
December 31, 1995 or 1994.
Debt issuance costs are included in other assets and are amortized using the
straight-line method over the life of the related debt.
REVENUE RECOGNITION
Revenue is recognized when products or services are provided to the
customer. A significant portion of the Company's revenues from sales of
pharmaceutical and medical products are
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<PAGE> 12
reimbursable from Medicaid and Medicare programs. The Company monitors its
receivables from these reimbursement sources under policies established by
management and reports such revenues at the net realizable amount expected to
be received from these third-party payors.
INCOME TAXES
The provision for income taxes includes federal, state and local income
taxes currently payable and those deferred because of differences between
income for financial reporting and income for tax purposes.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," on a prospective basis; SFAS No. 109 requires the use of an
asset and liability method of accounting for deferred income taxes.
PER SHARE DATA
Primary earnings per share are computed based on the weighted average number
of shares of common stock outstanding during the period and common stock
equivalents, if material. Fully diluted earnings per share include common stock
equivalents and assume the conversion of the 5.75% Convertible Subordinated
Notes due 2003 into common stock. Additionally, interest expense and
amortization of debt issuance costs arising from these convertible securities
are added, net of related income taxes, to income for the purpose of
calculating fully diluted earnings per share.
The Board of Directors declared a two-for-one split of the Company's $1 par
value common stock effective June 21, 1995. As a result of the split,
12,944,180 additional shares were issued including 2,514,994 from treasury
stock. Additional paid-in capital and treasury stock were reduced by
$45,524,000 and $35,095,000, respectively. All references in the financial
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<PAGE> 13
statements to share and per share amounts have been adjusted to reflect the
stock split.
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
disclosure 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.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company will adopt provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. As permitted by SFAS No. 123, the Company will continue to
follow the measurement principles prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and will disclose the pro forma impact of using
the fair value measurement principles of SFAS No. 123.
Effective January 1, 1996, the Company will adopt provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of." This statement establishes accounting standards for
recording the impairment of long-lived assets. The Company expects that
adoption of this statement will not have a material impact on its results of
operations or financial position.
RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made to conform
with the current year presentation.
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<PAGE> 14
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.
On June 30, 1995, the Company issued 403,185 shares of its common stock for
all of the outstanding common stock of Specialized Pharmacy Services, Inc.
("Specialized"). On September 30, 1994, the Company issued 2,222,644 shares of
its common stock for all the outstanding common stock of Evergreen
Pharmaceutical, Inc. and Evergreen Pharmaceutical East, Inc. ("EPE")
(collectively, "Evergreen"). These acquisitions were accounted for as poolings
of interests and, accordingly, the Company's consolidated financial statements
have been restated for all periods prior to the acquisitions to include the
results of operations, financial position and cash flow of Specialized and
Evergreen. In accordance with accounting rules for pooling of interests
transactions, charges to operating income for acquisition-related expenses were
recorded upon completion of the acquisitions. These acquisition-related
expenses totaled $1,292,000, or $989,000 after taxes, for the Specialized
transaction and $2,380,000, or $1,860,000 after taxes, for the Evergreen
transaction. Net sales and net income for Omnicare and Evergreen prior to the
Evergreen transaction and Omnicare and Specialized prior to the Specialized
transaction are as follows (in thousands):
<TABLE>
<CAPTION>
Omnicare Specialized Evergreen
-------- ----------- ---------
<S> <C> <C> <C>
Six months ended June 30, 1995:
Sales $171,211 $16,441 (a)
Net income 9,861 286 (a)
Year ended December 31, 1994:
Sales $275,663 $31,992 (a)
Net income 13,406 125 (a)
Nine months ended
September 30, 1994:
Sales $172,876 $23,748 $25,324
Net income 7,091 66 1,877
Year ended December 31, 1993:
Sales $159,574 $29,425 $34,130
Net income 9,014 (141) 2,377
</TABLE>
(a) The results of operations of Evergreen are included in the
consolidated results of Omnicare for these periods.
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<PAGE> 15
During 1995, the Company completed acquisitions of the following
institutional pharmacy businesses: Shore Pharmaceutical Providers, Inc. in
Westbury, New York, in January; North Shore Pharmacy Services, Inc. in Boston,
Massachusetts, Genrex Nursing Home Pharmacy Division of Genovese Drug Stores,
Inc. in Melville, New York and Consulting and Pharmaceutical Services, Inc. in
Yakima, Washington, in March; Pioneer I.V., Ltd. in Moline, Illinois, in May;
Specialized in Livonia, Michigan, in June; CPM Datascript, Corp. in Hollis, New
York, in July; the nursing home pharmacy business of Rite Aid Corp. in
September; and Apex Long-Term Care Pharmacy, Inc. in Hamden, Connecticut, in
December. Also in September, the Company acquired a care planning software
developer and marketer, the Dynatran Computer Systems Division of Health
Spectrum, Inc. in Portland, Oregon.
During 1994, the Company completed the acquisitions of Care Pharmaceutical
Services, Inc. in Griffith, Indiana and Schaufler Prescription Pharmacy in
Belleville, Illinois, in March; Weber Medical Systems, Inc. in Skokie, Illinois
and Lo-Med Prescription Services, Inc. ("Lo-Med") in Wadsworth, Ohio, in June;
UniCare, Inc. in Montgomery, Alabama, in August; and Lawrence Medical Supply,
Inc. in Deerfield, Illinois and Evergreen in Kirkland, Washington, in
September.
During 1993, the Company completed the acquisitions of Freed's Pharmacy,
Inc. in Overland Park, Kansas, in March; Kansas City Nursing Services, Inc. in
Kansas City, Kansas, Enloe Drugs, Inc. in Decatur, Illinois and Anderson
Medical Services, Inc., in Dover, Ohio, all in the fourth quarter.
The Specialized, Evergreen and Lo-Med acquisitions were accounted for as
pooling of interests transactions. Prior period financial statements have been
restated to include the historical results of Specialized and Evergreen. The
impact of the Lo-Med transaction on the Company's historical financial
statements is not significant; consequently, prior period financial statements
have not been restated for this transaction. All other acquisitions have been
accounted for as purchase
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<PAGE> 16
transactions. The purchase prices have been allocated to the estimated fair
value of the tangible and intangible net assets acquired. The following table
summarizes the aggregate purchase price for all businesses acquired which have
been accounted for under the purchase method (in thousands):
<TABLE>
<CAPTION>
Businesses acquired in
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash $21,309 $17,954 $16,100
Amounts payable in the future
(through 1998) 4,797 3,107 10,900
Common stock 10,856 2,819 -
Warrants 30 872 -
Assumption of indebtedness 197 2,027 600
------- ------- -------
$37,189 $26,779 $27,600
======= ======= =======
Amounts contingently payable $ 3,569 $ 4,809 $ 6,900
======= ======= =======
</TABLE>
Amounts payable in the future are subject to set-off for claims of
indemnity. Amounts contingently payable totaled $11.2 million at December 31,
1995 and, if paid, will be recorded as additional purchase price, serving to
increase goodwill in the period in which the contingencies are resolved. The
1995 acquisitions carry certain pre-acquisition contingencies which will be
resolved within one year of the transaction and which aggregate $3.6 million at
December 31, 1995. The pre-acquisition contingencies for the 1994 acquisitions
totaled $1.3 million at December 31, 1994.
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 Flow due primarily to purchase price payments
made during the year pursuant to acquisition agreements entered into in prior
years.
Warrants outstanding as of December 31, 1995 represent the right to purchase
516,000 shares of common stock and were issued in connection with certain
acquisitions. These warrants can be exercised at any time through 1998 at
prices ranging from $13.43 to $23.64 per share. Warrants to purchase 34,000
shares of common stock, issued in prior years, were exercised in 1995.
The results of operations of the companies acquired in purchase
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<PAGE> 17
transactions have been included in the consolidated results of operations of
the Company from the dates of acquisition. Unaudited pro forma data (net of
the cost of capital related to the cash purchase prices) as though the Company
had acquired these businesses at the beginning of each of the years are set
forth below and include the pooling transactions with Specialized, Evergreen
and Lo-Med (in thousands except per share data):
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993(a)
--------------------------------
<S> <C> <C> <C>
Pro Forma
- ---------
Sales $414,938 $365,392 $269,667
Net income 25,045 15,245 13,042
Earnings per share:
Primary $ .95 $ .66 $ .59
Fully diluted $ .86 $ .64 $ .59
</TABLE>
(a) 1993's pro forma data do not include any businesses acquired in 1995 and,
therefore, are not comparable to the 1995 and 1994 pro forma data.
The pro forma information does not purport to be indicative of operating
results which would have occurred had the acquisitions been made at the
beginning of the respective periods or of results which may occur in the
future.
NOTE 3 - CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
A summary of cash and cash equivalents and marketable securities follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
-----------------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 7,418 $ 3,042
Money market funds 197 251
U.S. Treasury-backed repurchase
agreements 32,522 31,260
------- -------
$40,137 $34,553
======= =======
Marketable securities $ - $45,245
======= =======
</TABLE>
Repurchase agreements represent investments in U.S. Treasury bills under
agreements to resell, usually overnight, but in no case longer than 30 days.
The Company has a collateralized interest in the underlying securities, which
are segregated in the accounts of the bank counterparty. At December 31, 1994,
Fifth Third Bank of Cincinnati, Ohio was the counterparty for $19,446,000 of
the repurchase agreements, which matured on January 3, 1995.
-17-
<PAGE> 18
NOTE 4 - PROPERTIES AND EQUIPMENT
A summary of properties and equipment follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
--------------------
<S> <C> <C>
Land $ 247 $ 257
Buildings 1,496 1,458
Machinery and equipment 27,487 19,883
Furniture, fixtures
and leasehold improvements 22,264 15,126
-------- --------
51,494 36,724
Accumulated depreciation (19,036) (13,272)
-------- --------
$ 32,458 $ 23,452
======== ========
</TABLE>
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 normal course of business. There are no
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 at December 31, 1995 (in thousands):
<TABLE>
<S> <C>
1996 $ 2,951
1997 2,760
1998 2,426
1999 1,784
2000 1,352
Later years 3,404
-------
Total minimum
payments required $14,677
=======
</TABLE>
Total rent expense under operating leases follows (in thousands):
For the years ended December 31,
1993 $3,035
1994 3,470
1995 4,567
-18-
<PAGE> 19
NOTE 6 - LONG-TERM DEBT
A summary of long-term debt follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
---------------------
<S> <C> <C>
Convertible Subordinated Notes due 2003 $80,445 $80,500
Employee Stock Ownership Plan
Loan Guarantee 2,260 2,760
Line of credit (Specialized) - 3,670
Notes payable (Specialized) - 3,155
Capitalized lease obligations 1,038 787
------- -------
83,743 90,872
Less current portion (1,051) (5,549)
------- -------
$82,692 $85,323
======= =======
</TABLE>
On October 1, 1993, the Company issued $80,500,000 principal amount of 5.75%
Convertible Subordinated Notes ("Notes") due 2003. The Notes are convertible
into common stock at any time at the option of the holder at a price of $14.44
per share. The Notes are redeemable at the option of the Company beginning in
October 1996, at redemption prices ranging from 103.83% of the principal amount
in 1996 to 100.64% in 2001 and 100% thereafter. Absent conversion of the Notes
into common stock or redemption by the Company at its election as described
above, the Notes are due on October 1, 2003. Interest on the notes is payable
semiannually, due in October and April of each year, until conversion or
redemption. Debt issuance costs are included in other assets and amortized
using the straight-line method over the ten-year life of the Notes. The
Company amortized $310,000 of deferred debt issuance costs in both 1995 and
1994. Based on the market value of the Notes in the last over-the-counter
trade prior to year-end, the estimated fair value of the Notes at December 31,
1995 was $250,000,000. The fair value of all other financial instruments of
the Company approximates the amounts presented on the consolidated balance
sheet.
In 1988, the Company established an Employee Stock Ownership Plan ("ESOP")
which currently covers certain acquired entities' employees and corporate
headquarters employees. The ESOP used proceeds from a $4 million bank loan to
purchase 986,874 shares of the Company's common stock on the open market at
prices ranging from $3.88 to $4.25 per share. Inasmuch as the Company has
guaranteed the repayment of
-19-
<PAGE> 20
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 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 $18,230,000 at December 31, 1995.
The Company funds ESOP expense as accrued. The components of total ESOP
expense are as follows (in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Interest expense $ 182 $ 214 $ 238
Principal payments 500 400 300
Dividends on ESOP stock (76) (70) (64)
---- ----- -----
$ 606 $ 544 $ 474
===== ===== =====
</TABLE>
At December 31, 1994, $3,670,000 was outstanding and $1,330,000 was
available for borrowing under the Specialized line of credit. The interest rate
charged equaled 1.75% over the bank's prime rate (10.25% at December 31, 1994).
The weighted average interest rate charged on the Specialized line of credit
was 10.25% for 1995 and 1994 and 7.75% for 1993. Amounts outstanding under the
line of credit were repaid and the line was closed during 1995.
Specialized notes payable represented various obligations incurred specific
to Specialized operations. The weighted average interest rate on the notes
approximated 10.1%, 10.7% and 8.8% for 1995, 1994 and 1993, respectively.
Included in Specialized notes payable are notes due to the former owners of
Specialized for $379,000 as of December 31, 1994. All of these obligations
were repaid in 1995.
-20-
<PAGE> 21
In February 1995, the Company reached an agreement with a consortium of six
banks for a five-year $135 million revolving line of credit. Borrowings under
this agreement bear interest based upon the bank's cost of funds plus a spread
of 25 to 75 basis points, dependent upon the Company's performance under
certain debt covenants, or the prime rate. Additionally, a commitment fee on
the unused portion of the facility is required which ranges from 10 to 25 basis
points and is also based upon the Company's performance under certain debt
covenants. No amounts were outstanding under this agreement at December 31,
1995.
The following is a schedule by year of required long-term debt payments as
of December 31, 1995 (in thousands):
1996 $ 1,051
1997 984
1998 1,100
1999 163
2000 -
Later years 80,445
-------
$83,743
=======
Total interest payments made in 1995, 1994 and 1993 amounted to $5,421,000,
$6,145,000 and $1,684,000, respectively.
NOTE 7 - PUBLIC OFFERING OF COMMON STOCK
In November 1994, the Company completed a public offering of 8,280,000
shares of common stock of which 3,247,482 shares were sold by the Company
resulting in net proceeds of $59,211,000 after deducting issuance costs.
NOTE 8 - STOCK INCENTIVE PLANS
The Company has stock incentive plans under which it may grant stock awards
or options to purchase its common stock at a price equal to the market value at
the date of grant. These options become exercisable beginning one year
following the date of grant in four approximately equal annual installments.
-21-
<PAGE> 22
The changes in stock options outstanding relating to these plans are
summarized below:
<TABLE>
<CAPTION>
Number of Average
Shares Price
--------- -------
<S> <C> <C>
Balance at December 31, 1992 970,992 7.82
Options granted 217,000 8.14
Options exercised (101,480) 7.62
Options terminated or cancelled (88,500) 9.19
---------
Balance at December 31, 1993 998,012 7.79
Options granted - -
Options exercised (235,076) 6.82
Options terminated or cancelled - -
---------
Balance at December 31, 1994 762,936 8.09
Options granted 529,000 24.37
Options exercised (163,050) 7.29
Options terminated or cancelled (8,000) 24.25
---------
Balance at December 31, 1995 1,120,886 15.77
=========
</TABLE>
At December 31, 1995, options for 373,886 shares (1994-363,186;
1993-424,512) were exercisable and 405,986 shares (1994-5,424; 1993-107,680)
were available for granting of additional stock options and awards.
During 1995, the Company's Board of Directors and stockholders approved the
1995 Premium-Priced Stock Option Plan, providing options to purchase 1,260,000
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
issued under this plan.
In 1995 and 1994, the Company granted restricted stock awards to certain key
employees covering 99,472 and 98,656 shares, respectively, of common stock. No
such stock awards were granted in 1993. These shares vest over a five- to
seven-year period and are restricted as to the transfer of ownership.
In 1995, 1994 and 1993, the Company granted unrestricted stock awards
covering 3,200, 3,600 and 4,200 shares, respectively, of its common stock to
members of the Board of Directors of the Company.
-22-
<PAGE> 23
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company contracted with a subsidiary of Chemed Corporation (Chemed), a
2% stockholder, to assist in the development of a new data processing system to
integrate and standardize all operational and financial reporting functions.
The Company also subleases its corporate offices from Chemed and is charged for
the occasional use of Chemed's corporate aviation department and other
incidental expenses based on Chemed's cost. The Company believes that the
method by which such charges are determined is reasonable and that the charges
are essentially equal to that which would have been incurred if the Company had
operated as an unaffiliated entity. Charges to the Company for these services
were $4,535,000, $2,951,000 and $1,624,000 in 1995, 1994 and 1993,
respectively. Net amounts owed by the Company to Chemed were $667,000 and
$845,000 at December 31, 1995 and 1994, respectively.
Included in accounts receivable are amounts due from companies affiliated
with the former owners of Evergreen. These amounts, net of payables, totaled
$479,000 and $850,000 at December 31, 1995 and 1994, respectively.
Effective May 1, 1993, Evergreen leased one of its facilities from a
partnership, a partner of which is a former owner of Evergreen. Rent expense
of $549,000, $569,000 and $437,000 was paid under this lease in 1995, 1994 and
1993, respectively.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has a non-contributory, defined benefit pension plan covering
certain corporate headquarters employees and the employees of a company sold by
Omnicare in 1992, for which benefits ceased accruing upon the sale. Benefits
accruing under this plan to corporate headquarters employees were fully vested
and frozen as of January 1, 1994.
Retirement benefits are based primarily on an employee's years of service
and compensation near retirement. Plan assets
-23-
<PAGE> 24
are invested in U.S. Treasury obligations. The Company's policy
is to fund pension costs in accordance with the funding
provisions of the Employee Retirement Income Security Act.
The funded status of the plan was as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
Actuarial present value of: 1995 1994
---------------
<S> <C> <C>
Unvested benefit obligation $ 5 $ 5
Vested benefit obligation 1,718 1,385
------ ------
Accumulated benefit obligation 1,723 1,390
Effect of projected future
salary increases - -
------ ------
Projected benefit obligation 1,723 1,390
Plan assets at fair market value 2,117 1,762
------ ------
Plan assets greater than
projected benefit obligation 394 372
Unrecognized net gain (247) (262)
------ ------
Prepaid pension asset $ 147 $ 110
====== ======
</TABLE>
The components of the Company's pension (income) cost follow (in
thousands):
<TABLE>
<CAPTION>
For the years ended
December 31,
1995 1994 1993
----------------------
<S> <C> <C> <C>
Service costs - benefits earned
during the period, net $ - $ - $ 81
Interest cost on projected benefit
obligation and service costs 112 103 133
Expected return on plan assets (149) (158) (104)
----- ----- -----
Pension (income) cost $ (37) $ (55) $ 110
===== ===== =====
</TABLE>
Actuarial assumptions used to calculate the prepaid pension asset and pension
(income) cost include a 7.25% discount rate as of December 31, 1995 (8% at
December 31, 1994 and 1993), an expected long-term rate of return on assets
of 8% and a 6% rate of increase in compensation levels in years prior to 1994.
Expenses relating to the Company's defined contribution and other similar
plans (including the ESOP described in Note 6) were $1,700,000, $1,536,000 and
$940,000 in 1995, 1994 and 1993, respectively.
In 1994, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." The adoption did not have a material impact on the
Company's financial position or results of operations.
-24-
<PAGE> 25
NOTE 11 - INCOME TAXES
The provision for income taxes is comprised of the following (in thousands):
<TABLE>
<CAPTION>
For the years
ended December 31,
1995 1994 1993
---------------------------
<S> <C> <C> <C>
Current:
Federal $13,197 $7,158 $ 4,282
State and local 1,473 1,072 920
------- ------ -------
14,670 8,230 5,202
------- ------ -------
Deferred:
Federal 1,272 802 1,109
State 478 115 (298)
------- ------ ------
1,750 917 811
------- ------ ------
Income taxes $16,420 $9,147 $6,013
======= ====== ======
</TABLE>
Tax benefits related to the exercise of stock options and stock awards have
been credited to paid-in capital in amounts of $1,357,000, $947,000 and
$234,000 for 1995, 1994 and 1993, respectively.
The difference between the Company's reported income tax expense
and the federal income tax expense computed at the statutory rates of
35% for 1995 and 1994 and 34% for 1993 is explained in the following table (in
thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at the
statutory rate $14,413 35.0% $7,937 35.0% $5,774 34.0%
Amortization of nondeductible
intangible assets 408 1.0 372 1.6 42 .2
State and local income taxes,
net of federal income tax benefit 1,268 3.1 772 3.4 412 2.4
Tax effect of EPE S Corporation
income - - (345) (1.5) (280) (1.6)
Other 331 .8 411 1.8 65 .4
------- ---- ------ ---- ------ ----
Income taxes $16,420 39.9% $9,147 40.3% $6,013 35.4%
======= ==== ====== ==== ====== ====
</TABLE>
The Omnibus Budget Reconciliation Act of 1993 permitted the Company to
deduct from taxable income the amortization of intangibles arising from certain
business acquisitions occurring subsequent to July 1991. The effect of this
change in tax law was to reduce 1993 income tax expense by $310,000 for the
period July 1991 through December 31, 1992 and by an additional $140,000 for
the portion of 1993 prior to enactment of the law.
Effective January 1, 1993, the Company adopted SFAS No. 109, which requires
the use of an asset and liability method of accounting for
-25-
<PAGE> 26
income taxes. The cumulative effect of this adoption resulted in a gain of
$280,000 ($.01 per share) and was otherwise not material to the Company's
financial position or results of operations.
Income tax payments made in 1995, 1994 and 1993 amounted to $14,014,000,
$5,569,000 and $11,412,000, respectively.
A summary of deferred tax assets and liabilities follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
------ ------
<S> <C> <C>
Accounts receivable reserves $4,469 $3,183
Accrued liabilities 4,929 3,944
Other 104 5
------ ------
Gross deferred tax assets $9,502 $7,132
====== ======
Fixed assets and depreciation methods $ 973 $ 611
Amortization of intangibles 3,798 1,954
Other 752 365
------ ------
Gross deferred tax liabilities $5,523 $2,930
====== ======
</TABLE>
The Company has evaluated its net deferred tax asset position and has
concluded that a valuation allowance is not required as these net assets are
more likely than not to be realized.
-26-
<PAGE> 27
NOTE 12 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following table presents the Company's quarterly financial information
for 1995 and 1994 (in thousands except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995(b)
Sales $90,527 $97,125 $102,145 $109,839 $399,636
Cost of sales 65,879 70,168 73,198 78,470 287,715
------- ------- -------- -------- --------
Gross profit 24,648 26,957 28,947 31,369 111,921
Selling, general and
administrative expenses 15,413 16,549 16,789 18,219 66,970
Acquisition expenses-pooling
of interests - 1,292 - - 1,292
------- ------- -------- -------- --------
Operating income 9,235 9,116 12,158 13,150 43,659
Interest expense, net of
investment income (535) (591) (638) (715) (2,479)
------- ------- -------- -------- --------
Income before income taxes 8,700 8,525 11,520 12,435 41,180
Income taxes 3,449 3,629 4,585 4,757 16,420
------- ------- -------- -------- --------
Net income $ 5,251 $ 4,896 $ 6,935 $ 7,678 $ 24,760
======= ======= ======== ======== ========
Earnings per share data:
Primary $ .20 $ .19 $ .26 $ .28 $ .94(a)
======= ======= ======== ======== ========
Fully diluted $ .19 $ .18 $ .24 $ .26 $ .86(a)
======= ======= ======== ======== ========
1994(b)
Sales $68,215 $73,901 $ 79,832 $ 85,707 $307,655
Cost of sales 50,998 54,828 58,924 62,783 227,533
------- ------- -------- -------- --------
Gross profit 17,217 19,073 20,908 22,924 80,122
Selling, general and
administrative expenses 10,550 11,959 13,173 14,429 50,111
Acquisition expenses-pooling
of interests - - 2,380 - 2,380
------- ------- -------- -------- --------
Operating income 6,667 7,114 5,355 8,495 27,631
Interest expense, net of
investment income (1,225) (1,310) (1,337) (1,081) (4,953)
------- ------- -------- -------- --------
Income before income taxes 5,442 5,804 4,018 7,414 22,678
Income taxes 2,033 2,241 1,956 2,917 9,147
------- ------- -------- -------- --------
Net income $ 3,409 $ 3,563 $ 2,062 $ 4,497 $ 13,531
======= ======= ======== ======== ========
Earnings per share data:
Primary $ .16 $ .16 $ .09 $ .19 $ .60(a)
======= ======= ======== ======== ========
Fully diluted $ .15 $ .16 $ .09 $ .18 $ .59(a)
======= ======= ======== ======== ========
<FN>
(a) Earnings per share is calculated independently for each quarter and the sum
of the quarters may not necessarily be equal to the full year earnings per
share amount.
(b) The quarterly information presented above for periods prior to the pooling
of interests with Specialized on June 30, 1995 has been restated to include
Specialized's results of operations.
</TABLE>
-27-
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
- ---------------------
(All share and per share data included in Management's Discussion and Analysis
of Financial Condition and Results of Operations have been adjusted for the
June 1995 two-for-one stock split.)
On June 30, 1995, the Company issued 403,185 shares of its Common Stock for
all the outstanding common stock of Specialized Pharmacy Services, Inc.
("Specialized"). Specialized is a leading provider of institutional pharmacy
services for long-term care facilities in Michigan with $32 million in sales
for the year ended December 31, 1994. On September 30, 1994, the Company
issued 2,222,644 shares of its Common Stock for all the outstanding common
stock of Kirkland, Washington-based Evergreen Pharmaceutical, Inc., and an
affiliated company (collectively, "Evergreen"). Evergreen had $34 million
in sales for the year ended December 31, 1993. These acquisitions were
accounted for as poolings of interests and, accordingly, the Company's
consolidated financial statements have been restated for all periods to include
the results of operations, financial position and cash flow of Specialized and
Evergreen (See Note 2 to the Consolidated Financial Statements). In accordance
with accounting rules for pooling of interests transactions, charges to
operating income for acquisition-related expenses were recorded upon completion
of these acquisitions. These pooling of interests expenses totaled $1,292,000,
or $989,000 after taxes, for the Specialized acquisition and $2,380,000, or
$1,860,000 after taxes, for the Evergreen acquisition.
The following table presents the Company's results of operations excluding
certain unusual items of income and expense, which are comprised of pooling of
interests expenses, the cumulative effect of
-28-
<PAGE> 29
an accounting change and a one-time favorable tax adjustment (in thousands
except per share amounts):
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net income, as reported $24,760 $13,531 $11,250
Acquisition expenses-pooling
of interests, net of taxes 989 1,860 --
Cumulative effect of accounting
change -- -- (280)
Favorable tax adjustment -- -- (450)
------- ------- -------
Pro forma net income $25,749 $15,391 $10,520
======= ======= =======
Pro forma earnings per share:
Net income, as reported $ .94 $ .60 $ .53
Acquisition expenses-pooling
of interests, net of taxes .04 .08 --
Cumulative effect of accounting
change -- -- (.01)
Favorable tax adjustment -- -- (.02)
------- ------- -------
Primary $ .98 $ .68 $ .50
======= ======= =======
Fully diluted $ .89 $ .66 $ .50
======= ======= =======
</TABLE>
Excluding the impact of charges taken for acquisitions accounted for as
pooling of interests transactions, net income for the year ended December 31,
1995 increased 67% over net income earned in 1994. Primary earnings per share,
on this basis, for the full year 1995 increased 44% over 1994 and fully diluted
earnings per share increased 35%.
Pro forma net income for the year ended December 31, 1994 increased 46%
over 1993. Primary earnings per share, on a pro forma basis, increased 36%
over 1993, and fully diluted earnings per share increased 32%. The 1994 pro
forma adjustment consisted of the Evergreen pooling of interests expenses. The
1993 pro forma adjustments were comprised of $450,000 arising from a change in
tax laws related to the amortization of intangibles and $280,000 related to the
change in accounting for income taxes.
Net income as reported for 1995 was $24,760,000, or $.94 per
-29-
<PAGE> 30
primary share ($.86 fully diluted), while 1994 net income was $13,531,000, or
$.60 per primary share ($.59 fully diluted), and 1993 net income was
$11,250,000, or $.53 per primary and fully diluted share.
Sales for 1995 were 30% higher than in 1994. For 1994, sales were 38% higher
than in 1993. Omnicare entered the long-term pharmacy business with its first
acquisition of an institutional pharmacy provider in December 1988. Omnicare
has completed a total of 33 institutional pharmacy provider acquisitions - one
in 1988, two in 1990, three in 1991, seven in 1992, four in 1993, seven in 1994
and nine in 1995. Except for the acquisitions of Specialized, Evergreen and
Lo-Med Prescription Services, Inc. ("Lo-Med"), purchase accounting was used to
record the acquisitions. The acquisitions of Specialized and Evergreen are
included in the financial results of all years presented as these acquisitions
were accounted for as poolings of interests. The acquisition of Lo-Med in 1994
was also accounted for as a pooling of interests; however, its operations were
immaterial to the Company's results prior to 1994 and, therefore, prior year
financial statements were not restated for this business combination. The
sales increases were caused by acquisitions, (described in detail in Note 2 of
the Consolidated Financial Statements), coupled with the internal growth of the
businesses previously acquired.
Increases in gross profit over the three-year period have generally remained
in line with or exceeded increases in sales, with margins of 25.7%, 26.0% and
28.0% for 1993, 1994 and 1995, respectively. Such increases were caused
primarily by changes in sales mix and the Company's increasing purchasing
leverage. Additionally, after excluding the aforementioned pro forma
adjustments, operating income as a percent of sales has increased from 8.6% to
9.8% to 11.2% in 1993, 1994 and 1995, respectively, reflecting the increased
gross profit margins.
-30-
<PAGE> 31
Over the past few years, political debate over health care reform has
increasingly focused attention on containing and reducing health care costs.
While the processes by which federal or state governments may pursue alternate
proposals for reform of the health care system are uncertain, market forces in
the form of managed care have and will continue to challenge health care
providers to maintain the high quality of care provided while reducing costs.
In this environment, the need to lower health care costs will drive industry
consolidation, which should continue to provide the impetus for the Company's
acquisition program. The Company's development of regional market positions
provides opportunities for economies of scale to lower overall costs. In
addition, Omnicare's proprietary geriatric formulary not only lowers costs for
payors and patients, but also enhances the quality of care for the elderly.
Moreover, demographic trends indicate that demand for long-term care will
increase well into the middle of the next century. Pharmaceutical therapy is
generally the most cost-effective form of treatment for chronic ailments
afflicting the elderly and, as such, is an essential part of long-term care.
Omnicare believes that it is well-positioned to be an integral part of the
solution to escalating health care costs among the elderly through careful
product selection (including drug formulary management), cost-effective drug
purchasing and efficient delivery systems. This, coupled with Omnicare's
pharmacy consulting services for nursing homes which identify, resolve and
prevent drug therapy-related problems, reduces costs to the health care system
while also promoting optimal patient outcomes. Thus, Omnicare should continue
to show solid growth in sales and earnings in
-31-
<PAGE> 32
1996, benefiting from a full year's contribution from businesses acquired in
1995, from internal growth and from the completion of additional acquisitions.
Non-Operating Income and Expense --------------------------------
Investment income increased by 120% to $3,475,000 in 1995, as the Company
received the full-year benefit of invested cash during 1995 due to receipt of
$59.2 million of cash proceeds from the November 1994 stock offering.
Investment income increased by 149% to $1,580,000 in 1994 from $635,000 in 1993
due to the increase in invested cash during 1994 resulting from the cash
proceeds from the October 1993 offering of $80.5 million in 5.75% Convertible
Subordinated Notes due 2003 ("Notes").
Interest expense decreased by 9% from $6,533,000 in 1994 to $5,954,000 in
1995, due to reductions in outstanding debt associated with Specialized and
Evergreen prior to acquisition by the Company. Interest expense increased by
$3,709,000 in 1994 as a result of a full year's interest on the Notes as
compared to only three months in 1993.
Income Taxes
- ------------
The Company's effective tax rates for 1993, 1994 and 1995 were 35.4%, 40.3%
and 39.9%, respectively. The 1995 and 1994 effective tax rates are slightly
higher than statutory rates due to the nondeductibility of certain acquisition
costs. As a result of the Omnibus Budget Reconciliation Act of 1993, the
Company was permitted to deduct from taxable income amortization of intangibles
arising from certain business acquisitions retroactive to July 1991.
Accordingly, the Company's effective tax rate in 1993 was favorably impacted by
the tax benefit of amortization of intangibles.
-32-
<PAGE> 33
Impact of Inflation
- -------------------
Inflation has not materially affected Omnicare's profitability inasmuch as
price increases have generally been obtained to cover inflationary drug cost
increases.
Liquidity and Capital Resources
- -------------------------------
In November 1994, the Company completed a public offering of 3,247,482
shares of Common Stock, resulting in net proceeds of $59,211,000.
In line with Omnicare's plan to invest in the long-term pharmacy
market, acquisitions completed during 1995 required an aggregate capital
investment of approximately $63.7 million. Such acquisitions were financed with
cash and cash equivalents on hand as well as Common Stock of the Company.
Shares of Common Stock with a market value of approximately $22.7 million
(879,919 shares) were issued in connection with the 1995 acquisitions.
Additionally, $10.6 million of other acquisition-related payments were made
during 1995 related to businesses acquired prior to 1995. Additional amounts
totaling $11.2 million may become payable through the year 2000 pursuant to the
terms of various acquisition agreements. Omnicare ended the year with
$40,137,000 in cash and cash equivalents and marketable securities as compared
to $79,798,000 at year-end 1994. At December 31, 1995, the Company had
invested $32,522,000 in U.S. Treasury-backed repurchase agreements which
represent investments under agreements to resell, usually overnight, but in no
case greater than thirty days. The Company has a collateralized interest in
the underlying securities which are segregated in the accounts of the
counterparty bank. Management believes these investments do not create any
exposure to the Company's liquidity. Omnicare's current ratio decreased to 2.9
to 1 at December 31, 1995 from 3.8 to 1 at December 31, 1994, and working
capital at December 31, 1995 decreased to $106,384,000 from year-end 1994
working capital of $125,550,000. This decrease is attributable to the cash
outlays required for the Company's 1995 acquisitions net
-33-
<PAGE> 34
of cash generated from 1995 operations. Book value per common share increased
to $8.16 per share as of December 31, 1995 from $7.01 per share at the prior
year-end, primarily attributable to current year net income, less dividends
paid.
On February 7, 1996, Omnicare's Board of Directors elected to increase the
quarterly cash dividend by 20% to 3 cents per share for an indicated annual
rate of 12 cents per share for 1996.
In February 1995, the Company entered into an agreement with a consortium of
six banks for a five-year $135 million revolving credit facility, replacing the
prior $50 million facility. Interest rates and commitment fees for this new
facility are based on the Company's level of performance under certain debt
covenants. No amounts were outstanding at December 31, 1995 under the credit
facility.
The Company believes that its sources of liquidity and capital are adequate
for its operating needs. There are no material commitments outstanding, other
than additional acquisition-related payments to be made (see Note 2 of the
Consolidated Financial Statements). If needed, other external sources of
financing are readily available to the Company.
-34-
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<NAME> OMNICARE, INC.
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