<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended June 30, 1999
Commission File Number 1-8269
OMNICARE, INC.
<TABLE>
<S> <C>
Incorporated under the laws of the I.R.S. Employer Identification
State of Delaware No. 31-1001351
</TABLE>
100 East RiverCenter Boulevard, Covington, Kentucky 41011
---------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (606) 392-3300
------------------------------------------------------------------
Indicate by check mark whether the registrant:
1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports) and
2) has been subject to such filing requirement for the past 90 days.
Yes x No
------ -----
COMMON STOCK OUTSTANDING
<TABLE>
<CAPTION>
Number of
Shares Date
----- ----
<S> <C> <C>
Common Stock, $1 par value 91,226,402 June 30, 1999
</TABLE>
<PAGE>
OMNICARE, INC. AND
SUBSIDIARY COMPANIES
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 1999 and December 31, 1998 3
Consolidated Statement of Income -
Three and six months ended -
June 30, 1999 and 1998 4
Consolidated Statement of Cash Flows -
Six months ended -
June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information:
Item 2. Recent Sales of Unregistered Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet
UNAUDITED
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 88,573 $ 54,312
Accounts receivable, less allowances of
$34,066 (1998-$31,417) 415,278 379,624
Inventories 145,596 117,936
Deferred income tax benefits 22,577 12,348
Other current assets 56,347 39,078
----------- -----------
Total current assets 728,371 603,298
Properties and equipment, at cost less accumulated
depreciation of $91,606 (1998-$76,854) 153,971 136,371
Goodwill, less accumulated amortization
of $66,856 (1998-$51,861) 1,197,215 1,110,254
Other assets 65,667 53,906
----------- -----------
Total assets $2,145,224 $1,903,829
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 106,508 $ 82,029
Amounts payable pursuant to acquisition agreements 11,792 10,230
Current portion of long-term debt 44,522 2,844
Accrued employee compensation 58,308 48,073
Deferred revenue 21,966 19,043
Other current liabilities 55,315 71,330
----------- -----------
Total current liabilities 298,411 233,549
Long-term debt 778,519 651,556
Deferred income taxes 19,113 16,230
Amounts payable pursuant to acquisition agreements 13,672 13,564
Other noncurrent liabilities 29,153 25,459
----------- -----------
Total liabilities 1,138,868 940,358
Stockholders' equity:
Preferred stock-authorized 1,000,000 shares
without par value; none issued
Common stock-authorized 200,000,000 shares $1 par; 91,526,000 shares issued
(1998-90,459,800 shares issued) 91,526 90,460
Paid-in capital 683,928 664,225
Retained earnings 254,262 225,937
----------- -----------
1,029,716 980,622
Treasury stock, at cost - 299,600 shares (1998-194,900 shares) (6,348) (4,166)
Deferred compensation (15,597) (12,932)
Cumulative translation adjustment (1,415) (53)
----------- -----------
Total stockholders' equity 1,006,356 963,471
----------- -----------
Total liabilities and stockholders' equity $2,145,224 $1,903,829
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
3
<PAGE>
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Statement of Income
UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $454,645 $358,194 $900,333 $698,452
Cost of sales 322,607 249,615 632,500 488,551
--------- --------- --------- ---------
Gross profit 132,038 108,579 267,833 209,901
Selling, general and administrative expenses 85,546 67,408 167,529 130,944
Acquisition expenses, pooling-of-interests 822 14,096 822 14,587
Restructuring costs 26,713 3,627 26,713 3,627
--------- --------- --------- ---------
Operating income 18,957 23,448 72,769 60,743
Investment income 367 977 649 2,423
Interest expense (10,848) (4,435) (20,829) (9,206)
--------- --------- --------- ---------
Income before income taxes 8,476 19,990 52,589 53,960
Income taxes 3,598 11,884 19,904 25,448
--------- --------- --------- ---------
Net income $ 4,878 $ 8,106 $ 32,685 $ 28,512
========= ========= ========= =========
Earnings per share:
Basic $ 0.05 $ 0.09 $ 0.36 $ 0.32
========= ========= ========= =========
Diluted $ 0.05 $ 0.09 $ 0.36 $ 0.32
========= ========= ========= =========
Weighted average number of
common shares outstanding:
Basic 90,890 88,824 90,709 88,466
========= ========= ========= =========
Diluted 91,073 89,918 90,976 89,516
========= ========= ========= =========
Comprehensive income $ 4,524 $ 8,235 $ 31,827 $ 28,690
========= ========= ========= =========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
4
<PAGE>
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Consolidated Statement of Cash Flows
UNAUDITED
<TABLE>
<CAPTION>
(In thousands) Six Months Ended
June 30,
-----------------------
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 32,685 $ 28,512
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 32,734 22,272
Provision for doubtful accounts 8,912 5,393
Deferred tax provision 2,112 3,996
Non-cash portion of restructuring costs 2,717 1,948
Changes in assets and liabilities, net of effects
from acquisition of businesses:
Accounts receivable (39,502) (42,516)
Inventories (23,588) (2,001)
Current and noncurrent assets (29,213) 1,904
Payables and accrued liabilities 42,303 33,034
Deferred revenue 2,923 (1,499)
Current and noncurrent liabilities (1,364) (2,498)
--------- --------
Net cash flows from operating activities 30,719 48,545
--------- --------
Cash flows from investing activities:
Acquisition of businesses (125,713) (76,411)
Capital expenditures (33,335) (23,496)
Other (775) 2,135
--------- --------
Net cash flows from investing activities (159,823) (97,772)
--------- --------
Cash flows from financing activities:
Borrowings on line of credit facilities 170,000 --
Principal payments on long-term obligations (1,526) (15,353)
Exercise of stock options and warrants,
net of stock tendered in payment (2,102) (1,533)
Dividends paid (4,094) (3,277)
Effect of exchange rate changes on cash and other 1,087 51
--------- --------
Net cash flows from financing activities 163,365 (20,112)
--------- --------
Net increase (decrease) in cash and cash equivalents 34,261 (69,339)
Cash and cash equivalents at beginning of period 54,312 138,062
--------- --------
Cash and cash equivalents at end of period $ 88,573 $ 68,723
======== =======
Supplemental disclosures of cash flow information:
Income taxes paid $ 25,343 $ 15,779
Interest paid 21,322 9,190
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
5
<PAGE>
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements
1. The interim financial data are unaudited; however, in the opinion of the
management of Omnicare, Inc., the interim data include all adjustments (which
include only normal adjustments, except as discussed in Note 4) considered
necessary for a fair presentation of the consolidated financial position,
results of operations and cash flows of Omnicare, Inc. and its consolidated
subsidiaries ("Omnicare" or the "Company"). Certain reclassifications of prior
year amounts have been made to conform with the current year presentation.
2. The Company has been involved in a program to acquire providers of
pharmaceutical and related pharmacy management services and medical supplies to
long-term care facilities and their residents. The Company's strategy includes
acquisitions of freestanding institutional pharmacy businesses as well as other
assets, generally insignificant in size, which are combined with existing
pharmacy operations to augment their internal growth. The Company may, from time
to time, acquire certain non-pharmaceutical companies which complement the
Company's core business.
Since January 1, 1999, the Company has completed five acquisitions
(excluding insignificant purchases of other assets) of institutional pharmacy
businesses, four of which were accounted for as purchase transactions and one as
a pooling-of-interests transaction. These transactions added approximately $65.5
million in revenues on an annualized basis. For all acquisitions accounted for
as purchases, including insignificant purchases of other assets, the purchase
price paid has been allocated to the fair value of the assets acquired and
liabilities assumed, and the results of operations of the acquired entities have
been included in the consolidated results of the Company from the effective
dates of the acquisitions.
Pooling-of-Interests Transactions
On June 26, 1998, Omnicare completed the acquisition of CompScript, Inc.
("CompScript"). Pursuant to the terms of the merger agreement, CompScript
stockholders received .12947 of a share of Omnicare common stock for each share
owned of CompScript common stock. Omnicare issued approximately 1.8 million
shares of its common stock with a value of approximately $67 million in this
transaction, which was accounted for as a pooling-of-interests and a tax free
reorganization.
CompScript is a Boca Raton, Florida-based provider of comprehensive
pharmacy management, infusion therapy and related consulting services to the
long-term care, alternate care and managed care markets. CompScript served
approximately 20,000 residents in 137 long-term care facilities in five states
at the time of the acquisition.
On June 29, 1998, Omnicare completed the acquisition of IBAH, Inc.
("IBAH"). Pursuant to the terms of the merger agreement, IBAH stockholders
received .1638 of a share of Omnicare common stock for each share owned of IBAH
common stock. Omnicare issued
6
<PAGE>
approximately 4.3 million shares of common stock with a value of approximately
$159 million in this transaction, which was accounted for as a
pooling-of-interests and a tax free reorganization.
IBAH, headquartered in Blue Bell, Pennsylvania, is an international
provider of comprehensive product development services to client companies in
the pharmaceutical, biotechnology, medical device and diagnostics industries.
IBAH offers services for all stages of drug development that are intended to
help client companies to accelerate products from discovery through development
and commercialization more cost-effectively.
In connection with the CompScript and IBAH mergers, in the 1998 second
quarter, Omnicare recorded a charge to operating expenses of $17,723,000
($15,391,000 after taxes) for direct and other merger-related costs pertaining
to the merger transactions and certain related restructuring actions.
Merger transaction costs consisted primarily of fees for investment
bankers, attorneys, accountants, financial printing and other related charges.
Restructuring costs include severance and exit costs. Details of these costs
follow (in thousands):
<TABLE>
<CAPTION>
Initial Utilized as of Balance at
Provision June 30, 1999 June 30, 1999
--------- -------------- -------------
<S> <C> <C> <C>
Merger transaction costs $14,096 $12,846 $1,250
Restructuring costs:
Employee severance 1,413 1,074 339
Exit costs 2,214 1,536 678
------- ------- ------
Total $17,723 $15,456 $2,267
======= ======= ======
</TABLE>
Restructuring costs include the costs of restructuring the CompScript
mail order pharmacy business and the cancellation of certain of its vendor
agreements along with severance and exit costs associated with the consolidation
of certain IBAH facilities and the restructuring of its pharmaceutics business.
These actions resulted in the reduction of approximately 20 employees. Included
in the exit costs are $1,948,000 of non-cash items. At June 30, 1999, all
remaining liabilities relating to these actions were classified as current
liabilities.
3. Based on the "management approach" as defined by Statement of Financial
Accounting Standards (SFAS) No. 131, Omnicare has two business segments. The
Company's largest segment is Pharmacy Services. Pharmacy Services provides
distribution of pharmaceuticals, related pharmacy consulting, data management
services and medical supplies to long-term care facilities. The Company's other
reportable segment is Contract Research Organization ("CRO") Services, which
provides comprehensive product development services to client companies in
pharmaceutical, biotechnology, medical devices and diagnostics industries.
7
<PAGE>
The table below presents information about the reportable segments as of
and for the three and six months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
1999: Services Services Consolidating Totals
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 419,142 $ 35,503 $ - $ 454,645
Depreciation and amortization 15,206 1,531 262 16,999
Operating income (expense), excluding acquisition expenses
and restructuring costs 47,973 4,731 (6,212) 46,492
Acquisition expenses (822) - - (822)
Restructuring costs (23,983) (2,730) - (26,713)
Operating income (expense) 23,168 2,001 (6,212) 18,957
Total assets 1,882,437 121,712 141,075 2,145,224
Expenditures for additions to long-lived assets 16,371 985 996 18,352
- -------------------------------------------------------------------------------------------------------------------------
1998:
- -------------------------------------------------------------------------------------------------------------------------
Sales $ 328,676 $ 29,518 $ - $ 358,194
Depreciation and amortization 9,869 1,537 125 11,531
Operating income (expense), excluding acquisition expenses
and restructuring costs 43,612 3,318 (5,759) 41,171
Acquisition expenses (8,827) (5,269) - (14,096)
Restructuring costs (1,245) (2,382) - (3,627)
Operating income (expense) 33,540 (4,333) (5,759) 23,448
Total assets 1,250,774 103,134 117,498 1,471,406
Expenditures for additions to long-lived assets 11,244 2,117 743 14,104
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------
Corporate
Pharmacy CRO and Consolidated
1999: Services Services Consolidating Totals
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 830,852 $ 69,481 $ - $ 900,333
Depreciation and amortization 29,176 3,107 451 32,734
Operating income (expense), excluding acquisition expenses
and restructuring costs 103,461 9,155 (12,312) 100,304
Acquisition expenses (822) - - (822)
Restructuring costs (23,983) (2,730) - (26,713)
Operating income (expense) 78,656 6,425 (12,312) 72,769
Total assets 1,882,437 121,712 141,075 2,145,224
Expenditures for additions to long-lived assets 29,446 1,553 2,336 33,335
- -------------------------------------------------------------------------------------------------------------------------
1998:
- -------------------------------------------------------------------------------------------------------------------------
Sales $ 640,274 $ 58,178 $ - $ 698,452
Depreciation and amortization 19,101 2,943 228 22,272
Operating income (expense), excluding acquisition expenses
and restructuring costs 85,184 5,014 (11,241) 78,957
Acquisition expenses (9,318) (5,269) - (14,587)
Restructuring costs (1,245) (2,382) - (3,627)
Operating income (expense) 74,621 (2,637) (11,241) 60,743
Total assets 1,250,774 103,134 117,498 1,471,406
Expenditures for additions to long-lived assets 19,025 3,260 1,211 23,496
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
4. In the second quarter of 1999, the Company announced a comprehensive
restructuring plan to streamline company-wide operations through the
implementation of a productivity and consolidation program. This program is in
response to the recent changes in the healthcare industry and to gain maximum
benefits from the existing acquisition program. The productivity and
consolidation initiatives are expected to eliminate redundant efforts, simplify
work processes and apply technology to maximize employee productivity, and
standardize operations around best practices. Facilities in overlapping
geographic territories are being consolidated to better align pharmacies around
customers to improve efficiency and enhance the Company's ability to deliver
innovative services and programs to its customers. Productivity initiatives are
being introduced at the majority of the Company's 220 pharmacy and other
operating locations. Also as part of the initiative, the roster of pharmacies
and other operating locations are being reconfigured through consolidations,
relocations, the creation of nine new sites, and the closing of approximately 20
sites. These strategic measures are expected to lead to the net reduction of
approximately 1,700 full- and part-time positions upon completion of the plan.
9
<PAGE>
In connection with this program, Omnicare expects to recognize total
restructuring costs of $32,354,000 ($20,783,000 after taxes). During the 1999
second quarter, Omnicare recorded a charge to operating expenses of $26,713,000
($17,229,000 after taxes) for restructuring activities. The remaining costs will
be expensed over the next six quarters when the amounts are required to be
recognized per generally accepted accounting principles. The restructuring
charge includes severance pay, the buy-out of current employee contract
agreements, the buy-out of lease obligations, the write-off of other assets
(representing $2,717,000 of non-cash items) and facility exit costs. Details
of these costs follow (in thousands):
<TABLE>
<CAPTION>
Initial Utilized as of Balance at
Provision June 30, 1999 June 30, 1999
--------- ------------- -------------
<S> <C> <C> <C>
Productivity and consolidation programs:
Employee severance $11,555 $ 248 $11,307
Employee contract agreement buy-outs 6,445 878 5,567
Lease terminations 5,536 72 5,464
Other assets and facility exit costs 3,177 1,932 1,245
-------- -------- --------
Total $26,713 $3,130 $23,583
======== ======== ========
</TABLE>
As of June 30, 1999, the Company had incurred approximately $1.1 million
of severance and other employee-related costs covering the reduction of
approximately 100 employees. All remaining liabilities relating to the initial
charge were classified as current liabilities at June 30, 1999 as the Company
anticipates that these activities will be completed by mid-2000. The Company
expects that the overall restructuring program will be completed by the end of
the year 2000.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Quarter Ended June 1999 vs. 1998
Diluted earnings per share for the three months ended June 30, 1999 were
$.25 as compared with $.26 earned in the prior year quarter, excluding
restructuring costs and acquisition expenses relating to pooling-of-interests
transactions from both periods. Net income for the 1999 quarter, on this basis,
was $22,693,000 versus the $23,497,000 earned in the 1998 quarter. Revenues for
the three months ended June 30, 1999 rose 26.9% to $454,645,000 from the
$358,194,000 recorded in the comparable prior year period. The second quarter of
1999 included a restructuring charge of $26,713,000 ($17,229,000 after taxes, or
$.19 per share) related to the Company's previously announced productivity and
consolidation initiative along with $822,000 ($586,000 after taxes, or $0.01 per
share) of acquisition expenses related to a pooling-of-interests transaction
completed during the quarter. The 1998 quarter included pooling expenses of
$14,096,000 ($12,702,000 after taxes, or $0.14 per share) for the acquisitions
of IBAH, Inc. and CompScript, Inc., both of which closed during that period. The
1998 quarter also included $3,627,000 ($2,689,000 after taxes, or $0.03 per
share) in non-recurring charges related to the restructuring of certain of
CompScript's and IBAH's businesses.
The increase in the Company's sales represents the cumulative effect of
its acquisitions of long-term care pharmacy providers, and continued internal
growth of the pharmacy services and contract research organization businesses.
The reduction in earnings reflects the very difficult operating environment in
the long-term care industry. The implementation of the Prospective Payment
System ("PPS") for Medicare residents of skilled nursing facilities has created
a much more turbulent environment than was anticipated. While Omnicare
experienced PPS-related pricing pressure from skilled nursing facility customers
late in 1998 and to a greater extent early in 1999, much of this pressure was
offset by the addition of new business, the benefits of increased compliance
with Omnicare's proprietary geriatric formulary, the Omnicare Geriatric
Pharmaceutical Care Guidelines'r', and reduced operating costs. However, the
increasing reluctance on the part of skilled nursing facilities to admit
Medicare residents, particularly those requiring complex care, owing to concerns
relating to the adequacy of reimbursement under PPS has caused Medicare census
to further weaken in many areas. Moreover, for many skilled nursing facilities,
the average length of stay for Medicare residents has decreased. These factors
have had the effect of significantly reducing overall occupancy in the
facilities Omnicare serves. Moreover, the mix of residents in skilled nursing
facilities also has adversely affected Omnicare's results as these facilities
have attempted to avoid high acuity patients which impacts overall utilization
of drugs, particularly infusion therapy. Reimbursement concerns have
increasingly driven many nursing facilities to admit residents funded by payors
other than Medicare. These trends accelerated during the second quarter and had
an unfavorable impact on sales and profit margins.
During the second quarter of 1999, the Company acquired four
institutional pharmacy providers (excluding insignificant purchases of other
assets) which when combined with internal
11
<PAGE>
growth, brought the total number of nursing facility residents served to 625,300
at June 30, 1999. These transactions added approximately $62.1 million in
revenues on an annualized basis.
Internal growth resulted from the efforts of the Company's National
Sales and Marketing Group and pharmacy staff in developing new pharmacy
contracts, drug price inflation, growth in other complementary
non-pharmaceutical service businesses and other changes in sales mix.
Gross profit as a percentage of sales decreased to 29.0% in 1999 from
30.3% in 1998. The positive impact on gross profit relating to the Company's
purchasing leverage associated with purchases of pharmaceuticals, leveraging
fixed and variable overhead costs at the Company's pharmacies, benefits realized
from the Company's formulary compliance program and changes in sales mix
including increased sales from contract research organizations were more than
offset by the aforementioned unfavorable impact of PPS on the Pharmacy Services
segment.
Selling, general and administrative ("operating") expenses for the
quarter ended June 30, 1999 increased 26.9% to $85,546,000 as compared to 1998
due to the overall growth of the Company. Operating expenses as a percentage of
sales of 18.8% in 1999 were consistent with the prior year.
Investment income for the three months ended June 30, 1999 was $367,000,
a decrease of $610,000 in comparison to the same period of 1998 due to a lower
average invested cash balance during the second quarter of 1999 than in the
second quarter of 1998. The use of cash is primarily attributable to the
Company's acquisition program.
Interest expense during the three months ended June 30, 1999 was
$10,848,000, an increase of $6,413,000 versus the comparable prior year period
primarily due to the impact of interest expense associated with the $390 million
and $85 million increases, respectively, in borrowings under the Company's
five-year $400 million and 364-day $400 million line of credit facilities from
June 30, 1998 to June 30, 1999. These increases are primarily attributable to
the Company's acquisition program, particularly $250 million borrowed in the
third quarter of 1998 in connection with the Company's acquisition of the
pharmacy business of Extendicare, Inc.
The decrease in the effective tax rate to 42.4% in the second quarter of
1999 from 59.4% in the comparable prior year quarter is primarily attributable
to a reduction in nondeductible acquisition expenses relating to the
pooling-of-interests transaction in the second quarter of 1999 as compared to
the aforementioned second quarter 1998 transactions, and a decrease in state and
local income taxes in 1999 due to the Company's state tax planning programs. The
Company expects the benefit realized from the state tax planning programs to
continue. The effective tax rates in the 1999 and 1998 second quarters are
higher than the statutory rate primarily due to state and local income taxes and
various nondeductible expenses (e.g., acquisition costs, etc.).
12
<PAGE>
Year-to-Date June 1999 vs. 1998
Diluted earnings per share for the six months ended June 30, 1999 were
$.56, up 12% over the $.50 per diluted share earned in the first half of 1998,
excluding restructuring costs and acquisition expenses relating to
pooling-of-interests transactions from both periods. Net income, on this basis,
for the first half of 1999 was $50,500,000, up 14% over the $44,318,000 earned
in the first half of 1998. Revenues of $900,333,000 in the first half of 1999
were 29% higher than the $698,452,000 recorded in the comparable prior year
period. The first six months of 1999 include the aforementioned restructuring
charge and pooling-of-interests expenses, totaling $27,535,000 before taxes
($17,815,000 after taxes, or $0.20 per diluted share). The comparable 1998
period includes pooling-of-interests expenses totaling $14,587,000 before taxes
($13,117,000 after taxes, or $0.15 cents per diluted share) and the
aforementioned restructuring charge of $3,627,000 before taxes ($2,689,000 after
taxes, or $0.03 per diluted share).
The increase in sales and, to a lesser extent, earnings represents the
cumulative effect of the Company's acquisitions of long-term care pharmacy
providers, and continued internal growth of the pharmacy services and contract
research organization businesses. These favorable factors were partially
offset by the aforementioned unfavorable impact of PPS.
During the first half of 1999, the Company acquired five institutional
pharmacy providers (excluding insignificant purchases of other assets) which
when combined with internal growth, brought the total number of nursing facility
residents served to 625,300 at June 30, 1999. These transactions added
approximately $65.5 million in revenues on an annualized basis.
Internal growth resulted from the efforts of the Company's National
Sales and Marketing Group and pharmacy staff in developing new pharmacy
contracts, drug price inflation, growth in other complementary
non-pharmaceutical service businesses and other changes in sales mix.
Gross profit as a percentage of sales decreased to 29.8% in 1999 from
30.1% in 1998. The positive impact on gross profit relating to the Company's
purchasing leverage associated with purchases of pharmaceuticals, leveraging
fixed and variable overhead costs at the Company's pharmacies, benefits realized
from the Company's formulary compliance program and changes in sales mix
including increased sales from contract research organizations were more than
offset by the aforementioned unfavorable impact of PPS on the Pharmacy Services
segment.
Operating expenses for the six months ended June 30, 1999 increased
27.9% to $167,529,000 as compared to 1998 due to the overall growth of the
Company. Operating expenses as a percentage of sales of 18.6% in 1999 were less
than the 18.8% in the prior year due to the leveraging of fixed overhead costs
through acquisitions and internal growth.
Investment income for the six months ended June 30, 1999 was $649,000, a
decrease of $1,774,000 in comparison to the same period of 1998 due to a lower
average invested cash balance during the second half of 1999 as compared to
1998. The use of cash is primarily attributable to the Company's acquisition
program.
13
<PAGE>
Interest expense during the six months ended June 30, 1999 was
$20,829,000, an increase of $11,623,000 versus the comparable prior year period
primarily due to the impact of interest expense associated with the $390 million
and $85 million increases, respectively, in borrowings under the Company's
five-year $400 million and 364-day $400 million line of credit facilities from
June 30, 1998 to June 30, 1999. These increases are primarily attributable to
the Company's acquisition program, particularly $250 million borrowed in the
third quarter of 1998 in connection with the Company's acquisition of the
pharmacy business of Extendicare, Inc.
The decrease in the effective tax rate to 37.9% during the first half of
1999 from 47.2% in the comparable prior year period is primarily attributable to
a reduction in nondeductible acquisition expenses relating to the
pooling-of-interests transaction in the second quarter of 1999 as compared to
the aforementioned second quarter 1998 transactions, and a decrease in state and
local income taxes in 1999 due to the Company's state tax planning programs. The
Company expects the benefit realized from the state tax planning programs to
continue. The effective tax rates in the 1999 and 1998 second quarters are
higher than the statutory rate primarily due to state and local income taxes and
various nondeductible expenses (e.g., acquisition costs, etc.).
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 1999 were $88.6 million versus
$54.3 million at December 31, 1998. Acquisitions of businesses through June 30,
1999 required $125.7 million of cash payments (including amounts payable
pursuant to acquisition agreements relating to pre-1999 acquisitions) which were
funded by borrowings from the Company's revolving credit facilities during the
first half of 1999. In October 1996, the Company entered into an agreement with
a consortium of sixteen banks for a $400 million revolving credit facility
available through 2001. In December 1998, the Company amended this five-year,
$400 million line of credit to permit an additional 364-day, $400 million line
of credit through December 20, 1999, which can be converted at maturity into a
one-year term loan. Interest rates and commitment fees for the five-year $400
million line of credit facility are based on the Company's level of performance
under certain financial ratios, debt covenants and the amount of borrowings
under the line of credit. The total amount outstanding under this facility as of
June 30, 1999 was $390 million. Interest rates and commitment fees under the
364-day $400 million line of credit are based on the Company's debt ratings.
The amount outstanding at June 30, 1999 under the 364-day facility was $85
million. The Company generated positive net cash flows from operating activities
of $30.7 million during the six months ended June 30, 1999. Inventories
increased during the first six months of 1999 relating primarily to the purchase
of $16.4 million of inventories in advance of pharmaceutical price increases
from manufacturers. Excluding these incremental inventory payments, net cash
flows from operating activities were approximately $47 million during the six
months ended June 30, 1999.
The Company's capital requirements are primarily related to its
acquisition program and, to a lesser extent, capital expenditures, including
those related to investments in the Company's information technology systems
such as its Year 2000 compliance initiative. During the six months ended June
30, 1999, the Company made five acquisitions (excluding insignificant
14
<PAGE>
purchases of other assets), as well as payments relating to individually
insignificant purchases of other assets and disbursements relating to amounts
payable pursuant to acquisition agreements relating to pre-1999 acquisitions.
Such acquisition activity was financed from cash and cash equivalents and the
issuance of approximately 398,000 shares of common stock. There are no
material commitments outstanding at June 30, 1999, other than estimated future
acquisition-related payments to be made in accordance with purchase agreements.
The Company's current ratio at June 30, 1999 and December 31, 1998 was
2.4 to 1.0 and 2.6 to 1.0, respectively. The decrease in the current ratio is
primarily attributable to liabilities recorded in connection with the Company's
aforementioned productivity and consolidation initiative. Excluding the
restructuring reserve associated with the productivity and consolidation
initiative recorded in the second quarter, the Company's current ratio at
June 30, 1999 would be 2.7 to 1.
On February 3, 1999, the Company's Board of Directors increased the
quarterly cash dividend by 13% to 2.25 cents per share for an indicated annual
rate of 9 cents per share in 1999. Dividends of $4.1 million were paid during
the six months ended June 30, 1999 versus the $3.3 million paid in the
comparable prior year period.
The Company believes its sources of liquidity and capital are adequate
for its ongoing operating needs. If needed, other external sources of financing
are readily available to the Company.
Impact of Year 2000
The Company utilizes information systems throughout its business to
carry out its day-to-day operations. Further, the Company has and will continue
to invest in financial and operational systems to support its growth strategy.
Incorporated in this process is the continuing assessment of the Company's Year
2000 compliance. The Company currently considers its internal information
technology ("IT") systems to be substantially Year 2000 compliant. For those
systems that are not Year 2000 compliant, Omnicare is currently correcting,
upgrading or replacing those systems with, among other systems, its new
proprietary information system, which is Year 2000 compliant. The Company
believes it will be able to modify or replace its affected systems in time to
avoid any interruptions in its operations and anticipates that such remediation
will be completed during the second half of 1999. The system remediation is
being completed using both internal resources and external consultants. The
Company estimates that the total costs associated with this project will range
from approximately $6.2 million to $7.9 million (with hardware accounting for
approximately 40 percent of these costs and software and implementation
approximating 60 percent of these costs). Approximately $4.8 million has been
spent to date. The cost of this project will be funded from the Company's
operating cash flows. No IT projects with high priority have been significantly
delayed due to the Year 2000 initiatives. The Company does not anticipate any
significant implications with respect to Year 2000 issues relating to non-IT
systems.
While the Company believes its plan for Year 2000 compliance will be
completed on a timely basis and within the foregoing estimates, there can be no
assurance that the remedial actions being implemented by the Company will be
completed in a timely manner; nor can assurance be given that any inability to
complete remedial action in a timely manner will not
15
<PAGE>
impact adversely operations or financial results. Moreover, there can be no
assurance that the costs associated with the remediation will not exceed the
foregoing estimates.
The failure by third parties with whom the Company has dealings,
particularly the Medicaid and Medicare programs, to adequately address their
Year 2000 issues could adversely affect the Company, and claims to these third
party payors could be unjustifiably denied and/or delayed. As a result, the
Company's accounts receivable balance could increase, unfavorably impacting
operating cash flows. The Company is communicating with each of these programs
to determine the extent to which it may be impacted by any Year 2000 issues not
yet resolved by these programs. The Company has developed a contingency plan
which, if necessary, would call for the submission of reimbursement claims using
universal claim (paper) forms to the programs in the event that computerized
processing is not feasible in the year 2000. While it is management's current
belief that this contingency plan would satisfactorily address the risk
associated with any absence of readiness experienced by these programs, there
can be no assurance that implementation of such plan will mitigate in whole or
in part such risk.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Regarding Forward-Looking Information
In addition to historical information, this report contains
forward-looking statements and performance trends that are subject to certain
known and unknown risks, uncertainties, contingencies and other factors that
could cause actual results, performance or achievements to differ materially
from those stated. Such forward-looking statements and trends include those
relating to Omnicare's acquisition program, internal growth trends, nursing home
admission trends, census and length of stay trends, the expected benefits from
the Company's state tax planning programs, the adequacy and availability of
Omnicare's sources of liquidity and capital, and the impact of the Year 2000
issue. Such risks, uncertainties, contingencies and other factors, many of which
are beyond the control of Omnicare, include, but are not limited to: overall
economic, financial and business conditions, the continued availability of
suitable acquisition candidates and the successful integration of acquired
companies, the effect of new government regulation and/or legislative
initiatives including those relating to reimbursement policies and in the
interpretation and application of such policies, the failure of Omnicare to
obtain or maintain required regulatory approvals or licenses, loss or delay of
contracts pertaining to Omnicare's CRO business for regulatory or other reasons,
the ability to implement the productivity and consolidation program and to
realize anticipated benefits, changes in tax law and regulation, trends for the
continued growth of the businesses of Omnicare, the demand for Omnicare's
products and services, pricing and other competitive factors in the industry,
variations in costs or expenses, changes in the scope of Year 2000 initiatives,
and delays or problems in the implementation of Year 2000 initiatives by
Omnicare and/or its suppliers and customers and other payors.
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have any financial instruments held for trading
purposes and does not hedge any of its market risks with derivative instruments.
The Company's primary market risk exposure relates to interest rate risk
exposure through its borrowings. The Company's debt obligations at June 30, 1999
includes $390 million outstanding under its five-year $400 million variable-rate
revolving line of credit facility at an approximate average rate of 6.3% at June
30, 1999 (a one-hundred basis point change in interest rates would impact
interest expense by approximately $1.0 million per quarter), $85 million
outstanding under its 364-day $400 million variable-rate revolving line of
credit facility at an approximate average rate of 5.9% at June 30, 1999 (a
one-hundred basis point change in interest rates would impact interest expense
by approximately $0.2 million per quarter) and $345 million outstanding under
convertible subordinated notes due in 2007, which accrue interest at a fixed
rate of 5%. The fair value of the Company's debt obligations approximates their
carrying value.
17
<PAGE>
PART II. -- OTHER INFORMATION
Item 2. Recent Sales of Unregistered Securities
The Company, as part of its ongoing acquisition program, issues its
common shares and warrants ('Securities') from time to time in private
transactions in connection with the purchase of the assets or stock of
businesses acquired. During the quarter ended June 30, 1999, the Company
completed two transactions involving unregistered Securities. In connection
with these transactions, a total of 397,507 shares of common stock were issued.
No underwriters were involved in these acquisition transactions.
The Securities were issued in reliance on the exemption from
registration contained at Section 4(2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Omnicare held its Annual Meeting of Stockholders on May 17, 1999.
(b) The names of each director elected at this Annual Meeting are as follows:
<TABLE>
<S> <C>
Edward L. Hutton Thomas C. Hutton
Joel F. Gemunder Patrick E. Keefe
Timothy E. Bien Sandra E. Laney
Charles H. Erhart, Jr. Andrea R. Lindell, DNSc, RN
Mary Lou Fox Sheldon Margen, M.D.
Geraldine A. Henwood Kevin J. McNamara
Cheryl D. Hodges
</TABLE>
With respect to the election of directors, the number of votes cast for
each nominee was as follows:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
E. L. Hutton 71,652,337 631,457
J. F. Gemunder 71,642,976 640,818
T. E. Bien 71,668,295 615,499
C. H. Erhart, Jr. 71,658,932 624,862
M. L. Fox 71,658,739 625,055
G. A. Henwood 71,673,402 610,392
C. D. Hodges 71,677,495 606,299
T. C. Hutton 71,667,466 616,328
P. E. Keefe 71,677,814 605,980
S. E. Laney 71,669,333 614,461
A. R. Lindell, DNSc, RN 71,672,280 611,514
S. Margen, M.D. 71,655,126 628,668
K. J. McNamara 71,678,782 605,012
</TABLE>
(c) The Stockholders ratified the selection by the Board of Directors of
PricewaterhouseCoopers LLP as independent accountants for the Company
and its consolidated subsidiaries for the 1999 year. A total of
72,117,507 votes were cast in favor of the proposal, 70,497 votes were
cast against it, 95,790 votes abstained and there were no Broker
non-votes.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K - The Company filed a Report on Form 8-K on
May 18, 1999 relating to the Board of Directors' adoption of a
Stockholder Rights Plan. Further, a Form 8-K was filed on June
17, 1999 to report the Company's preliminary second quarter 1999
results. The Company also filed a Report on Form 8-K on June 30,
1999 reporting the adoption of a comprehensive plan to streamline
company-wide operations.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Omnicare, Inc.
--------------
Registrant
Date August 16, 1999 By: /s/ David W. Froesel, Jr.
-------------------- ----------------------------
David W. Froesel, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as.................... 'r'
<PAGE>
Exhibit 11
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Computation of Earnings Per Common Share (EPS)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Basic Earnings:
Net income $ 4,878 $ 8,106 $ 32,685 $ 28,512
========== ========= ========== ========
Shares
Weighted average number of common
shares outstanding 90,890 88,824 90,709 88,466
========== ========= ========== ========
Basic earnings per common share $ 0.05 $ 0.09 $ 0.36 $ 0.32
========== ========= ========== ========
Diluted Earnings (a):
Net income $ 4,878 $ 8,106 $ 32,685 $ 28,512
========== ========= ========== ========
Shares
Weighted average number of common
shares outstanding 90,890 88,824 90,709 88,466
Additional shares assuming conversion of
stock options and stock warrants 183 1,094 267 1,050
---------- --------- ---------- ---------
Average common shares outstanding
as adjusted 91,073 89,918 90,976 89,516
========== ========= ========== ========
Diluted earnings per common share $ 0.05 $ 0.09 $ 0.36 $ 0.32
========== ========= ========== ========
</TABLE>
(a) 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 the three and six months ended June 30, 1999 and 1998 but were not
included in the computation of diluted EPS because the impact was
anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> $88,573
<SECURITIES> 0
<RECEIVABLES> 449,344
<ALLOWANCES> 34,066
<INVENTORY> 145,596
<CURRENT-ASSETS> 728,371
<PP&E> 245,577
<DEPRECIATION> 91,606
<TOTAL-ASSETS> 2,145,224
<CURRENT-LIABILITIES> 298,411
<BONDS> 0
0
0
<COMMON> 91,526
<OTHER-SE> 914,830
<TOTAL-LIABILITY-AND-EQUITY> 2,145,224
<SALES> 900,333
<TOTAL-REVENUES> 900,333
<CGS> 632,500
<TOTAL-COSTS> 632,500
<OTHER-EXPENSES> 195,064
<LOSS-PROVISION> 8,912
<INTEREST-EXPENSE> 20,829
<INCOME-PRETAX> 52,589
<INCOME-TAX> 19,904
<INCOME-CONTINUING> 32,685
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,685
<EPS-BASIC> .36
<EPS-DILUTED> .36
</TABLE>
