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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 3l, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ________ to ________.
Commission file number 1-8269
OMNICARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1001351
(State of Incorporation) (I.R.S. Employer Identification No.)
OMNICARE, INC.
50 EAST RIVERCENTER BOULEVARD
COVINGTON, KENTUCKY 41011
(Address of principal executive offices)
Registrant's telephone number, including area code:
606-291-6800
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock ($1 Par Value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (l) 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 requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the Registrant's voting stock held by
non-affiliates, based upon the closing price of said stock on the New York Stock
Exchange Composite Transaction Listing on February 27, 1998 ($37.00 per share):
$2,993,039,668.
As of February 28, 1998, 82,549,291 shares of the Common Stock, $1.00
par value, of the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Omnicare, Inc.'s, (Omnicare, the Company or the Registrant)
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, to be
held May 18, 1998, are incorporated by reference into Part III of this report.
Definitive copies of its 1998 Proxy Statement will be filed with the Securities
and Exchange Commission within 120 days of the end of the Company's fiscal year.
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OMNICARE, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business.................................................... 3
ITEM 2. Properties.................................................. 15
ITEM 3. Legal Proceedings........................................... 21
ITEM 4. Submission of Matters to a Vote of Security Holders......... 21
Executive Officers of the Company........................... 22
PART II
ITEM 5. Market for the Company's Common Stock and Related
Stockholder Matters......................................... 23
ITEM 6. Selected Financial Data..................................... 23
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
ITEM 7.A. Quantitative and Qualitative Disclosures About Market Risk.. 31
ITEM 8. Financial Statements and Supplementary Data................. 32
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 55
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 55
ITEM 11. Executive Compensation...................................... 55
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 55
ITEM 13. Certain Relationships and Related Transactions.............. 55
PART IV
ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 55
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PART I
ITEM 1 - BUSINESS
BACKGROUND
Omnicare, Inc. (the "Company" or "Omnicare") was incorporated in Delaware on
May 19, 1981 to conduct certain health care businesses contributed to it by W.
R. Grace & Co. and Chemed Corporation, and in July 1981 public trading of the
Company's Common Stock commenced. As part of a multi-year restructuring program
undertaken in 1985, the Company, through a series of divestitures and
acquisitions, redeployed all of its capital in the long-term pharmacy business.
As a result, Omnicare is today a leading provider of pharmacy services to
long-term care institutions such as nursing homes, retirement centers and other
institutional health care facilities. Omnicare purchases, repackages and
dispenses pharmaceuticals, both prescription and non-prescription, and provides
computerized medical recordkeeping and third-party billing for residents in such
facilities. Omnicare also provides consultant pharmacist services, including
evaluating monthly resident drug therapy, monitoring the control, distribution
and administration of drugs within the nursing facility and assisting in
compliance with state and federal regulations. In addition, Omnicare provides
ancillary services, such as infusion therapy, distributes medical supplies and
offers clinical care plans and financial software information systems to its
clients' nursing facilities. The Company operates principally in one business
segment- institutional pharmacy services for the long-term care market. At
December 31, 1997, Omnicare provided these services to approximately 443,100
residents in 5,500 long-term care facilities in 37 states. The Company does not
make any export sales.
In 1997, the Company completed the acquisition of 18 institutional pharmacy
providers, a long-term care software company and a contract research
organization. See "Note 2 - Acquisitions" of the Notes to Consolidated Financial
Statements at Item 8 of this Report for additional information.
PHARMACY SERVICES
Omnicare purchases, repackages and dispenses prescription and non-
prescription medication in accordance with physician orders and delivers such
prescriptions at least daily to the nursing facility for administration to
individual residents by the facility's nursing staff. Omnicare typically
services nursing homes within a 150-mile radius of its pharmacy locations.
Omnicare maintains a 24-hour, on-call pharmacist service, 365 days per year, for
emergency dispensing and delivery or for consultation with the facility's staff
or the resident's attending physician.
Upon receipt of a prescription, the relevant resident information is entered
into Omnicare's computerized dispensing and billing systems. At that time, the
dispensing system checks the prescription for any potentially adverse drug
interactions or resident sensitivity. When required and/or specifically
requested by the physician or patient, branded drugs are dispensed; generic
drugs are substituted in accordance with applicable state and federal laws and
as requested by the physician or resident. The Company also provides therapeutic
interchange, with
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physician approval, in accordance with the Company's pharmaceutical care
guidelines. See "The Omnicare Guidelines(R)" below.
Omnicare provides a "unit dose" distribution system. Most of its
prescriptions are filled utilizing specialized unit-of-use packaging and
delivery systems. Maintenance medications are typically provided in 30-day
supplies utilizing either a box unit dose system or unit dose punch card system.
The unit dose system, preferred over the bulk delivery systems employed by
retail pharmacies, improves control over drugs in the nursing facility and
improves resident compliance with drug therapy by increasing the accuracy and
timeliness of drug administration.
Integral to Omnicare's drug distribution system is its computerized medical
records and documentation system. Omnicare provides to the facility computerized
medication administration records and physician's order sheets and treatment
records for each resident. Data extracted from these computerized records are
also formulated into monthly management reports on resident care and quality
assurance. The computerized documentation system, in combination with the unit
dose drug delivery system, results in greater efficiency in nursing time,
improved control, reduced drug waste in the facility and lower error rates in
both dispensing and administration. These benefits improve drug efficacy and
result in fewer drug-related hospitalizations.
CONSULTANT PHARMACIST SERVICES
Federal and state regulations mandate that nursing facilities, in addition
to providing a source of pharmaceuticals, retain consultant pharmacist services
to monitor and report on prescription drug therapy in order to maintain and
improve the quality of resident care. The Omnibus Budget Reconciliation Act
("OBRA") implemented in 1990 seeks to further upgrade and standardize care by
setting forth more stringent standards relating to planning, monitoring and
reporting on the progress of prescription drug therapy as well as facility-wide
drug usage.
Omnicare provides consultant pharmacist services which help clients comply
with such federal and state regulations applicable to nursing homes. The
services offered by Omnicare's consultant pharmacists include: (i)
comprehensive, monthly drug regimen reviews for each resident in the facility to
assess the appropriateness and efficacy of drug therapies, including a review of
the resident's medical records, monitoring drug reactions to other drugs or
food, monitoring lab results and recommending alternate therapies or
discontinuing unnecessary drugs; (ii) participation on the Pharmacy and
Therapeutics, Quality Assurance and other committees of client nursing
facilities as well as periodic involvement in staff meetings; (iii) monthly
inspection of medication carts and storage rooms; (iv) monitoring and monthly
reporting on facility-wide drug usage and drug administration systems and
practices; (v) development and maintenance of pharmaceutical policy and
procedures manuals; and (vi) assistance to the nursing facility in complying
with state and federal regulations as they pertain to patient care.
Omnicare has also developed a proprietary software system for the use of its
consultant pharmacists. The system, called OSC(2)OR(R) (Omnicare System of Cost
and Clinical Outcomes Retrieval), enables Omnicare pharmacists not only to
perform their above described functions
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efficiently but also provides the platform for consistent data retrieval for
outcomes research and management.
Additionally, Omnicare offers a specialized line of consulting services
which help nursing facilities to enhance care and reduce and contain costs as
well as to comply with state and federal regulations. Under this service line,
Omnicare provides: (i) data required for OBRA and other regulatory purposes,
including reports on psychotropic drug usage (chemical restraints), antibiotic
usage (infection control) and other drug usage; (ii) plan of care programs which
assess each patient's state of health upon admission and monitor progress and
outcomes using data on drug usage as well as dietary, physical therapy and
social service inputs; (iii) counseling related to appropriate drug usage and
implementation of drug protocols; (iv) on-site educational seminars for the
nursing facility staff on topics such as drug information relating to clinical
indications, adverse drug reactions, drug protocols and special geriatric
considerations in drug therapy, and information and training on intravenous drug
therapy and updates on OBRA and other regulatory compliance issues;(v) mock
regulatory reviews for nursing staffs; and (vi) nurse consultant services and
consulting for dietary, social services and medical records.
THE OMNICARE GUIDELINES(R)
In June 1994, to enhance the pharmaceutical care management services that it
offers, Omnicare introduced to its client nursing facilities and their attending
physicians The Omnicare Guidelines(R) which it believes is the first
clinically-based formulary for the elderly residing in long-term care
institutions. The Omnicare Guidelines(R) presents an analysis ranking specific
drugs in therapeutic classes as Preferred, Acceptable or Unacceptable based
solely on their disease-specific clinical effectiveness in treating the elderly
in nursing facilities. The formulary takes into account such factors as
pharmacology, safety and toxicity, efficacy, drug administration, quality of
life and other considerations specific to the frail elderly population residing
in nursing facilities. The clinical evaluations and rankings were developed
exclusively for the Company by the Philadelphia College of Pharmacy and Science,
an academic institution recognized for its expertise in geriatric long-term
care. In addition, The Omnicare Guidelines(R) provides relative cost information
comparing the prices of the drugs to patients, their insurers or other payors of
the pharmacy bill.
As The Omnicare Guidelines(R) focuses on health benefits, rather than solely
on cost, in assigning rankings, the Company believes that use of The Omnicare
Guidelines(R) will assist physicians in making the best clinical choices of drug
therapy for the patient at the lowest cost to the payor of the pharmacy bill.
The Company also believes that the development of and subsequent compliance with
The Omnicare Guidelines(R) will lower costs for the patients it serves.
DISEASE AND OUTCOMES MANAGEMENT
The Company has expanded upon the data in The Omnicare Guidelines(R) to
develop disease and outcomes management programs targeted at major categories of
disease commonly found in the elderly. These programs currently include
congestive heart failure, osteoporosis, atrial
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fibrillation and depression. Such programs seek to identify patients who may be
candidates for more clinically efficacious drug therapy and to work with
physicians to optimize pharmaceutical care for these geriatric patients. Such
programs enhance the quality of care of elderly patients while reducing costs to
the health care system which arise from the adverse outcomes of sub-optimal or
inappropriate drug therapy.
ANCILLARY SERVICES
Omnicare provides the following ancillary products and services to nursing
facilities:
Infusion Therapy Products and Services. With cost containment pressures in
health care, nursing facilities are increasingly providing subacute care as a
means of treating moderately acute but stabilized patients more cost-effectively
than hospitals, provided that the nursing staff and pharmacy are capable of
supporting higher degrees of acuity. Omnicare provides infusion therapy support
services for such residents in its client nursing facilities and, to a lesser
extent, hospice and home care patients. Infusion therapy consists of the product
(a nutrient, antibiotic, chemotherapy or other drugs in solution) and the
intravenous administration of the product.
Omnicare prepares the product to be administered using proper equipment in a
sterile environment and then delivers the product to the nursing home for
administration by the nursing staff. Proper administration of intravenous ("IV")
drug therapy requires a highly trained nursing staff. Omnicare's consultant
pharmacists and nurse consultants operate an education and certification program
on IV therapy to assure proper staff training and compliance with regulatory
requirements in client facilities offering an IV program.
By providing an infusion therapy program, Omnicare enables its client
nursing facilities to admit and retain patients who otherwise would need to be
cared for in an acute-care facility. The Company believes that by providing
these high-acuity pharmacy services it has a competitive advantage over other
pharmacy providers. The most common infusion therapies Omnicare provides are
total parenteral nutrition, antibiotic therapy, chemotherapy, pain management
and hydration.
Wholesale Medical Supplies/Medicare Part B Billing. Omnicare distributes
disposable medical supplies, including urological, ostomy, nutritional support
and wound care products and other disposables needed in the nursing home
environment. In addition, Omnicare provides direct Medicare billing services for
certain of these product lines for patients eligible under the Medicare Part B
program. As part of this service, Omnicare determines patient eligibility,
obtains certifications, orders products and maintains inventory on behalf of the
nursing facility. Omnicare also contracts to act as billing agent for certain
nursing homes that supply these products directly to the patient.
Other Services. Omnicare also provides respiratory therapy products and
durable medical equipment and offers clinical care plan and financial software
information systems to its client nursing facilities. Omnicare continues to
review the expansion of these as well as other products and services that may
further enhance the ability of its client nursing facilities to care for their
patients in a cost-effective manner.
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CONTRACT PHARMACEUTICAL RESEARCH
On December 29, 1997, Omnicare completed its acquisition of all the
stock of Coromed, Inc., which marked Omnicare's entry into pharmaceutical
research. Coromed is an international full-service contract research
organization ("CRO") serving multinational pharmaceutical and biotechnology
firms, as well as medical device companies. Coromed provides support for the
preclinical and clinical (phase I-IV) development of pharmaceuticals by
offering comprehensive and fully integrated biological, pharmacological, and
chemical research services, as well as clinical, quality assurance, data
management, medical writing and regulatory support for its clients' drug
development programs. In addition to conducting business in the United States,
Coromed also operates in Canada, South America, and Europe. The Company
believes that its involvement in the CRO business is a logical adjunct to its
core institutional pharmacy business and will serve to leverage its assets,
including its access to a large geriatric population and its ability to collect
data for disease and outcomes management. Such assets will be of significant
value in the development of new drugs targeted at diseases of the elderly and
in meeting the Food and Drug Administration's recently issued geriatric dosing
and labeling requirements for all prescription drugs provided to the elderly as
well as in documenting health outcomes to payors and plan sponsors in a managed
care environment.
PRODUCT AND MARKET DEVELOPMENT
Omnicare's pharmacy business engages in a continuing program for the
development of new services and the marketing thereof. While new service and new
market development are important factors for the growth of this business,
Omnicare does not expect that any new service or marketing effort, including
those in the developmental stage, will require the investment of a material
portion of Omnicare's assets.
MATERIALS/SUPPLY
Omnicare purchases pharmaceuticals through a wholesale distributor with whom
it has a prime vendor contract and, on an increasing basis, under contracts
negotiated directly with pharmaceutical manufacturers. The Company also is a
member of industry buying groups which contract with manufacturers for
discounted prices based on volume which are passed through to the Company by its
wholesale distributor. The Company has numerous sources of supply available to
it and has not experienced any difficulty in obtaining pharmaceuticals or other
products and supplies used in the conduct of its business.
PATENTS, TRADEMARKS AND LICENSES
Omnicare's business operations are not dependent upon any material patents,
trademarks or licenses.
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INVENTORIES
Omnicare's pharmacies maintain adequate on-site inventories of
pharmaceuticals and supplies to ensure prompt delivery service to its customers.
The Company's primary wholesale distributor also maintains local warehousing in
most major geographic markets in which the Company operates.
COMPETITION
By its nature, the long-term care pharmacy business is highly regionalized
and, within a given geographic region of operations, highly competitive. In the
geographic regions it serves, Omnicare competes with numerous local retail
pharmacies, local and regional institutional pharmacies and pharmacies owned by
long-term care facilities. The Company is the largest independent institutional
pharmacy company in the U.S. Omnicare competes in this market on the basis of
quality, cost-effectiveness and the increasingly comprehensive and specialized
nature of its services along with the clinical expertise, pharmaceutical
technology and professional support it offers.
In its program of acquiring institutional pharmacy providers, the Company
competes with several other companies with similar acquisition strategies, some
of which may have substantial financial resources.
CUSTOMERS
At December 31, 1997, Omnicare served 443,100 residents in 5,500 long-term
care facilities and other institutional health care settings. The Company's
business would not be materially or adversely affected by the loss of any one
customer or small group of customers.
GOVERNMENT REGULATION
Institutional pharmacies, as well as the long-term care facilities they
serve, are subject to extensive federal, state and local regulation. These
regulations cover required qualifications, day-to-day operations, reimbursement
and the documentation of activities. Omnicare continuously monitors the effects
of regulatory activity on its operations.
Licensure, Certification and Regulation. States generally require that
companies operating a pharmacy within the state be licensed by the state board
of pharmacy. The Company currently has pharmacy licenses for each location in
the states in which it operates pharmacies. In addition, the Company currently
delivers prescription products from its licensed pharmacies to one state in
which the Company does not operate a pharmacy. This state regulates out-of-state
pharmacies, however, as a condition to the delivery of prescription products to
patients in that state. Omnicare's pharmacies hold the requisite licenses
applicable in these states. In addition, Omnicare's pharmacies are registered
with the appropriate state and federal authorities pursuant to statutes
governing the regulation of controlled substances.
Client nursing facilities are also separately required to be licensed in the
states in which they operate and, if serving Medicare or Medicaid patients, must
be certified to be in compliance with applicable program
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participation requirements. Client nursing facilities are also subject to the
nursing home reforms of the Omnibus Budget Reconciliation Act of 1987, which
imposed strict compliance standards relating to quality of care for nursing home
operations, including vastly increased documentation and reporting requirements.
In addition, pharmacists, nurses and other health care professionals who provide
services on the Company's behalf are in most cases required to obtain and
maintain professional licenses and are subject to state regulation regarding
professional standards of conduct.
Federal and State Laws Affecting the Repackaging, Labeling, and Interstate
Shipping of Drugs. Federal and state laws impose certain repackaging, labeling,
and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail. A drug repackager must register with the Food and Drug
Administration. The Company holds all required registrations and licenses, and
its repackaging operations are believed to be in compliance with applicable
state and federal requirements.
State Laws Affecting Access to Services. Some states have enacted "freedom
of choice" or "any willing provider" requirements as part of their state
Medicaid programs or in separate legislation. These laws and regulations may
prohibit a third party payor from restricting the pharmacies from which their
participants may purchase pharmaceuticals. Similarly, these laws may preclude a
nursing facility from requiring its patients to purchase pharmacy or other
ancillary medical services or supplies from particular providers that deal with
the nursing home. Such limitations may increase the competition which the
Company faces in providing services to nursing facility residents.
Medicare and Medicaid. The nursing home pharmacy business has long operated
under regulatory and cost containment pressures from state and federal
legislation primarily affecting Medicaid and, to a lesser extent, Medicare.
As is the case for nursing home services generally, Omnicare receives
reimbursement from the Medicaid and Medicare programs, directly from individual
residents (private pay), and from other payors such as third-party insurers. The
Company believes that its reimbursement mix is in line with nursing home
expenditures nationally. For the year ended December 31, 1997, Omnicare's payor
mix was approximately as follows: 50% private pay and nursing facilities, 44%
Medicaid, 4% Medicare and 2% other private sources.
For those patients who are not covered by government-sponsored programs or
private insurance, Omnicare generally directly bills the patient or the
patient's responsible party on a monthly basis. Depending upon local market
practices, Omnicare may alternatively bill private patients through the nursing
facility. Pricing for private pay patients is based on prevailing regional
market rates or "usual and customary" charges.
The Medicaid program is a cooperative federal-state program designed to
enable states to provide medical assistance to aged, blind, or disabled
individuals, or members of families with dependent children whose income and
resources are insufficient to meet the costs of necessary medical
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services. State participation in the Medicaid program is voluntary. To become
eligible to receive federal funds, a state must submit a Medicaid "state plan"
to the Secretary of the Department of Health and Human Services ("HHS") for
approval. The federal Medicaid statute specifies a variety of requirements which
the state plan must meet, including requirements relating to eligibility,
coverage of services, payment and administration.
Federal law and regulations contain a variety of requirements relating to
the furnishing of prescription drugs under Medicaid. First, states are given
authority, subject to certain standards, to limit or specify conditions for the
coverage of particular drugs. Second, federal Medicaid law establishes standards
affecting pharmacy practice. These standards include general requirements
relating to patient counseling and drug utilization review and more specific
standards for nursing facilities relating to drug regimen reviews for Medicaid
patients in such facilities. Recent regulations clarify that, under federal law
a pharmacy is not required to meet the general requirements for drugs dispensed
to nursing facility residents if the nursing facility complies with the drug
regimen review standards. However, the regulations indicate that states may
nevertheless require pharmacies to comply with the general requirements,
regardless of whether the nursing facility satisfies the drug regimen review
requirement, and the states in which the Company operates currently do require
its pharmacies to comply with these general standards.
Third, federal regulations impose certain requirements relating to
reimbursement for prescription drugs furnished to Medicaid patients. Among other
things, regulations establish "upper limits" on payment levels. In addition to
requirements imposed by federal law, states have substantial discretion to
determine administrative, coverage, eligibility and payment policies under their
state Medicaid programs which may affect the Company's operations. For example,
some states have enacted "freedom of choice" requirements which may prohibit a
nursing facility from requiring its residents to purchase pharmacy or other
ancillary medical services or supplies from particular providers that deal with
the nursing home. Such limitations may increase the competition which the
Company faces in providing services to nursing facility patients.
The Medicare program is a federally funded and administered health insurance
program for individuals age 65 and over or who are disabled. The Medicare
program consists of two parts: Part A, which covers, among other things,
inpatient hospital, skilled nursing facility, home health care and certain other
types of health care services; and Medicare Part B, which covers physicians'
services, outpatient services, and certain items and services provided by
medical suppliers. Medicare Part B also covers a limited number of specifically
designated prescription drugs. As part of the Balanced Budget Act, reimbursement
for these products is generally limited to 95 percent of the published average
wholesale price for such products. An increasing number of Medicare
beneficiaries are being served through health maintenance organizations. In
addition to the limited Medicare coverage for specified products described
above, some health maintenance organizations providing health care benefits to
Medicare beneficiaries may offer expanded drug coverage. The Medicare program
establishes certain requirements for participation of providers
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and suppliers in the Medicare program. Pharmacies are not subject to such
certification requirements. Skilled nursing facilities and suppliers of medical
equipment and supplies, however, are subject to specified standards. Failure to
comply with these requirements and standards may adversely affect an entity's
ability to participate in the Medicare program and receive reimbursement for
services provided to Medicare beneficiaries.
The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments,
administrative rulings, and freezes and funding reductions, all of which may
adversely affect the Company's business. There can be no assurance that
payments for pharmaceutical supplies and services under governmental
reimbursement programs will continue to be based on the current methodology or
remain comparable to present levels. In this regard, the Company may be subject
to rate reductions as a result of federal budgetary or other legislation
related to the Medicare and Medicaid programs. In addition, various state
Medicaid programs periodically experience budgetary shortfalls which may result
in Medicaid payment delays to the Company. To date, the Company has not
experienced any material adverse effect due to any such budgetary shortfall.
In addition, the failure, even if inadvertent, of Omnicare and/or its client
institutions to comply with applicable reimbursement regulations could adversely
affect Omnicare's business. Additionally, changes in such reimbursement programs
or in regulations related thereto, such as reductions in the allowable
reimbursement levels, modifications in the timing or processing of payments and
other changes intended to limit or decrease the growth of Medicaid and Medicare
expenditures, could adversely affect the Company's business.
Referral Restrictions. The Company is subject to federal and state laws
which govern financial and other arrangements between health care providers.
These laws include the federal anti-kickback statute, which prohibits, among
other things, knowingly and willfully soliciting, receiving, offering or paying
any remuneration directly or indirectly in return for or to induce the referral
of an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under federal healthcare programs. Many
states have enacted similar statutes which are not necessarily limited to items
and services for which payment is made by federal healthcare programs.
Violations of these laws may result in fines, imprisonment, and exclusion from
the federal programs or other state-funded programs. Federal and state court
decisions interpreting these statutes are limited, but have generally construed
the statutes to apply if "one purpose" of remuneration is to induce referrals or
other conduct within the statute.
Federal regulations establish "safe harbors," which give immunity from
criminal or civil penalties to parties meeting all of the safe harbor
requirements. While the failure to satisfy all criteria for a safe harbor does
not mean that an arrangement violates the statute, it may subject the
arrangement to review by the HHS Office of Inspector General ("OIG"), which is
charged with administering the federal anti-kickback statute. Until recently,
there were no procedures for obtaining binding interpretations or advisory
opinions from HHS on the application of the federal anti-kickback statute to an
arrangement or its qualification for
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a safe harbor upon which the Company could rely. However, on August 21, 1996,
the President signed into law the Health Insurance Portability and
Accountability Act of 1996, which requires the Secretary of HHS to issue
written advisory opinions regarding the applicability of certain aspects of the
anti-kickback statute to specific arrangements or proposed arrangements.
Advisory opinions are binding as to the Secretary and the party requesting the
opinion.
The OIG issues "Fraud Alerts" identifying certain questionable arrangements
and practices which it believes may implicate the federal anti-kickback statute.
The OIG has issued a Fraud Alert providing its views on certain joint venture
and contractual arrangements between health care providers. The OIG also issued
a Fraud Alert concerning prescription drug marketing practices that could
potentially violate the federal statute. Pharmaceutical marketing activities may
implicate the federal anti-kickback statute because drugs are often reimbursed
under the Medicaid program and, to a lesser extent, under the Medicare program.
According to the Fraud Alert, examples of practices that may implicate the
statute include certain arrangements under which remuneration is made to
pharmacists to recommend the use of a particular pharmaceutical product.
In addition, a number of states have undertaken enforcement actions against
pharmaceutical manufacturers involving pharmaceutical marketing programs,
including programs containing incentives to pharmacists to dispense one
particular product rather than another. These enforcement actions arose under
state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like.
The Company believes its contract arrangements with other health care
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with applicable federal and state laws. There can be no assurance
that such laws will not, however, be interpreted in the future in a manner
inconsistent with the Company's interpretation and application.
Health Care Reform and Federal Budget Legislation. In recent years, a number
of legislative proposals have been introduced in Congress that would effect
major changes in the health care system, either nationally or at the state
level. The Balanced Budget Act of 1997 ("Balance Budget Act") signed into law on
August 5, 1997, seeks to achieve a balanced federal budget by, among other
things, reducing federal spending on the Medicare and Medicaid programs. With
respect to Medicare, the law mandates establishment of a prospective payment
system ("PPS") for Medicare skilled nursing facilities ("SNFs") under which
facilities will be paid a federal per diem rate for virtually all covered SNF
services. It is anticipated that the PPS will be phased in over three cost
reporting periods, starting with cost reporting periods beginning on or after
July 1, 1998. In the accompanying Conference Report, the conferees specifically
note that, to ensure that the frail elderly residing in SNFs receive needed and
appropriate medication therapy, the Secretary of the Department of Health and
Human Services is to consider, as part of the PPS for SNFs, the results of
studies conducted by independent organizations, including those which examine
appropriate payment mechanism and payment rates for medications therapy, and
develop case mix adjustments that reflect the needs of such patients. The
Balanced Budget Act also imposes limits on annual updates in payments to
Medicare SNFs
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for routine services, and institutes consolidated billing for SNF services for
all non-physician Part B items and services for SNF residents, effective July 1,
1998. The law also imposes numerous other cost savings measures affecting
Medicare SNF services. In addition, the Balanced Budget Act requires Medicare
Part B suppliers to obtain a surety bond for each tax identification number
which also has a Medicare supplier number.
The Balanced Budget Act also repeals the "Boren Amendment" federal payment
standard for Medicaid payments to Medicaid nursing facilities effective October
1, 1997. There can be no assurance that budget constraints or other factors will
not cause states to reduce Medicaid reimbursement to nursing facilities or that
payments to nursing facilities will be made on a timely basis. The law also
grants states greater flexibility to establish Medicaid managed care programs
without the need to obtain a federal waiver. Although these waiver projects
generally exempt institutional care, including nursing facility and
institutional pharmacy services, no assurances can be given that these programs
ultimately will not change the reimbursement system for long-term care,
including pharmacy services, from fee-for-service to managed care negotiated or
capitated rates. The Company anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems and
payment methodologies. It is not possible to predict the effect of the recent
budget legislation or the interpretation or administration of such legislation
on Omnicare's business. Accordingly, there can be no assurance that these
changes or any future health care legislation will not adversely affect
Omnicare's business.
Several state Medicaid programs have established mandatory statewide managed
care programs for Medicaid beneficiaries to control costs through negotiated or
capitated rates, as opposed to traditional cost-based reimbursement for Medicaid
services, and propose to use savings achieved through these programs to expand
coverage to those not previously eligible for Medicaid. HHS has approved waivers
for statewide managed care demonstration projects in several states and they are
pending for several other states. These demonstration projects generally exempt
institutionalized care, including nursing facility services, from the programs,
and the Company's operations have not been adversely affected in states with
managed care demonstration projects in effect. The Company is unable to predict
what impact, if any, future Medicaid managed care systems might have on the
Company's operations.
It is uncertain at this time what additional health care reform initiatives,
if any, will be implemented, or whether there will be other changes in the
administration of governmental health care programs or interpretations of
governmental policies or other changes affecting the health care system. There
can be no assurance that future health care or budget legislation or other
changes will not have an adverse effect on the business of the Company.
ENVIRONMENTAL MATTERS
In operating its facilities, Omnicare makes every effort to comply with
pollution control laws. No major difficulties have been encountered in effecting
compliance. No material capital expenditures for environmental control
facilities are expected. While Omnicare cannot predict the effect which any
future legislation, regulations, or interpretations may have upon its
operations, it does not anticipate any changes that would
13
14
have a material adverse impact on its operations.
EMPLOYEES
At December 31, 1997, Omnicare employed approximately 7,450 persons
(including 1,796 part-time employees), 7,442 and 8 of whom were located within
and outside the United States, respectively.
14
15
ITEM 2 - PROPERTIES
Omnicare has offices and distribution centers in various locations in
the United States. A list of the major facilities operated by Omnicare as of
December 31, 1997 follows. The owned property is held in fee and is not subject
to any material encumbrance. Omnicare considers all of these facilities to be in
good operating condition and generally to be adequate for present and
anticipated needs.
LEASED
---------------------------------------------
OWNED
AREA AREA EXPIRATION
LOCATION TYPE (SQ. FT.) (SQ. FT.) DATE
- --------------------------- --------------------------- ------------------ ----------------- ------------------------
West Seneca, Offices and -- 5,000 November 30,
New York distribution 2001
center
Baton Rouge, Offices and -- 5,000 Month-to-Month
Louisiana distribution
center
Indianapolis, Home Health -- 5,000 Month-to-Month
Indiana
Lafayette, Offices and -- 5,000 March 31, 2002
Louisiana distribution
center
Pompton Plains, Offices and -- 5,032 June 14, 2002
New Jersey distribution
center
Tulsa, Offices and -- 5,600 Month-to-Month
Oklahoma distribution
center
Newington, Offices and -- 6,000 June 1, 1998
Connecticut distribution
center
Pikesville, Offices and -- 6,000 June 1, 2006
Maryland distribution
center
Pittsburgh, Offices and -- 6,240 September 30,
Pennsylvania distribution 2000
center
Vineland, Offices and -- 6,325 March 31, 2002
New Jersey distribution
center
Grand Rapids, Offices and -- 6,368 June 30, 2000
Michigan distribution
center
Conyers, Offices and -- 6,520 December 31,
Georgia distribution 2000
center
Livonia, Offices and -- 6,800 January 31,
Michigan distribution 2002
center
15
16
LEASED
---------------------------------------------
OWNED
AREA AREA EXPIRATION
LOCATION TYPE (SQ. FT.) (SQ. FT.) DATE
- --------------------------- --------------------------- ------------------ ----------------- ------------------------
West Boylston, Offices and -- 6,800 Month-to-Month
Massachusetts distribution
center
Irvine, Offices and -- 6,945 January 31,
California distribution 2000
center
St. Louis, Offices and -- 7,000 March 31, 2005
Missouri distribution
center
Lexington, Offices and -- 7,000 September 30,
Kentucky distribution 1998
center
Salt Lake City, Offices and -- 7,200 July 31, 2000
Utah distribution
center
Sanford, Offices and -- 7,395 September 15,
Maine distribution 1998
center
Greensburg, Offices and -- 7,450 February 3,
Pennsylvania distribution 2002
center
Greensburg, Offices and -- 7,500 February 3,
Pennsylvania distribution 2002
center
Oshkosh, Offices and -- 7,500 June 1, 1998
Wisconsin distribution
center
Racine, Offices and -- 7,500 July 31, 2001
Wisconsin distribution
center
Farmingdale, Offices and -- 7,500 October 31,
New York distribution 1999
center
Sioux Falls, Offices and -- 7,560 June 30, 1998
South Dakota distribution
center
Port Orchard, Offices and -- 7,700 June 1, 2003
Washington distribution
center
Harrisonburg, Offices and -- 7,900 December 31,
Virginia distribution 1998
center
St. Louis, Offices and -- 8,000 May 31, 1998
Missouri distribution
center
16
17
LEASED
---------------------------------------------
OWNED
AREA AREA EXPIRATION
LOCATION TYPE (SQ. FT.) (SQ. FT.) DATE
- --------------------------- --------------------------- ------------------ ----------------- ------------------------
Rockford, Offices and -- 8,000 December 31,
Illinois distribution 1998
center
Southington, Offices and -- 8,500 February 28,
Connecticut distribution 1999
center
Belleville, Offices and -- 8,800 March 31, 1999
Illinois distribution
center
Clarksburg, Offices and -- 9,000 January 31,
West Virginia distribution 2003
center
Tonawanda, Offices and -- 9,600 July 3, 2000
New York distribution
center
Shreveport, Offices and -- 9,703 August 14,
Louisiana distribution 2001
center
South Elgin, Offices and -- 10,000 August 1, 2002
Illinois distribution
center
Norwood, Offices and -- 10,000 July 31, 1998
New Jersey distribution
center
Tampa, Offices and -- 10,000 June 30, 1999
Florida distribution
center
Mobile, Offices and -- 10,800 November 30,
Alabama distribution 1999
center
Yakima, Offices and -- 11,000 February 29,
Washington distribution 2000
center
Rose Hill, Offices and -- 11,000 Month-to-Month
North Carolina distribution
center
Rockford, Retail Outlet -- 11,000 February 28,
Illinois 1999
Peoria, Offices and -- 11,022 June 30, 2001
Illinois distribution
center
Omaha, Offices and -- 11,250 May 31, 2001
Nebraska distribution
center
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LEASED
---------------------------------------------
OWNED
AREA AREA EXPIRATION
LOCATION TYPE (SQ. FT.) (SQ. FT.) DATE
- --------------------------- --------------------------- ------------------ ----------------- ------------------------
Rockford, Offices and -- 11,436 February 28,
Illinois distribution 2001
center
Griffith, Offices and -- 11,500 March 30, 2001
Indiana distribution
center
Newington, Offices and -- 11,600 June 1, 1998
Connecticut distribution
center
Augusta, Offices and -- 11,700 October 1,
Maine distribution 2007
center
Dover, Offices and -- 12,000 December 12,
Ohio distribution 2008
center
Alexandria, Offices and -- 12,000 April 30, 2001
Louisiana distribution
center
Hallowell, Offices and -- 13,000 October 31,
Maine distribution 2002
center
Malta, Offices and -- 13,546 December 31,
New York distribution 1999
center
Spokane, Offices and -- 13,750 October 31,
Washington distribution 2006
center
Pittsburgh, Offices and -- 14,000 December 31,
Pennsylvania distribution 2001
center
Salt Lake City, Offices and -- 14,000 November 30,
Utah distribution 1998
center
New Brighton, Offices and -- 14,400 March 31, 2000
Minnesota distribution
center
Milford, Offices and -- 14,890 December 31,
Ohio distribution 1999
center
Englewood, Offices and -- 15,000 January 31,
Ohio distribution 2001
center
Huber Heights, Offices and 15,000 -- --
Ohio distribution
center
18
19
LEASED
---------------------------------------------
OWNED
AREA AREA EXPIRATION
LOCATION TYPE (SQ. FT.) (SQ. FT.) DATE
- --------------------------- --------------------------- ------------------ ----------------- ------------------------
St. Louis, Offices and -- 15,200 December 31,
Missouri distribution 1999
center
Pompton Plains, Offices and -- 16,041 July 15, 2001
New Jersey distribution
center
Overland Park, Offices and -- 17,409 September 30,
Kansas distribution 1999
center
Springfield, Offices and -- 17,490 September 30,
Missouri distribution 2000
center
Lakeville, Offices and -- 17,500 January 25,
Massachusetts distribution 2002
center
Plainview, Offices and -- 17,500 June 30, 2005
New York distribution
center
Cincinnati, Offices and -- 18,000 September 30,
Ohio distribution 1999
center
Mobile, Offices and -- 18,000 June 30, 2000
Alabama distribution
center
Wadsworth, Offices and -- 21,000 June 30, 2001
Ohio distribution
center
Perrysburg, Offices and 23,200 -- --
Ohio distribution
center
Decatur, Offices and 23,274 -- --
Illinois distribution
center
Portland, Offices and -- 23,700 April 30, 2008
Oregon distribution
center
Indianapolis, Offices and -- 23,740 April 30, 2006
Indiana distribution
center
Oklahoma City, Offices and -- 24,000 September 15,
Oklahoma distribution 1998
center
Livonia, Offices and -- 28,524 May 1, 2002
Michigan distribution
center
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20
LEASED
---------------------------------------------
OWNED
AREA AREA EXPIRATION
LOCATION TYPE (SQ. FT.) (SQ. FT.) DATE
- --------------------------- --------------------------- ------------------ ----------------- ------------------------
Skokie, Offices and -- 29,556 November 30,
Illinois distribution 2000
center
Hunt Valley, Offices and -- 30,600 January 31,
Maryland distribution 2002
center
Louisville, Offices and -- 37,400 September 30,
Kentucky distribution 2001
center
Florrisant, Offices and 37,753 -- --
Missouri distribution
center
Kirkland, Offices and -- 52,040 April 15, 2003
Washington distribution
center
20
21
ITEM 3 - LEGAL PROCEEDINGS
On August 6, 1997, Omnicare announced that it had reached a tentative
settlement, subject to final federal and state governmental approvals, with the
U.S. Attorney's office in the Southern District of Illinois regarding the
previously announced federal investigation of Home Pharmacy Services, Inc., the
Company's wholly-owned institutional pharmacy subsidiary in Belleville,
Illinois.
Accordingly, in the third quarter of 1997, Omnicare recorded a
nonrecurring charge of $6,313,000 ($5,958,000 after tax) for the estimated costs
and legal and other expenses associated with resolving the investigation. The
$6,313,000 consists of anticipated payments to the government agencies of
$5,300,000 and estimated legal and other professional fees directly attributable
to the investigation of $1,013,000. The settlement, when finalized, is not
expected to result in any criminal charges against Home Pharmacy Services.
Additionally, Home Pharmacy Services is expected to continue to participate in
government reimbursement programs under the terms of the tentative settlement.
Home Pharmacy Services, which was acquired by Omnicare in 1992, has
continued to provide complete pharmacy services to nursing facility residents in
its market area without interruption. The pharmacy operation accounted for less
than 3% of Omnicare's total sales and earnings during 1997.
There are no other pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which Omnicare or any of its
subsidiaries is a party or of which any of their property is the subject, and no
such proceedings are known to be contemplated by governmental authorities.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
22
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of March 20, l998 are as follows:
Name Age Office First Elected
- ---------------- --- ----------------- -------------
Edward L. Hutton 78 Chairman May 20, l98l
Joel F. Gemunder 58 President May 20, l98l
Patrick E. Keefe 52 Executive Vice April 11, 1993
President - Operations
Timothy E. Bien 47 Senior Vice President- May 20, 1996
Professional Services
and Purchasing
Mary Lou Fox 66 Senior Vice President- May 20, 1996
Marketing
David W. Froesel, Jr. 46 Senior Vice President March 4, 1996
and Chief Financial
Officer
Cheryl D. Hodges 46 Senior Vice President August 4, l982
and Secretary
All of the executive officers listed above have been actively engaged in
the business of the Company or its predecessors for the past five years,
with the exception of Messrs. Keefe and Froesel. Mr. Keefe served as Vice
President of Diagnostek, Inc. from April 1992 to April 1993. From September
1990 to April 1992, he was President of HPI Health Care Services, Inc.
("HPI"), a subsidiary of Diagnostek which it acquired from Omnicare in
August 1989. He served as Executive Vice President of HPI from August 1984
until September 1990. Mr. Froesel was Vice President of Finance and
Administration at Mallinckrodt Veterinary Inc. from May 1993 to February
1996. From July 1989 to April 1993, he was worldwide corporate controller
of Mallinckrodt Medical Inc.
Executive officers are elected for one-year terms at the annual
organizational meeting of the Board of Directors which follows the annual
meeting of stockholders each year.
22
23
PART II
ITEM 5 - MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK; HOLDERS OF RECORD
The Company's Common Stock is listed on the New York Stock Exchange. The
following table sets forth the ranges of high and low closing prices for the
Common Stock on the New York Stock Exchange during each of the calendar quarters
of l997 and l996. All prices shown have been adjusted to reflect the two-for-one
stock split in June 1996.
1997 1996
--------------- ---------------
High Low High Low
---- --- ---- ----
First Quarter $30.63 $23.50 $27.13 $19.69
Second Quarter 31.38 22.88 30.00 25.00
Third Quarter 32.50 26.88 30.50 22.00
Fourth Quarter 34.31 27.50 32.13 26.13
The number of holders of record of Omnicare Common Stock on February 27,
l998 was 2,184. This figure does not include stockholders with shares held under
beneficial ownership in nominee name or within clearinghouse positions of
brokerage houses and banks.
DIVIDENDS
On February 5, 1997, the Board of Directors elected to increase the
quarterly cash dividend to $.0175 per share, for an indicated annual rate of
$.07 per share in 1997. On February 4, 1998, the quarterly cash dividend was
raised to $.02, for an indicated annual rate of $.08 per share in 1998. It is
presently intended that cash dividends will continue to be paid on a quarterly
basis; however, future dividends are necessarily dependent upon the Company's
earnings and financial condition and other factors not currently determinable.
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 December 31, 1997, the Company completed one
transaction involving unregistered Securities. In connection with this
transaction, a total of 59,738 shares of common stock were issued. No
underwriters were involved in this acquisition transaction.
On December 10, 1997, the Company issued and sold 5.0% convertible
subordinated debentures due 2007 in the principal amount of $345 million (the
"Debentures"). The Debentures were initially acquired from the Company by Morgan
Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities,
Inc., Smith Barney Inc. and William Blair & Company L.L.C. (the "Initial
Purchasers"). The Initial Purchasers advised the Company that the Debentures
were resold in transactions exempt from the Securities Act of 1933 to "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act) and
certain "accredited investors" (as defined in Rule 501 under the Securities
Act). The Debentures are convertible into Common Stock of the Company at any
time after March 10, 1998 through maturity, unless previously redeemed, at a
conversion price of $39.60 per share, subject to adjustment in certain events.
The net proceeds to the Company from the sale of the Debentures, after deducting
the expenses of the offering payable by the Company and commissions payable to
the Initial Purchasers, were approximately $337 million.
In addition, 394,000 warrants were issued in conjunction with services
provided to the Company.
The Securities and the Debentures were issued in reliance on the exemption
from registration contained at Section (42) of the Securities Act of 1933. See
Note 2 to Consolidated Financial Statements for additional information regarding
the 1997 acquisition transactions.
ITEM 6 - SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data, which should
be read in conjunction with the Company's Consolidated Financial Statements and
related Notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
23
24
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in thousands, except per share data)
For the years ended and at December 31,
1997 1996 1995 1994 1993
------------- ------------- ------------ ------------ ------------
INCOME STATEMENT DATA: (a)
Sales $ 895,702 $ 536,604 $ 399,636 $ 307,655 $ 223,129
============= ============= ============ ============ ============
Income from continuing
operations $ 55,705 (b)(c) $ 43,450 (d) $ 24,760 (e) $ 13,531 (f) $ 10,970 (g)
Cumulative effect of
accounting change - - - - 280 (h)
============= ============= ============ ============ ============
Net income $ 55,705 (b)(c) $ 43,450 (d) $ 24,760 (e) $ 13,531 (f) $ 11,250 (g)
============= ============= ============ ============ ============
Earnings per share data: (m)
Basic:
Income from continuing
operations $.70 (b)(c) $.67 (d) $ 0.47 (e) $.30 (f) $.26 (g)
Cumulative effect of
accounting change - - - - -
============= ============= ============ ============ ============
Net income $.70 (b)(c) $.67 (d) $ .47 (e) $.30 (f) $.26 (g)
============= ============= ============ ============ ============
Diluted:
Income from continuing
operations $.69 (b)(c) $.61 (d) $.43 (e) $.29 (f) $.26 (g)
Cumulative effect of
accounting change - - - - -
============= ============= ============ ============ ============
Net income $.69 (b)(c) $.61 (d) $.43 (e) $.29 (f) $.26 (g)
============= ============= ============ ============ ============
Dividends per share $.07 $.06 $.05 $.045 $.04
============= ============= ============ ============ ============
BALANCE SHEET DATA:
Working capital $ 343,854 $ 329,002 $ 106,384 $ 125,550 $ 80,570
Total assets 1,289,629 721,697 360,836 317,205 241,318
Long-term debt (i)(j) 352,579 1,992 82,692 85,323 86,477
Stockholders' equity (k)(l) 774,196 634,378 214,761 180,104 102,750
24
25
(a) The Company has had an active acquisition program in effect since 1989.
See Note 2 of the Notes to Consolidated Financial Statements for
information concerning these acquisitions.
(b) Includes acquisition expenses related to 1997 pooling-of-interests
transactions of $3,456. Such expenses, on an aftertax basis, were $3,070,
or $.04 per basic and diluted share. Net income, excluding these expenses
as well as the nonrecurring charge of $5,958 disclosed in (c) below, was
$64,733, or $.81 per basic and diluted share.
(c) A nonrecurring charge of $6,313 before taxes and $5,958 after taxes ($.07
per basic and diluted share) was recorded in the third quarter of 1997 for
the estimated costs and legal and other expenses associated with the
tentative settlement of the government investigation of Home Pharmacy
Services, Inc., a wholly-owned subsidiary of Omnicare. For the year ended
December 31, 1997, net income, excluding this charge as well as the
pooling-of-interests expenses of $3,070 disclosed in (b) above, was
$64,733 ($.81 per basic and diluted share).
(d) Includes acquisition expenses related to the 1996 pooling-of-interests
transaction of $690. Such expenses, on an aftertax basis, were $534, or
$.01 per basic and diluted share. Net income, excluding these expenses,
was $43,984, or $.67 per basic share ($.61 diluted).
(e) Includes acquisition expenses related to the 1995 Specialized
pooling-of-interests transaction of $1,292. Such expenses, on an aftertax
basis, were $989, or $.02 per basic and diluted share. Net income,
excluding these expenses, was $25,749, or $.49 per basic share
($.44 diluted).
(f) Includes acquisition expenses related to the 1994 Evergreen
pooling-of-interests transaction of $2,380. Such expenses, on an aftertax
basis, were $1,860, or $.04 per basic share ($.03 diluted). Net income,
excluding these expenses, was $15,391, or $.34 per basic share
($.33 diluted).
(g) Includes a one-time cumulative tax benefit of $450, or $.01 per share
(basic and diluted), arising from a change in tax laws enacted in August
1993 relating to the amortization of intangibles.
(h) Aftertax gain representing the cumulative effect of a change in accounting
for income taxes.
(i) In 1997, the Company issued $345 million of Convertible Subordinated Notes
due 2007 (See Note 6 of the Notes to Consolidated Financial Statements).
(j) In 1993, the Company issued $80.5 million of Convertible Subordinated
Notes due 2003 (See Note 6 of the Notes to Consolidated Financial
Statements).
(k) In 1996, the Company sold 5,750 (pre-1996 stock split) shares of its
Common Stock in a public offering, resulting in net proceeds of $279,159
(See Note 7 of the Notes to Consolidated Financial Statements).
(l) In 1994, the Company sold approximately 6,495 shares of Common Stock, in
a public offering, resulting in net proceeds of $59,211.
(m) The earnings per share data have been restated with the Company's
required adoption of Statement of Financial Accounting Standard No. 128,
"Earnings per Share."
25
26
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table presents sales and results of operations for Omnicare, Inc.
(the Company), excluding pooling-of-interests expenses for all periods presented
and a nonrecurring charge incurred in 1997 (in thousands, except per share
amounts):
For the years ended December 31,
1997 1996 1995
--------------------------------------------
Sales $895,702 $536,604 $399,636
======== ======== ========
Net income, as reported $ 55,705 $ 43,450 $ 24,760
Acquisition expenses, pooling-
of-interests (net of taxes) 3,070 534 989
Nonrecurring charge (net of taxes) 5,958 - -
-------- -------- -------
Pro forma net income $ 64,733 $ 43,984 $ 25,749
======== ======== ========
Earnings per share:
Net income, as reported $ .70 $ .67 $ .47
Acquisition expenses, pooling-
of-interests (net of taxes) .04 .01 .02
Nonrecurring charge (net of taxes) .07 - -
-------- -------- --------
Basic (pro forma) $ .81 $ .67 $ .49
======== ======== ========
Diluted (pro forma) $ .81 $ .61 $ .44
======== ======== ========
1997 vs. 1996
- -------------
Excluding the impact of acquisition-related expenses for pooling-of-interests
transactions for both periods and the 1997 nonrecurring charge, net income for
the year ended December 31, 1997 increased 47% over net income earned in 1996.
Basic earnings per share, on this basis, for 1997 increased 21% over 1996, and
diluted earnings per share increased 33%.
Sales increased 67% in 1997 versus 1996. The sales increase was the result of
the completion of 20 acquisitions in 1997 (excluding insignificant
acquisitions), including 18 institutional pharmacy businesses, a long-term care
software company and a contract research organization, and internal growth. As
described in Note 2 to the Consolidated Financial Statements, 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. This 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.
On September 16, 1997, Omnicare completed the acquisition of all outstanding
shares of American Medserve Corporation (AMC). AMC provided comprehensive
pharmacy and related services to approximately 51,400 residents in 720 long-term
care facilities in 11 states. The cash purchase price of AMC was approximately
$239.7 million, including bank
26
27
debt totaling $16.7 million, which was retired immediately following the
acquisition.
The Company also increases its revenues internally through the efforts of its
National Sales and Marketing Group and pharmacy staff in developing new pharmacy
contracts with long-term care facilities. Expansion of services such as infusion
therapy and the increasing acuity levels of residents in long-term care
facilities which results from efforts made to avoid or reduce hospitalization,
together with drug price inflation and other changes in sales mix also
contribute to the Company's revenue growth.
The Company's total sales increased by $359 million in 1997 versus 1996. The
Company estimates that approximately $257 million of its consolidated revenue
growth in 1997 was attributable to acquisitions. The Company believes that
additional revenue growth opportunities through acquisitions exist in the
institutional pharmacy industry and other related sectors. In addition, as
disclosed in the OUTLOOK section of Management's Discussion and Analysis of
Financial Condition and Results of Operations, the health care industry's need
to lower health care costs is driving ongoing industry consolidation which
should continue to provide momentum for the Company's acquisition program.
The Company estimates that internal growth contributed approximately $102
million of Omnicare's increased revenue in 1997 compared to 1996. The Company's
revenues attributable to infusion therapy grew by approximately $38 million in
1997 compared to 1996. The Company expects the trend of increasing infusion
therapy revenues to continue as nursing facilities treat elderly residents with
more acute health problems. When pharmaceutical prices are increased, the
Company generally is able to obtain price increases to cover such drug price
inflation; therefore, such inflation increases revenues. The Company estimates
that drug price inflation for its highest dollar volume products in 1997 was
approximately 4%-5% and this trend is continuing in 1998. The remainder of
Omnicare's increased revenues in 1997 compared to 1996 attributable to internal
growth reflects interrelated factors associated with sales mix, pricing and
volume, acuity levels of residents and efforts of the Company's National Sales
and Marketing Group and pharmacy staff in developing new pharmacy contracts. The
Company is not able to isolate and separately quantify accurately the increased
volumes associated with each of these individual factors.
Acquisitions and internal growth brought the total number of nursing facility
residents served at December 31, 1997 to 443,100, up 48% from the prior year
end.
Gross margin remained constant at 28.9% from 1996 to 1997. Changes in sales mix
including increased infusion therapy sales, the Company's purchasing leverage
associated with purchases of pharmaceuticals and leveraging fixed and variable
overhead costs at the Company's pharmacies positively impacted gross margins.
However, this was offset by the lower margins of the significant number of
companies acquired by the Company in 1997. Acquired companies generally have
lower margins because of lesser purchasing leverage prior to their acquisition
by Omnicare. These margins are increased after acquisition by Omnicare as the
Company's purchasing programs are implemented.
Sales mix for the Company includes primarily sales of pharmaceuticals and
infusion therapy products and services, and, to a lesser extent, medical
supplies and other. Sales of pharmaceuticals account for the majority of the
Company's sales and gross profit. Infusion therapy and medical supplies gross
margins are typically higher than gross margins associated with sales of
pharmaceuticals. That portion of the Company's sales mix
27
28
represented by infusion therapy has generally been increasing in recent years
and, as noted earlier herein, this trend is expected to continue.
Increased leverage in purchasing favorably impacts gross margins and is
primarily derived from discounts from suppliers. Leveraging of fixed and
variable overhead costs primarily relates to generating higher sales volumes
from pharmacy facilities with no increase in fixed costs (e.g. rent) and minimal
increases in variable costs (e.g. utilities). The Company believes it will be
able to continue to leverage fixed and variable overhead costs through internal
growth.
As noted earlier herein, the Company is generally able to obtain price increases
to cover drug price inflation. In order to maximize its gross margins, the
Company strategically allocates its resources to those activities which will
increase internal sales growth and favorably impact sales mix or will lower
costs. In addition, through the ongoing development of its pharmaceutical
purchasing programs, the Company is able to obtain discounts and thereby manage
its pharmaceutical costs.
Investment income decreased by 55% to $5,059,000 in 1997 as the Company utilized
the excess net proceeds from the March 1996 stock offering to finance current
year acquisitions. Interest expense increased 52% from $3,652,000 in 1996 to
$5,564,000 in 1997 as a result of the Company borrowing on its available line of
credit and issuing $345 million of convertible subordinated debentures during
1997 in order to finance acquisitions.
The effective tax rate of 42.4% in 1997 is higher than the statutory rate due to
the nondeductibility of certain acquisition costs and the nonrecurring charge
discussed in Note 13 to the Consolidated Financial Statements.
1996 vs. 1995
- -------------
Excluding the impact of charges taken for acquisitions accounted for as
pooling-of-interests transactions, net income for the year ended December 31,
1996 increased 71% over net income earned in 1995. Basic earnings per share, on
this basis, for 1996 increased 37% over 1995, and diluted earnings per share
increased 39%.
Sales increased 34%, or $137 million, in 1996 versus 1995. The sales increase
was the result of the completion of 18 acquisitions in 1996 (excluding
insignificant acquisitions), including 17 institutional pharmacy businesses and
a long-term care software company, and internal growth. The Company estimates
that approximately $60 million of its consolidated revenue growth in 1996 was
attributable to acquisitions and $77 million was attributable to internal
growth. Internal growth resulted from the higher acuity levels of residents in
client facilities, expansion of services such as infusion therapy (which grew
by approximately $16 million in 1996), drug price inflation (which the Company
estimates approximated 4%-5% for its higher dollar volume products) and the
addition of new clients owing to the efforts of the Company's National Sales
and Marketing Group and pharmacy staff.
Acquisitions and internal growth brought the total number of nursing facility
residents served at December 31, 1996 to 300,000, up 39% from the prior year
end.
Gross margin improvements from 28.0% in 1995 to 28.9% in 1996 resulted from
changes in sales mix, including increased infusion therapy revenue, and the
Company's purchasing leverage associated with purchases of pharmaceuticals and
leveraging fixed and variable overhead costs at the Company's pharmacies.
28
29
Investment income increased by 225% to $11,285,000 in 1996 as the Company
realized the benefit of investing the net proceeds of $279.2 million from the
March 1996 stock offering for the majority of the year. Interest expense
decreased 39% from $5,954,000 in 1995 to $3,652,000 in 1996, primarily due to
the conversion of the Convertible Subordinated Notes during 1996.
The effective tax rates of 39.9% in 1995 and 39.8% in 1996 are marginally higher
than statutory rates due primarily to the nondeductibility of certain
acquisition costs.
Impact of Year 2000
- -------------------
The Company utilizes information systems throughout its business to effectively
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. The Company is in the process of assuring that its systems are capable
of recognizing and processing information properly as the year 2000 approaches.
The Company has completed a preliminary assessment of its Year 2000 compliance
and is currently correcting, upgrading or replacing those systems that are not
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. The
Company does not anticipate that costs associated with this project will have a
material impact on the Company's financial position or results of operations in
future periods.
The Company is currently determining the extent to which it may be impacted by
any third parties' failure to remediate their own Year 2000 issues. The Company
is having, and will continue to have, formal communications with all of the
Company's significant customers, payors, suppliers, and other third parties to
determine the extent, if any, to which the Company's interface systems could be
impacted by any third-party Year 2000 issues and related remedies. There can be
no guarantee that the systems of other companies with which the Company's
systems interact will be timely converted and would not have an adverse effect
on the Company's business.
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
- -------------------------------
Acquisitions completed during 1997 utilized cash of $392.8 million and deferred
cash payments of $16.4 million were made relating to pre-1997 acquisitions.
Acquisitions were also financed, in part, with common stock of the Company.
Shares of common stock with a market value of approximately $109 million (3.9
million shares) were issued in connection with 1997 acquisitions and
approximately 36,000 shares with a market value of approximately $1.0 million
were issued during 1997 in connection with pre-1997 acquisitions. Additional
amounts totaling $36 million may become payable through the year 2002 pursuant
to the terms of various acquisition agreements.
In December 1997, the Company issued $345,000,000 principal amount of 5.0%
Convertible Subordinated Notes ("Notes") due 2007. The Notes are convertible
into common stock at any time after March 4, 1998, through maturity, unless
previously redeemed, at the option of the holder at a price of $39.60 per share.
In October 1996, the Company entered into an agreement with a consortium
29
30
of sixteen banks for a $400 million revolving credit facility, replacing the
prior $135 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, 1997 under the credit
facility.
Omnicare's current ratio decreased to 3.7 to 1.0 at December 31, 1997 from 6.3
to 1.0 at December 31, 1996, the decline being primarily attributable to the
Company's utilization of cash to fund its acquisition program. Working capital
at December 31, 1997 increased to $343,854,000 from year end 1996 working
capital of $329,002,000. Book value per common share increased to $9.42 per
share as of December 31, 1997 from $8.24 per share at the prior year end,
primarily attributable to net income and stock issued in connection with
acquisitions, partially offset by dividends paid. Operating cash flow for 1997
totaled $21,873,000 compared to $22,683,000 for 1996. During 1997, the Company
made significant purchases of inventory in advance of pharmaceutical price
increases from manufacturers and also funded certain benefit plan obligations
pertaining to both current and prior years. Had these unusual cash disbursements
not occurred, operating cash flow for 1997 would have been $34,258,000.
On February 4, 1998, Omnicare's Board of Directors increased the quarterly cash
dividend by 14% to 2 cents per share for an indicated annual rate of 8 cents per
share for 1998.
The Company believes that its sources of liquidity and capital are adequate for
its operating needs. There are no material commitments and contingencies
outstanding, other than additional acquisition-related payments to be made (see
Note 2 of the Notes to Consolidated Financial Statements) and the Home Pharmacy
estimated settlement described below. If needed, other external sources of
financing are readily available to the Company.
Contingency
- -----------
On August 6, 1997, Omnicare announced that it had reached a tentative
settlement, subject to final federal and state governmental approvals, with the
U.S. Attorney's office in the Southern District of Illinois regarding the
previously announced federal investigation of Home Pharmacy Services, Inc., the
Company's wholly-owned institutional pharmacy subsidiary in Belleville,
Illinois.
Accordingly, in the third quarter of 1997, Omnicare recorded a nonrecurring
charge of $6,313,000 ($5,958,000 after-tax) for the estimated costs and legal
and other expenses associated with resolving the investigation. The $6,313,000
consists of anticipated payments to the government agencies of $5,300,000 and
estimated legal and other professional fees directly attributable to the
investigation of $1,013,000. The settlement, when finalized, is not expected to
result in any criminal charges against Home Pharmacy Services. Additionally,
Home Pharmacy Services is expected to continue to participate in government
reimbursement programs under the terms of the tentative settlement.
Home Pharmacy Services, which was acquired by Omnicare in 1992, has continued to
provide complete pharmacy services to nursing facility residents in its market
area without interruption. The pharmacy operation accounted for less than 3% of
Omnicare's total sales and earnings during 1997.
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Outlook
- -------
In recent years, a number of legislative proposals have been introduced in
Congress that would effect major changes in the health care system, either
nationally or at the state level, including the Balanced Budget Act of 1997
("Balanced Budget Act") signed into law on August 5, 1997, which seeks to
achieve a balanced federal budget by, among other things, reducing federal
spending on the Medicare and Medicaid programs. Additionally, the private sector
continues its efforts to contain or reduce health care costs. The Company
anticipates that the government and the private sector will continue to review
and assess alternative health care delivery systems and payment methodologies.
While it is not possible to predict the effect of the 1997 budget legislation or
any future initiatives on Omnicare's business, market forces nevertheless
continue to challenge health care providers to lower costs while maintaining or
improving quality. In this environment, the need to lower health care costs will
drive ongoing industry consolidation, which should continue to provide momentum
for the Company's acquisition program. Moreover, the development of the
Company's institutional pharmacy network in key geographic regions 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.
Demographic trends also indicate that demand for long-term care will increase
well into the middle of the next century as the elderly population grows
significantly. Pharmaceutical therapy is generally considered 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 it is
well positioned to meet the challenges of today's health environment through a
number of initiatives, including drug formulary management, cost-effective drug
purchasing and efficient delivery systems. Additionally, Omnicare's pharmacy
consulting services for nursing facilities identify, resolve and prevent drug
therapy-related problems, reducing costs to the health care system while also
promoting optimal patient outcomes. Management believes Omnicare is
strategically positioned for continued sales and earnings growth in 1998.
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 which are subject to certain risks and
uncertainties that could cause actual results to differ materially from these
statements and trends. Such factors include, but are not limited to: the
continued availability of suitable acquisition candidates; changing economic
and market conditions that could impact the suitability of such candidates;
Omnicare's ability to integrate acquisitions; the effect of changes in
government regulation and reimbursement policies and in the interpretation and
application of such policies; and the failure of the Company to obtain or
maintain required regulatory approvals or licenses. See the "Competition,"
"Government Regulation" and "Legal Proceedings" sections at Item 1 and Item 3 of
this Report.
ITEM 7.A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to Omnicare since the Company's market capitalization at January
28, 1997 was less than $2.5 billion.
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32
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Page
----
Financial Statements:
Report of Independent Accountants 33
Consolidated Statement of Income 34
Consolidated Balance Sheet 35
Consolidated Statement of Cash Flows 36
Consolidated Statement of Stockholders'
Equity 37
Notes to Consolidated Financial
Statements 38
Financial Statement Schedule:
II - Valuation and Qualifying Accounts S-1
All other financial statement schedules are omitted because they are not
applicable or because the required information is shown in the Consolidated
Financial Statements or notes thereto.
32
33
Report of Independent Accountants
---------------------------------
To the Stockholders and
Board of Directors of Omnicare, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, cash flows and stockholders' equity present
fairly, in all material respects, the financial position of Omnicare, Inc. and
its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We 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 provide a reasonable basis for the opinion expressed
above.
/s/Price Waterhouse LLP
- -----------------------
Price Waterhouse LLP
Cincinnati, Ohio
January 30, 1998
33
34
CONSOLIDATED STATEMENT OF INCOME
Omnicare, Inc. and Subsidiary Companies
(In thousands, except per share data)
For the years ended December 31,
----------------------------------------
1997 1996 1995
------------- ------------ ------------
Sales $ 895,702 $ 536,604 $ 399,636
Cost of sales 636,577 381,768 287,715
------------- ------------ ------------
Gross profit 259,125 154,836 111,921
Selling, general and administrative expenses 152,061 89,636 66,970
Acquisition expenses, pooling-of-interests 3,456 690 1,292
Nonrecurring charge (Note 13) 6,313 - -
------------- ------------ ------------
Operating income 97,295 64,510 43,659
Investment income 5,059 11,285 3,475
Interest expense (5,564) (3,652) (5,954)
------------- ------------ ------------
Income before income taxes 96,790 72,143 41,180
Income taxes 41,085 28,693 16,420
------------- ------------ ------------
Net income $ 55,705 $ 43,450 $ 24,760
Earnings per share:
Basic $ .70 $ .67 $ .47
============= ============ ============
Diluted $ .69 $ .61 $ .43
============= ============ ============
Weighted average number of common shares outstanding:
Basic 80,144 65,298 52,396
============= ============ ============
Diluted 80,303 75,322 65,074
============= ============ ============
The Notes to Consolidated Financial Statements are an integral part of this
statement.
34
35
CONSOLIDATED BALANCE SHEET
Omnicare, Inc. and Subsidiary Companies
(In thousands, except share data)
December 31,
1997 1996
--------------------------
ASSETS
Current assets:
Cash and cash equivalents $131,042 $216,515
Accounts receivable, less allowances
of $15,872 (1996-$5,631) 225,774 118,913
Inventories 87,186 43,585
Deferred income tax benefits 10,205 6,036
Other current assets 17,757 5,686
------------- -----------
Total current assets 471,964 390,735
Properties and equipment, at cost less accumulated
depreciation of $42,204 (1996-$28,415) 84,074 56,055
Goodwill, less accumulated amortization
of $27,763 (1996-$15,550) 693,007 259,507
Other assets 40,584 15,400
------------- -----------
Total assets $1,289,629 $721,697
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $45,669 $21,432
Amounts payable pursuant to acquisition agreements 17,073 11,651
Current portion of long-term debt 2,936 1,199
Accrued employee compensation 29,529 10,645
Other current liabilities 32,903 16,806
------------- -----------
Total current liabilities 128,110 61,733
Long-term debt 352,579 1,992
Deferred income taxes 10,302 4,197
Amounts payable pursuant to acquisition agreements 10,404 9,088
Other noncurrent liabilities 14,038 10,309
------------- -----------
Total liabilities 515,433 87,319
Stockholders' equity:
Preferred stock-authorized 1,000,000 shares without par value; none issued
Common stock-authorized 110,000,000 shares $1 par;
82,254,711 shares issued (1996-77,025,661 shares issued) 82,255 77,026
Paid-in capital 526,727 433,117
Retained earnings 183,887 135,398
------------- -----------
792,869 645,541
Treasury stock, at cost-102,046 shares (1996-0 shares) (2,926) -
Deferred compensation (14,807) (9,503)
Unallocated stock of ESOP (940) (1,660)
------------- -----------
Total stockholders' equity 774,196 634,378
------------- -----------
Contingencies (Note 13)
Total liabilities and stockholders' equity $1,289,629 $721,697
============= ===========
The Notes to Consolidated Financial Statements are an integral part of this
statement.
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36
CONSOLIDATED STATEMENT OF CASH FLOWS
Omnicare, Inc. and Subsidiary Companies
(In thousands)
For the years ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 55,705 $ 43,450 $ 24,760
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 25,704 15,407 11,117
Provision for doubtful accounts 6,942 3,614 3,086
Deferred tax provision 10,350 3,083 1,750
Changes in assets and liabilities, net of effects
from acquisition/disposal of businesses:
Accounts receivable (62,972) (31,555) (19,286)
Inventories (28,537) (8,356) (4,930)
Current and noncurrent assets (6,400) (8,625) (1,402)
Payables and accrued liabilities 13,940 882 4,335
Current and noncurrent liabilities 7,141 4,783 444
------------ ------------ ------------
Net cash flows from operating activities 21,873 22,683 19,874
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of businesses (409,239) (96,895) (35,373)
Capital expenditures (30,477) (26,716) (13,603)
Marketable securities - - 45,245
Other (647) (542) (591)
------------ ------------ ------------
Net cash flows from investing activities (440,363) (124,153) (4,322)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings on line-of-credit 2,300 - (3,670)
Proceeds from long-term borrowings 345,000 - 5,343
Principal payments on long-term obligations (1,128) (470) (9,130)
Fees paid for financing arrangements (7,763) - -
Net proceeds from stock offering - 279,159 -
Proceeds from exercise of stock options and warrants,
net of stock tendered in payment 204 3,059 70
Dividends paid (5,596) (3,900) (2,581)
------------ ------------ ------------
Net cash flows from financing activities 333,017 277,848 (9,968)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (85,473) 176,378 5,584
Cash and cash equivalents at beginning of period 216,515 40,137 34,553
------------ ------------ ------------
Cash and cash equivalents at end of period $ 131,042 $ 216,515 $ 40,137
============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of this
statement.
36
37
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Omnicare, Inc. and Subsidiary Companies
(In thousands, except per share data)
Unallocated Total
Common Paid-in Retained Treasury Deferred Stock of Stockholders'
Stock Capital Earnings Stock Compensation ESOP Equity
----------- ------------ ------------ ----------- ------------ ---------- ------------
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 ($.05 per share) (2,581) (2,581)
Two-for-one stock split 10,429 (45,524) 35,095 0
Conversion of subordinated debt 4 49 53
Stock and warrants issued in
connection with acquisitions 254 10,632 10,886
Exercise of warrants 298 (298) 0
Exercise of stock options 82 1,760 (1,902) (60)
Stock awards, net of amortization 52 2,636 (317) (1,268) 1,103
Decrease in unallocated stock of ESOP 500 500
Other 188 (136) (56) (4)
----------- ------------ ------------ ----------- ------------- ---------- ------------
BALANCE AT DECEMBER 31, 1995 26,345 99,686 93,598 (482) (2,126) (2,260) 214,761
Pooling-of-interests (Note 2) 193 (1,673) 2,250 770
Net income 43,450 43,450
Dividends paid ($.06 per share) (3,900) (3,900)
Stock issued in public offering 5,750 273,409 279,159
Two-for-one stock split 32,689 (33,147) 458 0
Conversion of subordinated debt 10,815 67,423 78,238
Stock and warrants issued in
connection with acquisitions 540 16,156 16,696
Exercise of warrants 405 2,313 44 2,762
Exercise of stock options 97 (290) 562 369
Stock awards, net of amortization 192 9,352 (582) (7,377) 1,585
Decrease in unallocated stock of ESOP 600 600
Other (112) (112)
----------- ------------ ------------ ----------- ------------- ---------- ------------
BALANCE AT DECEMBER 31, 1996 77,026 433,117 135,398 - (9,503) (1,660) 634,378
Pooling-of-interests (Note 2) 1,221 660 (1,620) 261
Net income 55,705 55,705
Dividends paid ($.07 per share) (5,596) (5,596)
Stock and warrants issued in
connection with acquisitions 2,708 74,054 76,762
Exercise of warrants 610 7,135 42 7,787
Exercise of stock options 269 265 (346) 188
Stock awards, net of amortization 421 11,539 (2,379) (5,304) 4,277
Decrease in unallocated stock of ESOP 720 720
Other (43) (243) (286)
----------- ------------ ------------ ----------- ------------- ---------- ------------
BALANCE AT DECEMBER 31, 1997 $ 82,255 $ 526,727 $ 183,887 $ (2,926) $ (14,807) $ (940) $ 774,196
=========== ============ ============ =========== ============= ========== ============
The Notes to Consolidated Financial Statements are an integral part of this
statement.
37
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Omnicare, Inc. ("Omnicare" or the "Company") primarily operates in one business
segment which includes the distribution of pharmaceuticals, related pharmacy
consulting and data management services and medical supplies to long-term care
institutions and their residents in the United States. The consolidated
financial statements include the accounts of the Company and all majority-owned
subsidiaries.
CASH EQUIVALENTS
Cash equivalents include all investments in highly liquid instruments with
original maturities of three months or less.
INVENTORIES
Inventories consist primarily of purchased pharmaceuticals and medical supplies
held for sale to customers and are stated at the lower of cost or market. Cost
is determined using the first-in, first-out ("FIFO") method.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost. Expenditures for maintenance,
repairs, renewals and betterments that do not materially prolong the useful
lives of the assets are charged to expense as incurred. Depreciation of
properties and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the lease terms, including renewal options, or their useful lives.
GOODWILL, INTANGIBLES AND OTHER ASSETS
Intangible assets, comprised primarily of goodwill, arising from business
combinations accounted for as purchase transactions are amortized using the
straight-line method over their estimated useful lives, not in excess of forty
years.
At each balance sheet date, the Company reviews the recoverability of goodwill.
The measurement of possible impairment is based primarily on the ability to
recover the balance of the goodwill from expected future operating cash flows on
an undiscounted basis. In management's opinion, no such impairment exists as of
December 31, 1997 or 1996.
Debt issuance costs as of December 31, 1997 are included in other assets and are
amortized using the effective interest rate method over the life of the related
debt.
38
39
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of all financial instruments of the Company approximates the
amounts presented on the consolidated balance sheet.
REVENUE RECOGNITION
Revenue is recognized when products or services are provided to the customer. A
significant portion of the Company's revenues from sales of pharmaceutical and
medical products are reimbursable from Medicaid and Medicare programs. The
Company monitors its receivables from these reimbursement sources under policies
established by management and reports such revenues at the net realizable amount
expected to be received from these third-party payors.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates to differences between the
tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements.
EARNINGS PER SHARE DATA
The earnings per share data and related average number of shares outstanding
have been restated for all periods presented with the Company's required
adoption of Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings
per Share."
Basic earnings per share are computed based on the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
include the dilutive effect of stock options and warrants, and for the years
ended December 31, 1996 and 1995, assumed the conversion of the 5.75%
Convertible Subordinated Notes due 2003 into common stock. Additionally, for the
years ended December 31, 1996 and 1995, interest expense and amortization of
debt issuance costs arising from these convertible securities were added, net of
related income taxes, to income for the purpose of calculating diluted earnings
per share. The 5.75% Convertible Subordinated Notes were converted on October 3,
1996; accordingly, they had no impact on the diluted earnings per share
calculation subsequent to that date. The 5.0% Convertible Subordinated Notes due
2007 (issued in December 1997) were not included in the 1997 dilutive earnings
per share calculation since the impact was antidilutive.
39
40
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued SFAS Nos. 130 and 131,
"Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information," respectively. Effective January 1, 1998,
the Company will adopt the provisions of these Statements. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses). SFAS No. 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Currently, the Company expects that adoption of SFAS Nos. 130 and 131 will not
have a significant impact on the Company's reporting and disclosures.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.
NOTE 2 - ACQUISITIONS
Since 1989, the Company has been involved in a program to acquire providers of
pharmaceutical and related pharmacy management services and medical supplies to
long-term care facilities and their residents. The Company's strategy includes
acquisitions of freestanding institutional pharmacy businesses as well as other
assets, generally insignificant in size, which are combined with existing
pharmacy operations to augment their internal growth. From time to time, the
Company may acquire other businesses such as long-term care software companies,
contract research organizations, pharmacy consulting companies and medical
supply companies. To date, none of these non-pharmacy acquisitions have been
significant.
During the year ended December 31, 1997, the Company completed 20 acquisitions
(excluding insignificant acquisitions), including 18 institutional pharmacy
businesses, a long-term care software company and a contract research
organization. Seventeen of the acquisitions were accounted for as purchases and
three as poolings-of-interests.
On September 16, 1997, Omnicare completed the acquisition of all outstanding
shares of American Medserve Corporation (AMC). AMC provided comprehensive
pharmacy and related services to approximately 51,400 residents in 720 long-term
care facilities in 11 states. The cash purchase price of AMC was approximately
$239.7 million, including bank debt totaling $16.7 million, which was retired
immediately following the acquisition.
During the year ended December 31, 1996, the Company completed 18 acquisitions
(excluding insignificant acquisitions), including 17 institutional pharmacy
businesses and a long-term care software company. Seventeen of the acquisitions
were accounted for as purchases and one as a pooling-of-interests.
During the year ended December 31, 1995, the Company completed 10
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41
acquisitions (excluding insignificant acquisitions), including nine
institutional pharmacy businesses and a long-term care software company. Nine of
the acquisitions were accounted for as purchases and one as a
pooling-of-interests.
PURCHASES
For all acquisitions accounted for as purchases, including insignificant
acquisitions, the purchase price paid for each has been allocated to the fair
value of the assets acquired and liabilities assumed. Purchase price allocations
are subject to final determination within one year after the acquisition date.
The following table summarizes the aggregate purchase price for all businesses
acquired which have been accounted for as purchases (in thousands):
Businesses acquired in
---------------------------------------------
1997 1996 1995
---- ---- ----
Cash $392,756 $ 72,953 $ 21,309
Amounts payable in the future 14,234 19,026 4,797
Common stock 75,239 13,814 10,856
Warrants 287 696 30
Assumption of indebtedness 2,520 4,831 197
-------- -------- --------
$485,036 $111,320 $ 37,189
======== ======== ========
Cash in the above table represents payments made in the year of acquisition.
This amount differs from cash paid for the acquisition of the businesses in the
Consolidated Statement of Cash Flows due primarily to purchase price payments
made during the year pursuant to acquisition agreements entered into in prior
years.
Warrants outstanding issued in connection with acquisitions as of December 31,
1997 represent the right to purchase 333,460 shares of common stock. These
warrants can be exercised at any time through 2002 at prices ranging from $11.82
to $29.18 per share. Warrants to purchase 611,540 shares of common stock, issued
in prior years, were exercised in 1997.
Further, the purchase agreements for acquisitions generally include provisions
whereby the seller will or may be paid additional consideration at a future date
depending on the passage of time and/or whether certain future events occur. The
agreements also include a number of representations and covenants by the seller
and provide that if those covenants are violated or found not to have been true,
Omnicare may offset any payments required to be made at a future date against
any claims it may have under the agreement caused by the representation and/or
covenant violations. There are no significant anticipated future offsets against
indemnity provisions or related accruals as of December 31, 1997 and 1996.
Amounts contingently payable through 2002 totaled $36,296,000 as of December 31,
1997 and, if paid, will be recorded as additional purchase price, serving to
increase goodwill in the period in which the contingencies are resolved.
The results of operations of the companies acquired in purchase transactions
have been included in the consolidated results of operations of the Company from
the dates of acquisition.
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42
Unaudited pro forma combined results of operations of the Company for the years
ended December 31, 1997 and 1996, are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions had been made as
of January 1, 1996 (in thousands, except per share data).
For the years ended December 31,
1997 1996
--------------------------------
Pro Forma
- ---------
Sales $1,044,231 $851,347
Net income 47,420 32,088
Earnings per share:
Basic $ .58 $ .47
Diluted $ .58 $ .44
The pro forma information does not purport to be indicative of operating results
which would have occurred had the acquisitions been made at the beginning of the
respective periods or of results which may occur in the future. The primary pro
forma adjustments reflect amortization of goodwill acquired on a straight-line
basis over 40 years and interest costs. The pro forma information does not give
effect to any synergies anticipated by the Company's management as a result of
the acquisitions, in particular improvements in gross margin attributable to the
Company's purchasing leverage associated with purchases of pharmaceuticals and
the elimination of duplicate payroll and other operating expenses.
POOLING-OF-INTERESTS
The impact of the 1997 and 1996 pooling-of-interests transactions on the
Company's historical consolidated financial statements were not material;
consequently, prior period and current year financial statements have not been
restated for these transactions.
On June 30, 1995, the Company issued 806,370 shares of its common stock for all
of the outstanding common stock of Specialized Pharmacy Services, Inc.
("Specialized"). This acquisition was accounted for as a pooling-of-interests
and, accordingly, the Company's consolidated financial statements have been
restated for all periods prior to the acquisition to include the results of
operations, financial position and cash flows of Specialized. Net sales and net
income for Omnicare and Specialized prior to the Specialized transaction are as
follows (in thousands):
Omnicare Specialized
-------- -----------
Six months ended June 30, 1995:
Sales $171,211 $ 16,441
Net income 9,861 286
In accordance with accounting rules for pooling-of-interests transactions,
charges to operating income for acquisition-related expenses were recorded upon
completion of the pooling acquisitions. These acquisition-related expenses
totaled $3,456,000 ($3,070,000 aftertax) for the 1997 transactions, $690,000
($534,000 aftertax) for the 1996 transaction and $1,292,000 ($989,000 aftertax)
for the Specialized transaction in 1995.
42
43
NOTE 3 - CASH AND CASH EQUIVALENTS
A summary of cash and cash equivalents follows (in thousands):
December 31,
1997 1996
------------------------
Cash and cash equivalents:
Cash $ 35,844 $ 16,108
Money market funds 203 177
U.S. Treasury bills 94,995 -
U.S. Treasury-backed repurchase
agreements - 200,230
-------- --------
$131,042 $216,515
======== ========
Repurchase agreements represent investments in U.S. Treasury bills under
agreements to resell the securities to the counterparty, usually overnight, but
in no case longer than 30 days. The Company has a collateralized interest in the
underlying securities of repurchase agreements, which are segregated in the
accounts of the bank counterparty.
NOTE 4 - PROPERTIES AND EQUIPMENT
A summary of properties and equipment follows (in thousands):
December 31,
1997 1996
----------------------------
Land $ 1,456 $ 1,355
Buildings 2,855 2,459
Machinery and equipment 83,364 57,802
Furniture, fixtures and leasehold
improvements 38,603 22,854
--------- ---------
126,278 84,470
Accumulated depreciation (42,204) (28,415)
--------- ---------
$ 84,074 $ 56,055
========= =========
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 significant
contingent rentals in the Company's operating leases.
The following is a schedule of future minimum rental payments required under
operating leases that have initial or remaining noncancellable terms in excess
of one year as of December 31, 1997 (in thousands):
1998 $ 8,367
1999 7,555
2000 5,669
2001 4,798
2002 3,369
Later years 16,345
--------
Total minimum payments required $46,103
========
Total rent expense under operating leases for the years ended December 31, 1997,
1996 and 1995 were $9,015,000, $5,889,000 and $4,567,000, respectively.
43
44
NOTE 6 - LONG-TERM DEBT
A summary of long-term debt follows (in thousands):
December 31,
1997 1996
--------- ----------
Convertible Subordinated Notes
due 2007 $ 345,000 $ -
Employee Stock Ownership Plan ("ESOP")
Loan Guarantee 940 1,660
Other bank debt, LIBOR + 2.75%,
due 1998 - 2001 4,820 -
Capitalized lease obligations 4,755 1,531
--------- ---------
355,515 3,191
Less current portion (2,936) (1,199)
--------- ---------
$ 352,579 $ 1,992
========= =========
The following is a schedule by year of required long-term debt payments as of
December 31, 1997 (in thousands):
1998 $ 2,936
1999 937
2000 827
2001 3,770
2002 82
Later years 346,963
--------
$355,515
========
Total interest payments made for the years ended December 31, 1997, 1996 and
1995 were $4,014,000, $4,968,000 and $5,421,000, respectively.
Convertible Subordinated Notes
- ------------------------------
On December 10, 1997, the Company issued $345,000,000 principal amount of 5.0%
Convertible Subordinated Notes ("1997 Notes") due 2007. The 1997 Notes are
convertible into common stock at any time after March 4, 1998 at the option of
the holder at a price of $39.60 per share. In connection with the issuance of
the 1997 Notes, the Company deferred $8.5 million in debt issuance costs. The
Company amortized $51,000 of deferred debt issuance costs relating to the 1997
Notes in 1997.
On October 1, 1993, the Company issued $80,500,000 principal amount of 5.75%
Convertible Subordinated Notes ("1993 Notes") due 2003. The 1993 Notes were
convertible into common stock at any time at the option of the holder at a price
of $7.22 per share. The remaining 1993 Notes were converted in October 1996 into
10,201,700 shares of common stock. Prior to the October conversion, a portion of
the 1993 Notes were converted into 613,444 shares of common stock during 1996.
In connection with the 1993 Notes conversions, the Company recorded the $1.9
million in unamortized deferred debt issuance costs against the paid-in capital
balance for the common stock issued. The Company amortized $220,000 of deferred
debt issuance costs relating to the 1993 Notes in 1996 (prior to the final 1993
Notes conversion) and $310,000 in 1995.
44
45
ESOP Loan Guarantee
- -------------------
In 1988, the Company established an Employee Stock Ownership Plan ("ESOP") which
currently covers certain acquired entities' employees and corporate headquarters
employees. The ESOP used proceeds from a $4 million bank loan to purchase
1,973,748 shares of the Company's common stock on the open market at prices
ranging from $1.94 to $2.13 per share. Inasmuch as the Company has guaranteed
the repayment of this obligation, it has recorded the ESOP's bank debt as
long-term debt and also as a reduction of stockholders' equity in the
accompanying consolidated balance sheet.
The ESOP services its debt with Company contributions which were previously made
to the Company's Employee Savings and Investment Plan, and dividends received on
shares held by the ESOP. Principal and interest payments on the bank debt are
made in increasing quarterly installments over a ten-year period, the final
payment being due on December 31,1998. The loan bears interest at the per annum
rate of 7% and is secured by the unallocated shares of common stock held by the
ESOP trust. These unallocated shares had a fair market value equal to $9,738,000
and $18,515,000 as of December 31, 1997 and 1996, respectively.
The Company funds ESOP expense as accrued. The components of total ESOP expense
are as follows (in thousands):
For the years ended December 31,
1997 1996 1995
----------------------------------
Interest expense $ 90 $ 145 $ 182
Principal payments 720 600 500
Dividends on ESOP stock (100) (90) (76)
----- ----- -----
$ 710 $ 655 $ 606
===== ===== =====
Revolving Credit Facility
- -------------------------
In October 1996, the Company negotiated a five-year, $400 million line of credit
agreement with a consortium of sixteen banks, which replaced the existing $135
million revolving credit facility. Borrowings under this agreement bear interest
based upon LIBOR plus a spread of 25 to 60 basis points, dependent upon the
Company's Fixed Charge Coverage Ratio, or other rates negotiated with the banks.
Additionally, a commitment fee on the unused portion of the facility ranges from
9 to 20 basis points, and is also based on the Company's Fixed Charge Coverage
Ratio. The agreement also contains debt covenants which include the Fixed Charge
Coverage Ratio and minimum consolidated net worth. The Company is in compliance
with these covenants. No amounts were outstanding under this agreement as of
December 31, 1997 or 1996.
NOTE 7 - PUBLIC OFFERING OF COMMON STOCK
In March 1996, the Company completed a public offering of 5,750,000 shares
(pre-1996 stock split) of common stock resulting in gross proceeds of
$298,281,000 (before underwriting discounts and expenses).
45
46
NOTE 8 - STOCK INCENTIVE PLANS
The Company has stock incentive plans under which it may grant stock options
or stock awards to key employees at a price equal to the fair market value at
the date of grant. Under these plans, stock options become exercisable
beginning one year following the date of grant in four equal annual
installments. As of December 31, 1997, 957,581 shares were available for
grant.
Summary information for stock options relating to these plans is presented
below (in thousands, except per share data):
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 2,474 $11.76 2,242 $ 7.89 1,526 $ 4.04
Options granted 769 28.53 508 26.36 1,058 12.19
Options exercised (942) 15.98 (273) 7.03 (326) 3.65
Options forfeited (19) 27.22 (3) 26.22 (16) 12.13
- -----------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 2,282 $15.54 2,474 $11.76 2,242 $ 7.89
- -----------------------------------------------------------------------------------------------------------------
Options exercisable, end of year 1,057 1,083 748
- -----------------------------------------------------------------------------------------------------------------
The following summarizes information about stock options outstanding as of
December 31, 1997 (in thousands, except per share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Life (in years) Price at 12/31/97 Price
- --------------------------------------------------------------------- ------------------------------
$ 2.78 - $ 4.64 656 4.34 $ 4.08 656 $4.08
11.39 - 12.13 787 7.17 12.10 274 12.11
18.41 - 25.75 30 8.29 22.80 8 22.24
26.22 - 30.22 809 8.88 27.89 119 26.36
- ----------------------------------------------------------------------------------------------------
$ 2.78 - $30.22 2,282 6.98 $15.54 1,057 $8.81
- ----------------------------------------------------------------------------------------------------
46
47
During 1995, the Company's Board of Directors and stockholders approved the 1995
Premium-Priced Stock Option Plan, providing options to purchase 2,520,000 shares
of Company common stock available for grant at an exercise price of 125% of the
stock's fair market value at the date of grant. No options have been granted
under this plan.
Nonvested stock awards that are granted to key employees at the discretion of
the Incentive Committee are restricted as to the transfer of ownership and vest
over 2 to 7 years. Unrestricted stock awards are granted annually to members of
the Board of Directors. The fair value of a stock award is equal to the fair
market value of a share of Company stock at the grant date.
Summary information relating to stock award grants is presented below:
For the years ended December 31,
1997 1996 1995
-----------------------------------
Nonvested shares 421,464 378,092 198,944
Unrestricted shares 6,000 6,400 6,400
Weighted-average grant date
fair value $ 27.36 $ 23.99 $ 11.68
When granted, the cost of nonvested stock awards is deferred and amortized over
the vesting period. Unrestricted stock awards are expensed during the year
granted. During 1997, 1996 and 1995, the amount of compensation expense related
to stock awards charged against income was $1,312,000, $937,000 and $506,000,
respectively.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for stock options and stock awards granted under these plans
according to APB Opinion 25, "Accounting for Stock Issued to Employees." As a
result, no compensation cost has been recognized for the stock options granted
under the incentive plans. The fair value of each option at grant date is
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995: risk-free
interest rate of 6%, volatility of 35% (32% in 1996 and 1995), dividend yield of
0.2% and expected life of 4.2 years. The weighted average fair value at grant
date during 1997, 1996 and 1995 was $10.97, $9.13 and $4.22, respectively.
Unaudited pro forma data as though the Company had accounted for stock-based
compensation cost in accordance with SFAS No. 123 are as follows (in thousands,
except per share data):
For the years ended December 31,
1997 1996 1995
----------------------------------
Pro Forma
Net income $54,258 $42,269 $24,225
Earnings per share:
Basic $ .68 $ .66 $ .47
Diluted $ .68 $ .60 $ .43
The above pro forma information includes only stock options granted in 1995 and
thereafter. Because it does not include stock options granted prior to 1995, the
pro forma effects are not representative of effects on net income or earnings
per share for future years.
47
48
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company contracted with a division of Chemed Corporation ("Chemed"), a 1%
stockholder, to assist in the development of a new information system to
integrate and standardize all operational functions. The Company also subleases
offices from Chemed and is charged for the occasional use of Chemed's corporate
aviation department and other incidental expenses based on Chemed's cost. The
Company believes that the method by which such charges are determined is
reasonable and that the charges are essentially equal to that which would have
been incurred if the Company had operated as an unaffiliated entity. Charges to
the Company for these services for the years ended December 31, 1997, 1996 and
1995 were $4,039,000, $7,139,000 and $4,535,000, respectively. Net amounts owed
by the Company to Chemed as of December 31, 1997 and 1996 were $556,000 and
$946,000, respectively.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has a non-contributory, defined benefit pension plan covering
certain corporate headquarters employees and the employees of several companies
sold by the Company in 1992, for which benefits ceased accruing upon the sale
(the "Qualified Plan"). Benefits accruing under this plan to corporate
headquarters employees were fully vested and frozen as of January 1, 1994. The
Company also has an excess benefits plan which provides retirement payments to
participants in amounts consistent with what they would have received under the
Qualified Plan if payments to them under the Qualified Plan were not limited by
the Internal Revenue Code and other restrictions.
Retirement benefits are based primarily on an employee's years of service and
compensation near retirement. Plan assets are invested primarily in U.S.
Treasury obligations. The Company's policy is to fund pension costs in
accordance with the funding provisions of the Employee Retirement Income
Security Act.
Actuarial assumptions used to calculate the Accumulated Benefit Obligation and
net expenses include a 7% interest rate as of December 31, 1997, (7.25% at
December 31, 1996 and 1995), an expected long-term rate of return on assets of
8% and a 6% rate of increase in compensation levels.
The Accumulated Benefit Obligation in excess of plan assets as of December 31,
1997 and 1996 was $5,008,000 and $7,422,000, respectively. In 1997, the Company
changed the actuarial assumptions used to determine the Accumulated Benefit
Obligation by using the actual compensation history of participants rather than
an estimated compensation history based on current compensation projected
backward at the assumed rate of increase in compensation levels (6%). The net
expenses relating to the Company's defined contribution and defined benefit
plans (including the ESOP described in Note 6) for the years ended December 31,
1997, 1996 and 1995 were $3,293,000, $1,907,000 and $1,663,000, respectively.
48
49
NOTE 11 - INCOME TAXES
The provision for income taxes is comprised of the following (in thousands):
For the years ended December 31,
1997 1996 1995
---------------------------------------
Current:
Federal $27,395 $21,917 $13,197
State and local 3,590 3,693 1,473
------- ------- -------
30,985 25,610 14,670
------- ------- -------
Deferred:
Federal 8,734 2,993 1,272
State 1,366 90 478
------- ------- -------
10,100 3,083 1,750
------- ------- -------
Income taxes $41,085 $28,693 $16,420
======= ======= =======
Tax benefits related to the exercise of stock options, stock awards and stock
warrants have been credited to paid-in-capital in amounts of $7,827,000,
$2,243,000 and $1,357,000 for 1997, 1996 and 1995, respectively.
The difference between the Company's reported income tax expense and the federal
income tax expense computed at the statutory rate of 35% is explained in the
following table (in thousands):
For the years ended December 31,
1997 1996 1995
---------------- ---------------- ----------------
Federal income tax at
the statutory rate $33,877 35.0% $25,250 35.0% $14,413 35.0%
State and local income
taxes, net of federal
tax benefit 3,221 3.3 2,459 3.4 1,268 3.1
Amortization of nondeduct-
ible intangible assets 948 1.0 448 0.6 408 1.0
Nondeductible pooling-of-
interests expenses 824 0.9 55 0.1 149 0.4
Nondeductible nonrecurring
charge (Note 13) 1,855 1.9 - - - -
Other 360 0.3 481 0.7 182 0.4
------- ------ ------- ------ ------- ------
Income taxes $41,085 42.4% $28,693 39.8% $16,420 39.9%
======= ====== ======= ====== ======= ======
Income tax payments made in 1997, 1996 and 1995 amounted to $22,824,000,
$19,749,000 and $14,014,000, respectively.
49
50
A summary of deferred tax assets and liabilities follows (in thousands):
December 31,
1997 1996
--------- ---------
Accounts receivable reserves $ 5,035 $ 3,912
Accrued liabilities 11,646 3,841
Other 1,092 106
------- -------
Gross deferred tax assets $17,773 $ 7,859
======= =======
Fixed assets and depreciation methods $ 3,120 $ 945
Amortization of intangibles 12,129 4,046
Other current and noncurrent assets 2,553 807
Other 68 222
------- -------
Gross deferred tax liabilities $17,870 $ 6,020
======= =======
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.
50
51
NOTE 12 - EARNINGS PER SHARE DATA
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations (in thousands, except
per share data):
For the year ended December 31, 1997
-------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ---------------- --------------
Net income $ 55,705
Other 5
--------------
BASIC EPS
Income available to common stockholders 55,710 80,144 $ .70
================
EFFECT OF DILUTIVE SECURITIES
Stock options and stock warrants - 159
-------------- ----------------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $ 55,710 80,303 $ .69
============== ================ ================
For the year ended December 31, 1996
-------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ---------------- --------------
Net income $ 43,450
Other (23)
--------------
BASIC EPS
Income available to common stockholders 43,427 65,298 $ .67
===============
EFFECT OF DILUTIVE SECURITIES
Stock options and stock warrants - 2,075
1993 Convertible Subordinated Notes 2,266 7,949
-------------- ----------------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $ 45,693 75,322 $ .61
============== ================ ================
For the year ended December 31, 1995
-------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ---------------- --------------
Net income $ 24,760
Other (28)
--------------
BASIC EPS
Income available to common stockholders 24,732 52,396 $ .47
==============
EFFECT OF DILUTIVE SECURITIES
Stock options and stock warrants - 1,530
1993 Convertible Subordinated Notes 3,209 11,148
-------------- ----------------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $ 27,941 65,074 $ .43
============== ================ ==============
The $345,000,000 of 5.0% Convertible Subordinated Notes due 2007 that are
convertible into 8,712,121 shares at $39.60 per share were outstanding during
December 1997, but were not included in the computation of diluted EPS because
the impact in 1997 was anti-dilutive.
51
52
NOTE 13 - CONTINGENCIES
On August 6, 1997, Omnicare announced that it had reached a tentative
settlement, subject to final federal and state governmental approvals, with the
U.S. Attorney's office in the Southern District of Illinois regarding the
previously announced federal investigation of Home Pharmacy Services, Inc., the
Company's wholly-owned institutional pharmacy subsidiary in Belleville,
Illinois.
Accordingly, in the third quarter of 1997, Omnicare recorded a nonrecurring
charge of $6,313,000 ($5,958,000 aftertax) for the estimated costs and legal and
other expenses associated with resolving the investigation. The $6,313,000
consists of anticipated payments to the government agencies of $5,300,000 and
estimated legal and other professional fees directly attributable to the
investigation of $1,013,000. The settlement, when finalized, is not expected to
result in any criminal charges against Home Pharmacy Services. Additionally,
Home Pharmacy Services is expected to continue participating in government
reimbursement programs under the terms of the tentative settlement.
Home Pharmacy Services, which was acquired by Omnicare in 1992, has continued to
provide complete pharmacy services to nursing facility residents in its market
area without interruption. The pharmacy operation accounted for less than 3% of
Omnicare's total sales and earnings for the year ended December 31, 1997.
52
53
NOTE 14 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following table presents the Company's quarterly financial information for
1997 and 1996 (in thousands, except per share data):
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------------ ------------ ----------- ----------- -----------
1997 (h)
Sales $ 181,608 $ 203,060 $ 228,050 $ 282,984 $ 895,702
Cost of sales 128,903 144,134 162,224 201,316 636,577
------------ ------------ ----------- ----------- -----------
Gross profit 52,705 58,926 65,826 81,668 259,125
Selling, general and
administrative expenses 30,570 34,194 38,314 48,983 152,061
Acquisition expenses, pooling-
of-interests 978 (d) 693 (e) - 1,785 (f) 3,456 (b)
Nonrecurring charge (c) - - 6,313 (c) - 6,313 (c)
------------ ------------ ----------- ----------- -----------
Operating income 21,157 (d) 24,039 (e) 21,199 (c) 30,900 (f) 97,295 (b)(c)
Interest (expense), net of
investment income 1,512 1,060 (19) (3,058) (505)
------------ ------------ ----------- ----------- -----------
Income before income taxes 22,669 (d) 25,099 (e) 21,180 (c) 27,842 (f) 96,790 (b)(c)
Income taxes 9,226 9,961 10,343 11,555 41,085
------------ ------------ ----------- ----------- -----------
Net income $ 13,443 (d) $ 15,138 (e) $ 10,837 (c) $ 16,287 (f) $ 55,705 (b)(c)
============ ============ =========== =========== ===========
Earnings per share: (a)
Basic $ .17 (d) $ .19 (e) $ .13 (c) $ .20 (f) $ .70 (b)(c)
============ ============ =========== =========== ===========
Diluted $ .17 (d) $ .19 (e) $ .13 (c) $ .20 (f) $ .69 (b)(c)
============ ============ =========== =========== ===========
1996 (h)
Sales $ 117,185 $ 121,833 $ 140,733 $ 156,853 $ 536,604
Cost of sales 83,553 86,738 100,111 111,366 381,768
------------ ------------ ----------- ----------- -----------
Gross profit 33,632 35,095 40,622 45,487 154,836
Selling, general and
administrative expenses 19,433 20,639 23,213 26,351 89,636
Acquisition expenses, pooling-
of-interests - - - 690 (g) 690 (g)
------------ ------------ ----------- ----------- -----------
Operating income 14,199 14,456 17,409 18,446 (g) 64,510 (g)
Investment income, net of
interest (expense) (760) 2,803 2,512 3,078 7,633
------------ ------------ ----------- ----------- -----------
Income before income taxes 13,439 17,259 19,921 21,524 (g) 72,143 (g)
Income taxes 5,310 6,863 8,108 8,412 28,693
------------ ------------ ----------- ----------- -----------
Net income $ 8,129 $ 10,396 $ 11,813 $ 13,112 (g) $ 43,450 (g)
============ ============ =========== =========== ===========
Earnings per share: (a)
Basic $ .15 $ .16 $ .18 $ .17 (g) $ .67 (g)
============ ============ =========== =========== ===========
Diluted $ .13 $ .14 $ .16 $ .17 (g) $ .61 (g)
============ ============ =========== =========== ===========
53
54
(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. The earnings per share data have been restated with the
Company's required adoption of Statement of Financial Accounting Standard
No. 128, "Earnings per Share."
(b) Includes acquisition expenses related to pooling-of-interests transactions
of $3,456 before taxes. Such expenses, on an aftertax basis, were $3,070,
or $.04 per basic and diluted share. For the year ended December 31, 1997,
net income, excluding this charge as well as the nonrecurring charge of
$5,958 disclosed in (c) below, was $64,733 ($.81 per basic and diluted
share).
(c) A nonrecurring charge of $6,313 before taxes and $5,958 after taxes, or
$.07 per basic and diluted share, was recorded in the third quarter of 1997
for the estimated costs and legal and other expenses associated with the
tentative settlement of the government investigation of Home Pharmacy
Services, Inc., a wholly-owned subsidiary of Omnicare. Third quarter net
income, excluding the nonrecurring charge, was $16,795 ($.21 per basic and
diluted share). For the year ended December 31, 1997, net income,
excluding this charge as well as the pooling-of-interests expenses of
$3,070 disclosed in (b) above, was $64,733 ($.81 per basic and diluted
share).
(d) Includes acquisition-related expenses of $978 relating to the first quarter
1997 pooling-of-interests transaction. Such expenses, on an aftertax basis,
were $854, or $.01 per basic and diluted share. First quarter net income,
excluding these expenses, was $14,297 ($.18 per basic and diluted share).
(e) Includes acquisition-related expenses of $693 relating to the second
quarter 1997 pooling-of-interests transaction. Such expenses, on an
aftertax basis, were $575, or $.01 per basic and diluted share. Second
quarter net income, excluding these expenses, was $15,713 ($.20 per basic
and diluted share).
(f) Includes acquisition-related expenses of $1,785 relating to the fourth
quarter 1997 pooling-of-interests transaction. Such expenses, on an
aftertax basis, were $1,641, or $.02 per basic and diluted share. Fourth
quarter net income, excluding these expenses, was $17,928 ($.22 per basic
and diluted share).
(g) Includes acquisition-related expenses of $690 relating to the 1996
pooling-of-interests transaction. Such expenses, on an aftertax basis, were
$534, or $.01 per basic and diluted share. Net income, excluding these
expenses, was $13,646 for the fourth quarter, or $.18 per basic share and
$.17 per diluted share, and $43,984 for the full year 1996, or $.67 per
basic share and $.61 per diluted share.
(h) The impact of the 1997 and 1996 pooling-of-interests transactions on the
Company's historical consolidated financial statements was not material;
consequently, prior period and current year financial statements have not
been restated for these transactions.
54
55
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding the Company's executive officers
included in Part I of this Form 10-K, the information required under this Item
is set forth in the Company's 1998 Proxy Statement which is incorporated herein
by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information required under this Item is set forth in the Company's 1998
Proxy Statement which is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item is set forth in the Company's 1998
Proxy Statement which is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is set forth in the Company's 1998
Proxy Statement which is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The 1997 Consolidated Financial Statements of Omnicare are
included in Part II, Item 8.
(a)(2) Financial Statement Schedule
See Index to Financial Statements and Financial Statement
Schedule at page 32 of this Report.
(a)(3) Exhibits
See Index of Exhibits starting at page E-1 of this Report.
(b) Reports on Form 8-K
On December 1 and 10, 1997, Form 8-Ks were filed to report the
Company's completion of an offering of $345 million of 5.0%
Convertible Subordinated Debentures (including a $45 million
over-allotment option). On December 4, 1997, a Form 8-K/A was
filed relating to the Company's acquisition of all outstanding
shares of American Medserve Corporation.
55
56
SIGNATURES
----------
Pursuant to the requirements of Section l3 or l5(d) of the Securities
Exchange Act of l934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, on this 27th day of
March, 1998.
OMNICARE, INC.
/s/ Joel F. Gemunder
----------------------------
Joel F. Gemunder, President
Pursuant to the requirements of the Securities Exchange Act of l934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Edward L. Hutton Chairman and Director |
- --------------------- (Principal Executive Officer) |
Edward L. Hutton |
|
/s/Joel F. Gemunder President and Director |
- --------------------- (Principal Executive Officer) |
Joel F. Gemunder |
|
/s/David W. Froesel, Jr. Senior Vice President and |
- ------------------------ Chief Financial Officer |
David W. Froesel, Jr. (Principal Financial and |
Accounting Officer) |
|
|
Ronald K. Baur, Director* |
Kenneth W. Chesterman, Director* |
Charles H. Erhart, Jr., Director* |
Mary Lou Fox, Director* |
Thomas C. Hutton, Director* March 27, 1998
Patrick E. Keefe, Director* |
Sandra E. Laney, Director* |
Andrea R. Lindell, Director* |
Sheldon Margen, M.D., Director* |
Kevin J. McNamara, Director* |
John M. Mount, Director* |
D. Walter Robbins, Jr., Director* |
|
--
* Cheryl D. Hodges, by signing her name hereto, signs this document on
behalf of herself as a director and on behalf of each person indicated above
pursuant to a power of attorney duly executed by such person and filed with the
Securities and Exchange Commission.
/s/ Cheryl D. Hodges
-----------------------------
Cheryl D. Hodges
(Attorney-in-Fact)
56
57
Schedule II
OMNICARE, INC. AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
(in thousands)
Additions
Balance at charged Write-offs, Balance
beginning of to cost net of at end
period and expenses Acquisitions recoveries of period
------------ ------------ ------------ ------------ ------------
Allowance for
uncollectible
accounts receivable
Year ended
December 31,
1997 $5,631 $6,942 $8,838 $(5,539) $15,872
1996 4,761 3,614 105 (2,849) 5,631
1995 3,681 3,086 239 (2,245) 4,761
Allowance for
uncollectible
accounts receivable,
discontinued operations
Year ended
December 31,
1997 $ - $ - $ - $ - $ -
1996 282 - - (282) -
1995 282 - - - 282
S-1
58
INDEX OF EXHIBITS
-----------------
Numbers Refer to Item 601 Document Incorporated by Reference
Regulation S-K and from a Previous Filing or Filed Herewith,
Description of Exhibit As Indicated Below
-------------------------------------------------- ------------------------------------------
(3.1) Restated Certificate of Form 10-K
Incorporation of Omnicare, March 31, 1997
Inc.
(3.2) By-Laws of Omnicare, Inc., Form 10-K
as amended March 26, 1993
(4) Credit Agreement among Form 10-K
Omnicare, Inc., March 31, 1997
First National Bank of
Chicago, Agent, and certain
banks dated as of
October 22, 1996
(4.1) Indenture dated as of Form S-3
December 10, 1997 between February 6, 1998
the Company and The
First National Bank
of Chicago, as Trustee
(10.1) Executive Salary Protection Form 10-K
Plan, as amended, March 25, 1996
May 22, 1981
(10.2) 1981 Stock Incentive Plan, Form 10-K
as amended March 25, 1988
(10.3) 1989 Stock Incentive Plan Proxy Statement
for 1989 Annual
Meeting of
Stockholders
dated
April 10, 1989
(10.4) 1992 Long-Term Stock Proxy Statement
Incentive Plan for 1997 Annual
Meeting of
Stockholders
dated
March 31,1997
(10.5) 1995 Premium-Priced Stock Proxy Statement
Option Plan for 1995 annual
Meeting of
Stockholders
dated
April 10, 1995
(10.6) Excess Benefits Plan Form 10-K
March 25, 1988
E-1
59
INDEX OF EXHIBITS
-----------------
Numbers Refer to Item 601 Document Incorporated by Reference
Regulation S-K and from a Previous Filing or Filed Herewith,
Description of Exhibit As Indicated Below
------------------------------------ -------------------------------------------
(10.7) Form of Indemnification Proxy Statement
Agreement with Directors and for 1987 Annual
Officers Meeting of
Stockholders
dated
April 14, 1987
(10.8) Employment Agreements with Form 10-K
J.F. Gemunder and March 29, 1989
C.D. Hodges dated
August 4, 1988
(10.9) Amendment to Employment Form 10-K
Agreements with March 25, 1994
J.F. Gemunder and
C.D. Hodges dated
May 17, 1993
(10.10) Employment Agreement with Form 10-K
T.R. Marsh dated March 25, 1994
August 4, 1988 and Amendment
dated May 17, 1993
(10.11) Employment Agreement with Form 10-K
P.E. Keefe dated March 25, 1994
March 4, 1993
(10.12) Amendment to Employment Form 10-K
Agreements with March 25, 1995
J.F. Gemunder,
P.E. Keefe,
C.D. Hodges and T.R. Marsh
dated May 16, 1994
(10.13) Amendment to Employment Form 10-K
Agreements with March 25, 1996
J.F. Gemunder,
P.E. Keefe and C.D. Hodges
dated May 15, 1995
E-2
60
INDEX OF EXHIBITS
-----------------
Numbers Refer to Item 601 Document Incorporated by Reference
Regulation S-K and from a Previous Filing or Filed
Description of Exhibit Herewith, As Indicated Below
-------------------------------------------------- ------------------------------------
(10.14) Split Dollar Agreement with Form 10-K
E.L. Hutton dated March 25, 1996
June 1, 1995 (Agreement in
the same form exists with
J.F. Gemunder)
(10.15) Split Dollar Agreement Form 10-K
dated June 1, 1995 March 25, 1996
(Agreements in the same form
exist with the following Executive
Officers:
C.D. Hodges, P.E. Keefe and
T.E. Bien)
(10.16) Annual Incentive Plan for Proxy Statement
Senior Executive Officers for 1996 Annual
Meeting of
Shareholders
dated
May 20, 1996
(10.17) Employment Agreement with Form 10-K
T.E. Bien dated March 31, 1997
January 1, 1994
(10.18) Employment Agreement with Form 10-K
D.W. Froesel dated March 31, 1997
February 17, 1996
(10.19) Employment Agreement with Form 10-K
M.L. Fox dated April 4, 1996 March 31, 1997
(10.20) Consulting Agreement with Form 10-K
MLF Co. dated April 4, 1996 March 31, 1997
(10.21) Amendment to Employment Form 10-K
Agreement with March 31, 1997
J.F. Gemunder dated
May 20, 1996 (Amendments in
the same form exist with the
following Executive
Officers:
P.E. Keefe
and C.D. Hodges)
E-3
61
INDEX OF EXHIBITS
-----------------
Numbers Refer to Item 601 Document Incorporated by Reference
Regulation S-K and from a Previous Filing or Filed
Description of Exhibit Herewith, As Indicated Below
-------------------------------------------------- ------------------------------------
(10.22) Amendment to Employment Filed Herewith
Agreement with
J.F. Gemunder dated
May 19, 1997 (Amendments in
the same form exist with the
following Executive
Officers:
P.E. Keefe and C.D. Hodges)
(10.23) Agreement and Plan of Schedule 14D-1
Merger, dated as of August 14, 1997
August 7, 1997, by and
among the Company,
Omnicare Acquisition
Corp. and American
Medserve Corporation
(11) Statement of Computation of Filed Herewith
Earnings per Common Share
(12) Statement of Computation of Filed Herewith
Ratio of Earnings to Fixed
Charges
(21) Subsidiaries of Filed Herewith
Omnicare, Inc.
(23) Consent of Filed Herewith
Price Waterhouse LLP
(24) Powers of Attorney Filed Herewith
(27) Financial Data Schedule Filed Herewith
(including restated schedules
for adoption of FAS No. 128)
E-4