<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 0-19076
QUANTUM HEALTH RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0414232
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
TWO PARKWOOD CROSSING
310 EAST 96TH STREET, SUITE 300
INDIANAPOLIS, IN 46240
(Address of principal executive offices) (Zip Code)
(317) 580-6830
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- ------
The number of shares outstanding of the registrant's Common Stock, $0.01 Par
Value, as of March 31, 1996 was 15,152,147 shares.
1
<PAGE> 2
INDEX
QUANTUM HEALTH RESOURCES, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements
--------------------
Consolidated Balance Sheets (Unaudited) as of March 31, 1996 and December 31, 1995........................ 3
Consolidated Statements of Income (Unaudited) for the three months ended March 31, 1996 and 1995.......... 4
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 1996 and 1995...... 5
Notes to Consolidated Financial Statements (Unaudited).................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 11
-------------------------------------------------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 19
-----------------
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 22
--------------------------------
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUANTUM HEALTH RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except share data) March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash, cash equivalents and current portion of available for
sale securities $ 55,352 $ 66,267
Accounts receivable (less allowance for uncollectible accounts
of $4,610 in 1996 and $6,039 in 1995) 93,194 84,958
Inventories 40,702 43,101
Refundable income taxes 902 3,323
Deferred tax assets, net 5,953 4,196
Other current assets 5,049 4,489
-------- --------
Total Current Assets 201,152 206,334
NON-CURRENT ASSETS
Available for sale securities, less current portion 1,000 10,205
Equipment and improvements, net 15,963 15,734
Unamortized goodwill 11,720 7,206
Other non-current assets 3,682 3,761
-------- --------
$233,517 $243,240
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 18,794 $ 32,523
Accrued liabilities 9,238 9,310
Accrued litigation settlement 5,500 --
-------- --------
Total Current Liabilities 33,532 41,833
CONVERTIBLE SUBORDINATED DEBENTURES 86,250 86,250
MINORITY INTEREST IN SUBSIDIARY 2,708 2,899
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value -- authorized 6,277,778
shares; none outstanding -- --
Common stock, $0.01 par value -- authorized - 60,000,000 shares;
issued - 15,821,147 shares in 1996 and 15,796,747 shares in 1995;
outstanding - 15,152,147 shares in 1996 and 15,127,747 shares in 1995 158 158
Paid-in capital 65,444 65,342
Retained earnings 57,935 59,268
Less: Treasury stock, 669,000 shares, at cost (12,510) (12,510)
-------- --------
Total Stockholders' Equity 111,027 112,258
-------- --------
$233,517 $243,240
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
QUANTUM HEALTH RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended March 31,
1996 1995
------- -------
<S> <C> <C>
REVENUES $80,032 $71,313
OPERATING EXPENSES:
Cost of revenues:
Cost of products sold 49,674 41,984
Branch personnel costs 9,200 8,153
Other branch costs 4,601 4,223
------- -------
Total cost of revenues 63,475 54,360
Provision for uncollectible accounts 4,406 3,181
General and administrative expenses 8,997 7,731
------- -------
Total operating expenses 76,878 65,272
------- -------
OPERATING INCOME 3,154 6,041
Other income (expense), net (178) 71
Minority interest in subsidiary losses 190 370
Settlement of litigation (5,500) --
------- -------
Income (loss) before income taxes (2,334) 6,482
Income taxes (980) 2,560
------- -------
NET INCOME (LOSS) $(1,354) $ 3,922
======= =======
EARNINGS (LOSS) PER SHARE $ (0.09) $ 0.25
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 15,220 15,829
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
QUANTUM HEALTH RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) Three Months Ended March 31,
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (1,354) $ 3,922
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,811 1,385
Provision for uncollectible accounts 4,406 3,181
Deferred income taxes (1,757) (160)
Settlement of litigation 5,500 --
Minority interest in subsidiary losses (190) (370)
Changes in current assets and liabilities:
Accounts receivable (11,670) (11,881)
Inventories 2,398 (1,910)
Income taxes 2,421 2,197
Other current assets (692) 882
Other non-current assets 17 (514)
Accounts payable and accrued liabilities (16,463) 5,756
-------- --------
Net cash provided by (used in) operating activities (15,573) 2,488
-------- --------
INVESTING ACTIVITIES:
Sales of available for sale securities, net 9,225 5,248
Purchases of equipment and improvements (1,776) (2,274)
Purchase of subsidiary, net of cash acquired (2,188) --
-------- --------
Net cash provided by investing activities 5,261 2,974
-------- --------
FINANCING ACTIVITIES:
Repayment of acquired subsidiary notes payable (705) --
Proceeds from exercise of stock options, including
associated tax benefits 102 205
-------- --------
Net cash provided by (used in) financing activities (603) 205
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,915) 5,667
Cash and cash equivalents at beginning of period 66,267 73,545
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 55,352 $ 79,212
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
QUANTUM HEALTH RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1996
A. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all material
adjustments of a normal recurring nature and necessary for a fair
presentation of the financial position and results of operations of Quantum
Health Resources, Inc. and subsidiaries (the "Company") have been included.
Operating results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, please refer to the
Company's Annual Report on Form 10-K which contains the Company's audited
consolidated financial statements and notes thereto for the year ended
December 31, 1995.
B. New Accounting Standard
-----------------------
During the quarter ended March 31, 1996, the Company adopted FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company has evaluated the value of its
long-lived assets in accordance with Statement 121, and at the present
time, has determined that no impairment write-down is necessary. The
Company's assessment is based on estimates and assumptions made by
management as of the reporting date. Such assessment could change, however,
should changes in the underlying estimates and assumptions occur in the
future.
C. Indebtedness
------------
The Company's $86,250,000 of convertible subordinated debentures have a
4.75% per annum coupon rate (5.2% effective interest rate) and mature on
October 1, 2000. The debentures are convertible into 2,845,596 shares
6
<PAGE> 7
of the Company's Common Stock at a conversion price of $30.31 per share and
are redeemable at stipulated redemption prices, ranging from 103.39% of the
principal amount through October 1, 1996 to 100.68% of the principal amount
during the twelve months ended October 1, 2000 (except that until October
1, 1996, the debentures cannot be redeemed unless the Company's Common
Stock has traded at or above 150% of the then-effective conversion price
for at least 20 of 30 consecutive trading days).
D. Earnings per Share
------------------
Primary earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding and common
stock equivalents resulting from the assumed exercise of all dilutive stock
options using the "treasury stock" method. Fully diluted earnings per share
include adjustments to net income and the number of weighted average shares
outstanding to reflect the elimination of interest expense and other costs
relating to the convertible subordinated debentures and the conversion of
these debentures into 2,845,596 shares of common stock, unless the
computation is determined to be anti-dilutive.
E. Acquisitions
------------
On January 16, 1996, the Company acquired all the issued and outstanding
shares of preferred and common stock of Commonwealth Care, Inc.
(hereinafter referred to as "CCI" or "Quantum Care Network") in exchange
for a cash payment of $2.2 million. In addition, the Company advanced
approximately $950,000 to CCI to retire debt held by former CCI preferred
and common stockholders and to provide bridge loan financing to be used by
CCI for working capital purposes. Should CCI achieve certain performance
measures over the two-year period ended December 31, 1997, additional cash
of up to $385,000 and options to purchase up to 27,500 shares of the
Company's common stock may be paid and granted, respectively, to a former
holder of CCI common stock. Such additional consideration, if paid or
granted, would be accounted for as goodwill.
CCI provides home health care network management programs and services to
patients referred to CCI through contracts with local and national managed
care payors. The transaction has been accounted for as a purchase and
resulted in approximately $4.6 million of goodwill. The operations of CCI
have been included in the consolidated statements of income since the date
of acquisition.
7
<PAGE> 8
F. Contingencies
-------------
On March 1, 1995, a civil class-action complaint was filed against the
Company, certain of its officers and one of its outside directors in the
United States District Court for the Central District of California
(COLANERO EQUIPMENT COMPANY 401(K) PLAN, FBO STEPHEN COLANERO V. QUANTUM
HEALTH RESOURCES, INC., ET AL.) on behalf of the named plaintiff and
purportedly on behalf of a class of all purchasers of the Company's
securities during the period October 25, 1994 to February 28, 1995. On
March 2, 1995, a second civil class-action complaint was filed against the
Company and certain of its officers in the same District (RONALD STERNBERG
V. QUANTUM HEALTH RESOURCES, INC. ET AL.) on behalf of the named plaintiff
and purportedly on behalf of a class of all purchasers of the Company's
securities during the period from March 31, 1992 to February 28, 1995. On
March 10, 1995, a third class-action complaint was filed in the same
District against the Company and its Chairman and Chief Executive Officer
(MUCH. SHELIST ET AL. V QUANTUM HEALTH RESOURCES, INC.) on behalf of the
named plaintiff and purportedly on behalf of a class of all purchasers of
the Company's securities during a period from November 1, 1994 to February
28, 1995. On June 19, the three lawsuits were consolidated by the filing of
an amended complaint (IN RE QUANTUM HEALTH RESOURCES, INC. SECURITIES
LITIGATION). The amended complaint seeks to establish a class period of
October 25, 1994 through February 28, 1995. The consolidated complaint
alleges claims under the Securities Exchange Act of 1934 based on alleged
misstatements and omissions in certain public disclosures made by the
Company and certain individual defendants. The claims center on the alleged
absence of disclosure by the Company of the Company's reimbursement
practices for services to patients with hemophilia covered by three
California state programs and of an alleged investigation by California
with respect to those practices. The complaint seeks monetary damages in
unspecified amounts. Defendants have filed an answer.
On August 9, 1995, a civil class-action complaint was filed against the
Company, one of its officers, and two of its former officers in the United
States District Court for the Central District of California (LOUIS
GOLDSTEIN v. QUANTUM HEALTH RESOURCES, INC., ET AL.) on behalf of the named
plaintiff and purportedly on behalf of a class of all purchasers of the
Company's securities during the period May 9, 1995 to August 4, 1995. On
October 18, 1995, the two former officers were dismissed from the suit. The
complaint alleges claims under the Securities Exchange Act of 1934 based on
alleged misstatements and omissions in certain public disclosures made by
the Company and the remaining individual defendant. The claims center on
allegedly inadequate disclosures by the Company concerning the
reorganization of its branch offices; the costs associated with the alleged
investigation by the State of California into the Company's reimbursement
practices for services to patients with hemophilia covered by the
California state programs, and related litigation; and costs related to
8
<PAGE> 9
the relocation of the Company's executive offices from California to
Indiana. The complaint seeks monetary damages in unspecified amounts. The
defendants' motion to dismiss the complaint was denied on February 9, 1996,
and the defendants have filed an answer.
On September 12, 1995, a civil class-action complaint was filed against the
Company, one of it officers, and one of its former officers in the United
States District Court for the Central District of California (R. JOE
STOCKHUS V. QUANTUM HEALTH RESOURCES, INC., ET AL.) on behalf of the named
plaintiff and purportedly on behalf of a class of all purchasers of the
Company's securities during the period October 25, 1994 to August 4, 1995
(thus encompassing both of the class periods alleged in the earlier-filed
shareholder litigation described above, together with an intervening
period). The complaint alleges claims under the Securities Exchange Act of
1934 based on alleged misstatements and omissions in certain public
disclosures made by the Company and the individual defendants. The claims
center on allegedly inadequate disclosures by the Company concerning the
Company's reimbursement practices for services to patients with hemophilia
covered by the California state programs; an alleged investigation by the
State of California with respect to those practices; and litigation
relating to the California state programs. The complaint seeks monetary
damages in unspecified amounts. Defendants have filed an answer.
On May 1, 1996, the Company entered into a memorandum of understanding with
representatives of the plaintiffs named in the IN RE QUANTUM HEALTH
RESOURCES, INC. SECURITIES LITIGATION and the R. JOE STOCKHUS complaints
regarding a proposed settlement of those lawsuits. The proposed settlement,
under which the defendants admit no liability, would cover a class period
from October 25, 1994 to May 8, 1995 and contemplates that the Company will
pay $5.5 million, net of insurance coverage, in settlement on those claims.
The Company recorded a charge to earnings during the quarter ended March
31, 1996 for its portion of the settlement. The settlement is conditioned
on the conclusion of definitive documentation, notice to putative class
members in both lawsuits, and approval by the court after a hearing. The
LOUIS GOLDSTEIN lawsuit was not included in the settlement and remains
outstanding.
The Company believes it has substantial and meritorious defenses against
the allegations in the LOUIS GOLDSTEIN lawsuit, and intends to defend its
position vigorously. The Company further believes, based on information
known at this time, that the ultimate resolution of this remaining lawsuit
will not have a material adverse effect on the Company's consolidated
financial position. However, should an unfavorable resolution of this
lawsuit occur, it is possible that the Company's future results of
operations and liquidity or its consolidated financial position could be
materially affected in a particular period.
9
<PAGE> 10
The Company is not a party to any other pending litigation, and is not
aware of any threatened litigation, that can reasonably be expected to have
a material adverse effect on the Company's consolidated financial
condition.
G. Subsequent Event
----------------
On May 1, 1996, the Company entered into an Agreement and Plan of Merger
with Olsten Corporation ("Olsten"), whereby, upon closing, each issued and
outstanding share of the Company's Common Stock will be converted into 0.58
share of Olsten Class B Common Stock. Consummation of the merger, which is
anticipated to occur sometime in July, is subject to satisfaction of
customary conditions, including approval by the stockholders of both
companies and the completion of certain regulatory filings. The boards of
directors of both companies have approved the transaction. If consummated,
the transaction would be accounted for as a pooling of interests and,
accordingly, the Company's historical financial data will be included in
the restated future financial reports issued by Olsten.
Olsten, through its Olsten Kimberly Quality Care subsidiary, provides
network management and caregivers for home health care and institutions.
Services include skilled nursing, home health aids, infusion therapy, home
medical equipment, respiratory therapy, pediatrics, rehabilitation and
disease management. Olsten also provides management services to
hospital-based home health agencies.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company's principal business is providing alternate site pharmaceutical
therapies and related services to persons affected by chronic disorders through
Quantum Health Resources ("QHR"), a wholly owned subsidiary. Other ancillary
business activities of the Company currently include (i) managing networks of
alternate site health care providers (nursing, infusion, durable medical
equipment and respiratory therapy) on behalf of third party payors, (ii)
assisting pharmaceutical companies in the commercialization of new products,
(iii) providing shared risk and managed care products utilizing integrated
healthcare networks for the care of persons affected by certain rare chronic
disorders and (iv) developing software and services pertaining to workers
compensation, occupational health and safety, case management, encounters-based
data for specific disease states and related products through OptimalCare, Inc.
("OCI"), a majority owned subsidiary.
The Company has historically derived a majority of its revenues from the
provision of therapies and services to patients affected by hemophilia
("Hemophilia"). A large portion of the Company's revenues has also been
attributable to the provision of therapies and services to patients affected by
other chronic disorders, including alpha(1)-antitrypsin deficiency, primary
immunodeficiency and autoimmune disorders, human growth disorders, cystic
fibrosis, and beginning with the quarter ended March 31, 1996, primary pulmonary
hypertension (collectively, "Other Chronicare Disorders"). Therapies for
patients in the Hemophilia and Other Chronicare Disorders categories consist
primarily of infused protein replacement products such as anti-hemophilic
factor, Prolastin(R), intravenous immune globulin ("IVIG") and human growth
hormone. The Company derived the balance of its revenues from therapies and
services provided to patients with other chronic or non-chronic disorders,
including the distribution of pharmaceuticals through the Company's mail order
operation, Quantum Express(TM) ("All Other Disorders"); from the provision of
alternate site network management services through Quantum Care Network (since
January 16, 1996); from a shared risk contract obtained by Quantum Disease
Management, Inc., a wholly owned subsidiary (from January 1, 1995 through
December 31, 1995); and from software and related services developed and
provided by OCI (collectively, "All Other Revenues").
11
<PAGE> 12
RESULTS OF OPERATIONS
Selected consolidated financial data, as a percentage of revenues, and period
to period percentage increases (decreases) based on absolute dollar amounts,
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Comparisons
March 31, Three months
1996 1995 1996 vs.1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUES
Hemophilia 54.5% 63.6% (3.8)%
Other Chronicare Disorders 31.7 26.4 34.9
All Other Disorders 11.6 9.2 41.9
All Other Revenues 2.2 0.8 179.0
---------------- ---------------- ----------------
TOTAL REVENUES 100.0 100.0 12.2
BRANCH OPERATING EXPENSES:
Cost of products sold 62.1 58.9 18.3
Branch personnel costs 11.5 11.4 12.8
Other branch costs 5.7 5.9 9.0
---------------- ---------------- ----------------
Total cost of revenues 79.3 76.2 16.8
Provision for uncollectible accounts 5.5 4.5 38.5
---------------- ---------------- ----------------
TOTAL BRANCH OPERATING EXPENSES 84.8 80.7 18.0
---------------- ---------------- ----------------
BRANCH CONTRIBUTION TO EARNINGS 15.2 19.3 (11.8)
General and administrative expenses 11.2 10.8 16.4
---------------- ---------------- ----------------
OPERATING INCOME 4.0 8.5 (47.8)
Other income (expense), net 0.0 0.6 (97.3)
Settlement of litigation (6.9) N/A N/A
Income taxes (1.2) 3.6 (138.3)
---------------- ---------------- ----------------
NET INCOME (LOSS) (1.7)% 5.5% (134.5)%
================ ================ ================
Effective income tax rate 42.0% 39.5%
================ ================ ================
</TABLE>
REVENUES
The Company's historical revenue growth has been principally attributable to
revenues associated with the provision of therapies and services to patients in
the Hemophilia and Other Chronicare Disorders categories. In contrast to
traditional home infusion therapies which generally are prescribed to treat
acute diseases of short duration, chronic disorders typically entail recurring
therapies and services over extended periods, often over the lifetime of the
patient. Revenue gains generally reflect the Company's continued focus on
providing therapies and services to patients affected by chronic disorders
requiring such longer-term therapy. Revenue increases for the first quarter of
1996 as compared to the first quarter of 1995 were primarily attributable to
revenues relating to new products and services, including the distribution of
Flolan(R) which commenced in January 1996, distribution of certain new
12
<PAGE> 13
products through Quantum Express (commencing in December 1995), and network
management service revenues derived through Quantum Care Network (commencing in
January 1996). In addition, revenues attributable to Other Chronicare
Disorders, particularly human growth disorders, were favorably impacted by
patient gains. Revenues also continue to be favorably impacted by the
conversion of persons with hemophilia from plasma-derivative to more expensive
recombinant anti-hemophilic factor. Recombinant anti-hemophilic factor
accounted for approximately 47% of Hemophilia revenues in the first quarter of
1996 and approximately 41% of Hemophilia revenues in the first quarter of 1995.
These revenue increases were partially offset by ongoing patient attrition due
to competition and other factors, and by a significant decline in the number of
units of anti-hemophilic factor ("AHF") shipped to patients in the Company's
West region. The Company believes the decline experienced by the West region
was in large part due to its decision, in November 1995, to discontinue
providing AHF and related services to patients covered by California state
programs. The Company took this action because the State of California had
refused to alter its reimbursement methodology for AHF pending the outcome of
its study. Shortly after the Company announced its decision, it became apparent
that no other providers of AHF services were willing to assume the delivery of
AHF services to substantially all of these patients due to the current
reimbursement methodology for AHF. In response to the concern that patients be
able to continue receiving AHF in the home pending the outcome of the State's
study, the Company, in February 1996, contracted with an independent retail
pharmacy to provide the pharmacy with AHF and certain related services on a
wholesale basis. The pharmacy in turn provides the AHF to the patients and,
where necessary, makes the Company's services available to the patients. The
Company has received written guidance from the State of California that this
arrangement is acceptable under the current reimbursement methodology, although
the State views it as a short term solution pending the outcome of the study.
Revenues are likely to be impacted for the foreseeable future by these factors,
and by an increase in the number of the Company's patients covered by managed
care plans for which the Company is not a provider.
With the exception of recombinant factor introduced in early 1993, which
carries higher average selling prices (and correspondingly higher acquisition
costs), changes in pricing for therapies and services provided were not a
material factor in the Company's revenue gains.
Revenues attributable to the Hemophilia category decreased as a percentage of
revenues through the periods presented, primarily as a result of the new
product offerings discussed above. Consequently, revenues attributable to the
Company's Other Chronicare Disorders category, increased in both absolute
dollar amounts and as a percentage of revenues. Excluding mail order revenues
derived through Quantum Express and network management service revenues derived
through Quantum Care Network, revenues in the All Other Disorders category and
the All Other Revenues category remained relatively flat on an absolute dollar
basis.
13
<PAGE> 14
BRANCH OPERATING EXPENSES
Branch contribution to earnings, defined as the difference between revenues and
the components of branch operating expense, is directly impacted by the volume
and mix of therapies and services provided to the Company's patients. The cost
components discussed herein have also been key factors in period to period
variances.
Cost of Products Sold. Therapies and services provided to patients affected by
hemophilia have generally produced gross margin percentages (defined as
revenues minus the cost of products sold, divided by revenues) in the range of
25-45% for anti-hemophilic factor, although pricing pressures are likely to
push this range lower. The level of gross margins produced depends on the
product (plasma-derivative or recombinant), payor (i.e., governmental agency,
private insurer or other) and level of coverage. A small number of state
programs, most notably California's, provide reimbursement for these therapies
and services at levels below this range. Higher average selling prices of
recombinant factor are typically offset by higher acquisition costs of such
product. Consequently, gross margins on revenues attributable to recombinant
products, while higher on a absolute margin per unit basis, are generally lower
as a percentage of revenues than those for plasma-derivative products. Gross
margins from therapies and services provided to patients affected by
hemophilia, as a percentage of revenues, declined in the first quarter of 1996
as compared to the same period in 1995, principally due to increases in the
percentage of revenues from recombinant factor.
A majority of the revenues attributable to protein replacement therapies (IVIG
and Prolastin) provided to patients in the Other Chronicare Disorders category
have historically produced higher gross margin percentages than Hemophilia
therapies, generally in the range of 40-55%, depending on the payor, level of
coverage, type of therapy and product(s) provided to the patient, although
pricing pressures are likely to push this range lower. Other therapies in this
category, however, such as human growth hormone for human growth disorders and
Pulmozyme for cystic fibrosis are characterized by higher product costs per
revenue dollar, and have contributed, and are likely to continue to contribute,
to lower gross margin percentages for the Company. In addition, during the
past year the Company has experienced a decrease in its gross margin as a
percentage of revenues on therapies utilizing IVIG primarily due to pricing
pressures and product cost increases. Certain therapies provided to patients
in the All Other Disorders category, such as antibiotic and total parenteral
nutritional therapies, often produce higher gross margin percentages than
therapies in the Company's two Chronicare categories. On the other hand,
certain new technologically advanced therapies in this category have been
characterized by higher product costs per revenue dollar. Overall, revenues
generated within this category have remained flat relative to prior periods,
with the exception of the additional
14
<PAGE> 15
revenues generated through the Company's mail order facility, which produces
lower gross margin percentages than other therapies in this category.
The increase in cost of products sold, as a percentage of revenues, during the
first quarter of 1996 compared to the first quarter of 1995 was principally due
to (i) the increase, in absolute dollar amount, of revenues from Other
Chronicare Disorders attributable to products with lower margins; (ii) the
continuing conversion to lower margin recombinant anti-hemophilic factor; and
(iii) the increase in revenues attributable to lower margin Quantum Care
Network and Quantum Express business. Recently, certain manufacturers have
begun to impose price increases for recombinant factor, and future price
increases may be imposed for other recombinant factor and plasma-derived
products due to increased international distribution of product and limited
availability and production capacity of pharmaceutical manufacturers to meet
the combined foreign and domestic demand for such products. Such increases may
not be able to be passed on to payors due to pricing pressures mentioned above
and may also affect the Company's gross margins.
Branch Personnel Costs and Other Branch Costs. Branch personnel and other
branch costs have increased in absolute dollar amounts during the periods
reported mainly due to increases in personnel and other personnel-related costs
primarily in response to the growth in new patients and resultant business
activity generated from the launch of new therapies during the quarter ended
March 31, 1996 and the acquisition of CCI. In the aggregate, such costs have
declined as a percentage of revenues during the periods presented as a result
of operating efficiencies.
Provision for Uncollectible Accounts. The Company's provision for
uncollectible accounts covers potential differences between recorded revenues
and subsequent collections from third-party payors and patients. The adequacy
of the provision and the resultant allowance is reviewed periodically. Such
review focuses on the Company's collection experience, anticipated
reimbursement levels with specific payors and for new disorders which the
Company may not initially have and/or is in the process of developing
significant collection experience, industry reimbursement trends, and other
relevant factors. Historically, any receivables which remain uncollected for
more than twelve months are written off, although collection efforts continue.
During the quarter ended March 31, 1996, management determined that certain
uncollected amounts billed for services performed more than twelve months ago
should not be written off in accordance with the Company's historical policy.
These amounts were uncollected largely due to delays by the Company in billing
for its services and other payor imposed delays. Management made this
determination after concluding that such amounts were more likely than not to
be collectible. The Company's write-offs and resultant allowance for
uncollectible accounts would have been approximately $3.4 million higher and
lower, respectively, had the Company not deviated from its historical write-off
policy. In addition, during the quarter
15
<PAGE> 16
ended March 31, 1996, the Company increased its provision for uncollectible
accounts from 4.5% to 5.5% of revenues as a result of changes in estimates
based upon a recent evaluation of the Company's collection experience. This
increase incrementally increased the Company's provision for uncollectible
accounts by approximately $800,000. The Company will continue to monitor its
collection experience and historical write-off policy to determine the
realizability of its accounts receivable.
CORPORATE EXPENSES
General and Administrative Expenses. General and administrative expenses rose
in absolute dollar amount and as a percentage of revenues in the first quarter
of 1996 compared to the first quarter of 1995. The increase was principally
due to increased marketing related expenditures, the continuing development of
and investment in the Company's information systems, and the inclusion, for the
first time, of the operating results of CCI, including goodwill associated with
the acquisition. These increases were partially offset by personnel related
expense reductions realized as a result of the restructuring implemented by the
Company in December 1995.
Other Income (Expense), Net. The Company has generated interest income from
the investment of excess funds in interest-bearing investment grade securities.
Funds available for investment decreased due primarily to the need to fund
working capital, resulting from increases in the Company's days sales
outstanding ("DSO") and the increased level of the Company's inventories, the
share repurchase program adopted during the second quarter of 1995, the
settlement of the Company's billing dispute with the State of California, and
the acquisition of CCI. The Company anticipates that it will reinvest its
excess funds in similar investment grade instruments, to the extent such funds
are not needed for working capital, acquisitions, or other purposes.
Minority Interests. Minority interest in subsidiary losses reflects the
minority owners' share of pretax operating losses in OCI during the period
presented.
Settlement of Litigation. The Company entered into a memorandum of
understanding in regards to certain of its outstanding shareholder litigation
and recorded an estimate of the ultimate costs of settling those claims. (See
Note F.)
Income Taxes. The Company's effective tax rate increased during the quarter
ended March 31, 1996 due primarily to the conversion of the Company's
investment portfolio from tax-exempt securities to taxable securities. The
impact
16
<PAGE> 17
of this effective rate increase is mitigated by the incrementally higher yields
earned on the taxable security portfolio. Goodwill amortization resulting from
the Company's acquisition of CCI has also contributed to the higher effective
tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Available funds, excluding certain subsidiary funds, were $56 million at March
31, 1996 and $76 million at December 31, 1995. The Company's investment
portfolio generally consists of diversified interest-bearing investment grade
securities issued by financial and government institutions located throughout
the United States and, by Company policy, exposure with any one institution is
limited. During the quarter ended March 31, 1996, available funds decreased by
approximately $20 million, principally due to the use of funds to meet the
working capital needs of the Company's ongoing operations ($15.6 million),
purchases of computer and other equipment ($1.8 million), and the purchase of
CCI ($2.2 million). Funds used for working capital during the quarter
supported an increase in the Company's receivables (see below), as well as
payments for inventory as the Company positioned itself for the launch of new
therapies.
The Company's most significant non-cash or investment asset is its accounts
receivable portfolio due from private payors, government payors and patients.
There is no material concentration of credit risk with any one reimbursement
payor due to the large number of patients served and dispersion of payors.
Certain Medicaid and Blue Cross programs have from time to time experienced
funding shortages and financial and operational difficulties which have, in
turn, lead to slower processing of payments. The impact of these conditions on
the ultimate collectibility of the Company's receivables from these payors is
believed to be negligible. Accounts receivable increased significantly during
the periods reported principally due to the growth in revenues; however, as
noted herein, delays in the timing of reimbursement by certain payors have
been, and may continue to be, a contributing factor to increasing receivables.
The Company calculates its DSO by dividing the Company's net receivables at the
end of each calendar quarter by the average daily revenue for that calendar
quarter. At March 31, 1996 and December 31, 1995, the Company's DSO was 106
and 107 days, respectively. Payors are increasingly demanding a greater level
of documentation for claims and are scrutinizing claims more closely. Such
demands and scrutiny have delayed payment of the Company's claims in certain
cases. DSO varies from therapy to therapy and from payor to payor, so
changing therapy mix and payor mix have also influenced, and will continue to
influence, the Company's DSO.
17
<PAGE> 18
The Company believes that its overall collections experience reflects the
nature of the recurring therapies and services it provides and the emphasis it
places on sound billing and collection procedures. The Company's experience
has been that once reimbursement processing for these patients has been
established with the payor, claims processing and reimbursement tend to become
routine, subject to continued patient eligibility, coverage limitations and
proper claim documentation. The Company continually monitors its accounts
receivable and works closely with payors to ensure timely payments. In
management's opinion, fluctuations in DSO reflect the timing of the ultimate
collection of the receivable portfolio, not the overall collectibility of the
portfolio nor the adequacy of the Company's provision and resultant allowance
for uncollectible accounts. Any receivables which remain uncollected for
twelve months after the date of service are generally written off for financial
reporting purposes; however, the Company actively continues to seek payment of
such receivables until it has been determined that payment of any portion
thereof is unlikely. In addition, the Company is taking steps to increase
staffing in the reimbursement area as well as to engage the services of outside
collection agents in an effort to improve the timing and amount of its cash
collections.
The Company's inventory levels have generally been greater than those
maintained by traditional home infusion and other alternate site companies
since (i) biological and pharmaceutical products utilized for chronic disorders
tend to be more expensive, and (ii) the Company is required to carry a broader
array of dosage levels to satisfy the varied needs of its Chronicare patients.
The Company from time to time experiences a general increase in its inventory
levels, usually at the end of each calendar quarter as it purchases inventory
to meet contract commitments with its suppliers and takes advantage of
favorable spot purchasing opportunities. In addition, the Company recently
increased its inventory levels in connection with the distribution of
Flolan(R), and certain products distributed through Quantum Express, the
funding of which occurred during the quarter ended March 31, 1996.
From time to time, the Company has been subjected to voluntary product recalls
and/or limited product availability from certain manufacturers, both of which
are inherent to the nature of the biological and pharmaceutical products making
up the bulk of the Company's inventory. The Company's willingness to build up
inventory levels when advantageous economically is partially a defense against
the possibility of recalls and limited product availability, but contributes to
the magnitude of inventory levels.
In January 1996, the Company acquired all the issued and outstanding shares of
preferred and common stock of network management company, Commonwealth Care,
Inc. ("CCI"), in exchange for a cash payment of $2.2 million. In addition, the
Company advanced approximately $950,000 to CCI to retire debt held by former
CCI preferred and common stockholders and to provide bridge loan financing to
be used by CCI for working capital purposes. Should
18
<PAGE> 19
CCI achieve certain performance measures over the two-year period ended
December 31, 1997, additional cash of up to $385,000 and options to purchase up
to 27,500 shares of the Company's common stock may be paid or granted,
respectively, to a former holder of CCI common stock as part of the purchase
consideration.
Through May 6, 1996, the Company also has advanced approximately $1.6 million
to CCI to support its working capital needs. Additional working capital
advances may be required in the future as CCI continues to develop its home
health care programs and services, however, CCI is not expected to have a
material effect on the Company's liquidity.
The Company believes that its cash, cash equivalents and investment securities,
together with internally generated funds, will be sufficient to satisfy the
Company's liquidity needs for the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the matters discussed
in this document are forward looking statements that are subject to risks and
uncertainties. Those risks and uncertainties include the impact of pricing
pressures and patient attrition from increased competition and the continuing
movement of patients into managed care plans for which the Company is not a
provider, as well as the other risks and uncertainties described elsewhere in
this document or from time to time in the Company's periodic reports filed with
the Securities and Exchange Commission. Further, the consummation of the
merger with Olsten Corporation is subject to a number of customary conditions,
such as shareholder approval and certain regulatory approvals. There can be no
assurances that such conditions will be satisfied or that the merger will be
consummated.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
On March 1, 1995, a civil class-action complaint was filed against the Company,
certain of its officers and one of its outside directors in the United States
District Court for the Central District of California (COLANERO EQUIPMENT
COMPANY 401(K) PLAN, FBO STEPHEN COLANERO V. QUANTUM HEALTH RESOURCES, INC., ET
AL.) on behalf of the named plaintiff and purportedly on behalf of a class of
all purchasers of the Company's securities during the period October 25, 1994
to February 28, 1995. On March 2, 1995, a second civil class-action complaint
was filed against the
19
<PAGE> 20
Company and certain of its officers in the same District (RONALD STERNBERG V.
QUANTUM HEALTH RESOURCES, INC. ET AL.) on behalf of the named plaintiff and
purportedly on behalf of a class of all purchasers of the Company's securities
during the period from March 31, 1992 to February 28, 1995. On March 10, 1995,
a third class-action complaint was filed in the same District against the
Company and its Chairman and Chief Executive Officer (MUCH. SHELIST ET AL. V
QUANTUM HEALTH RESOURCES, INC.) on behalf of the named plaintiff and
purportedly on behalf of a class of all purchasers of the Company's securities
during a period from November 1, 1994 to February 28, 1995. On June 19, the
three lawsuits were consolidated by the filing of an amended complaint (IN RE
QUANTUM HEALTH RESOURCES, INC. SECURITIES LITIGATION). The amended complaint
seeks to establish a class period of October 25, 1994 through February 28,
1995. The consolidated complaint alleges claims under the Securities Exchange
Act of 1934 based on alleged misstatements and omissions in certain public
disclosures made by the Company and certain individual defendants. The claims
center on the alleged absence of disclosure by the Company of the Company's
reimbursement practices for services to patients with hemophilia covered by
three California state programs and of an alleged investigation by California
with respect to those practices. The complaint seeks monetary damages in
unspecified amounts. Defendants have filed an answer.
On August 9, 1995, a civil class-action complaint was filed against the
Company, one of its officers, and two of its former officers in the United
States District Court for the Central District of California (LOUIS GOLDSTEIN
V. QUANTUM HEALTH RESOURCES, INC., ET AL.) on behalf of the named plaintiff and
purportedly on behalf of a class of all purchasers of the Company's securities
during the period May 9, 1995 to August 4, 1995. On October 18, 1995, the two
former officers were dismissed from the suit. The complaint alleges claims
under the Securities Exchange Act of 1934 based on alleged misstatements and
omissions in certain public disclosures made by the Company and the remaining
individual defendant. The claims center on allegedly inadequate disclosures by
the Company concerning the reorganization of its branch offices; the costs
associated with the alleged investigation by the State of California into the
Company's reimbursement practices for services to patients with hemophilia
covered by the California state programs, and related litigation; and costs
related to the relocation of the Company's executive offices from California to
Indiana. The complaint seeks monetary damages in unspecified amounts. The
defendants' motion to dismiss the complaint was denied on February 9, 1996, and
the defendants have filed an answer.
On September 12, 1995, a civil class-action complaint was filed against the
Company, one of it officers, and one of its former officers in the United
States District Court for the Central District of California (R. JOE STOCKHUS
V. QUANTUM HEALTH RESOURCES, INC., ET AL.) on behalf of the named plaintiff and
purportedly on behalf of a class of all purchasers of the Company's securities
during the period October 25, 1994 to August 4, 1995 (thus encompassing
20
<PAGE> 21
both of the class periods alleged in the earlier-filed shareholder litigation
described above, together with an intervening period). The complaint alleges
claims under the Securities Exchange Act of 1934 based on alleged misstatements
and omissions in certain public disclosures made by the Company and the
individual defendants. The claims center on allegedly inadequate disclosures
by the Company concerning the Company's reimbursement practices for services to
patients with hemophilia covered by the California state programs; an alleged
investigation by the State of California with respect to those practices; and
litigation relating to the California state programs. The complaint seeks
monetary damages in unspecified amounts. Defendants have filed an answer.
On May 1, 1996, the Company entered into a memorandum of understanding with
representatives of the plaintiffs named in the IN RE QUANTUM HEALTH RESOURCES,
INC. SECURITIES LITIGATION and the R. JOE STOCKHUS complaints regarding a
proposed settlement of those lawsuits. The proposed settlement, under which
the defendants admit no liability, would cover a class period from October 25,
1994 to May 8, 1995 and contemplates that the Company will pay $5.5 million,
net of insurance coverage, in settlement on those claims. The Company recorded
a charge to earnings during the quarter ended March 31, 1996 for its portion of
the settlement. The settlement is conditioned on the conclusion of definitive
documentation, notice to putative class members in both lawsuits, and approval
by the court after a hearing. The LOUIS GOLDSTEIN lawsuit was not included in
the settlement and remains outstanding.
The Company believes it has substantial and meritorious defenses against the
allegations in the LOUIS GOLDSTEIN lawsuit, and intends to defend its position
vigorously. The Company further believes, based on information known at this
time, that the ultimate resolution of this remaining lawsuit will not have a
material adverse effect on the Company's consolidated financial position.
However, should an unfavorable resolution of this lawsuit occur, it is possible
that the Company's future results of operations and liquidity or its
consolidated financial position could be materially affected in a particular
period.
The Company is not a party to any other pending litigation, and is not aware of
any threatened litigation, that can reasonably be expected to have a material
adverse effect on the Company's consolidated financial condition.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
quarter ended March 31, 1996.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUANTUM HEALTH RESOURCES, INC.
Date: May 14, 1996 By: /s/ Douglas H. Stickney
--------------------------------------
Douglas H. Stickney, Chairman and
Chief Executive Officer
By: /s/ Keith T. Coleman
--------------------------------------
Keith T. Coleman, Senior Vice
President, Chief Financial Officer and
Treasurer
By: /s/ Timothy P. Zingraf
--------------------------------------
Timothy P. Zingraf, Vice President and
Chief Accounting Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 35,912
<SECURITIES> 19,440
<RECEIVABLES> 97,804
<ALLOWANCES> 4,610
<INVENTORY> 40,702
<CURRENT-ASSETS> 201,152
<PP&E> 29,528
<DEPRECIATION> 13,565
<TOTAL-ASSETS> 233,517
<CURRENT-LIABILITIES> 33,532
<BONDS> 86,250
<COMMON> 158
0
0
<OTHER-SE> 110,869
<TOTAL-LIABILITY-AND-EQUITY> 233,517
<SALES> 80,032
<TOTAL-REVENUES> 80,032
<CGS> 49,674
<TOTAL-COSTS> 63,475
<OTHER-EXPENSES> 8,997
<LOSS-PROVISION> 4,406
<INTEREST-EXPENSE> 1,137
<INCOME-PRETAX> (2,334)
<INCOME-TAX> (980)
<INCOME-CONTINUING> (1,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,354)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
