SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the second quarter ended June 30, 1996
Commission file number 0-19878
OPTION CARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3791193
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
100 Corporate North
Suite 212
Bannockburn, Illinois 60015
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (847) 615-1690
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 31, 1996
Common Stock - .01 par value 9,993,688
<PAGE>
INDEX
OPTION CARE, INC. & SUBSIDIARIES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) PAGE NO.
Condensed Consolidated Balance Sheets - June 30, 1996
and December 31, 1995........................................ 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1996 and 1995............ 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995...................... 5
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 1996............................... 6
Notes to Condensed Consolidated Financial Statements......... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 11
Item 6. Exhibits..................................................... 13
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
OPTION CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............... $ 738 $ 389
Accounts receivable, net................. 18,784 15,807
Inventories.............................. 1,328 1,292
Deferred income taxes.................... 626 1,402
Other current assets..................... 4,765 3,748
------- -------
Total current assets.................. 26,241 22,638
Property and equipment, net................ 3,645 3,260
Goodwill................................... 31,296 30,228
Other assets............................... 2,434 1,642
------- -------
Total assets.......................... $63,616 $57,768
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt........ $ 1,067 $ 1,341
Trade accounts payable................... 3,091 2,849
Accrued wages & related employee benefits 2,001 1,810
Accrued expenses......................... 1,156 1,193
------- -------
Total current liabilities............. 7,315 7,193
Long-term debt, excluding current portion.. 10,687 6,696
Deferred income taxes...................... 1,024 1,024
Minority interest.......................... 164 296
------- -------
Total liabilities..................... 19,190 15,209
Stockholders' equity:
Common stock, $.01 par value, 30,000,000
shares authorized, 9,993,688 and 9,915,460
shares issued and outstanding at
June 30, 1996 and December 31, 1995,
respectively........................... 100 100
Additional paid-in capital............... 41,403 41,125
Retained earnings........................ 2,923 1,334
------- -------
Total stockholders' equity............ 44,426 42,559
------- -------
Total liabilities and stockholders'
equity............................. $63,616 $57,768
<FN>
See accompanying notes to condensed consolidated financial statements.<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
------------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Royalty Fees & Other $ 3,217 $ 3,004 $ 6,348 $ 5,917
Product Sales 2,266 3,095 4,589 6,314
Patient Care Services 11,943 10,080 21,515 19,351
------- ------- ------- -------
Total revenues 17,426 16,179 32,452 31,582
Cost of Revenues 12,492 11,428 23,068 22,301
------- ------- ------- -------
Gross Profit 4,934 4,751 9,384 9,281
Selling, General and
Administrative Expenses 2,605 2,697 5,155 5,587
Provision for Doubtful Accounts 589 373 947 741
Amortization of Goodwill 257 209 477 417
------ ------ ------ ------
Total Operating Expenses 3,451 3,279 6,579 6,745
Operating Income 1,483 1,472 2,805 2,536
Other Income (Expense), Net 15 (108) 127 (69)
------- ------- ------- -------
Income Before Income Taxes 1,498 1,364 2,932 2,467
Income Tax Expense 672 628 1,343 1,176
------- ------- ------- -------
Net Income $ 826 $ 736 $ 1,589 $ 1,291
Net Income Per Common &
Common Equivalent Share $ 0.08 $ 0.07 $ 0.16 $ 0.13
Weighted Average Common &
Common Equivalent Shares
Outstanding 10,241 9,956 10,181 9,950
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
OPTION CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands)
(Unaudited)
<CAPTION>
1996 1995
------- - ------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 1,589 $ 1,291
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 1,098 940
Provision for doubtful accounts...................... 947 741
Change in assets and liabilities net of effects
from purchase of businesses......................... (3,009) (1,612)
-------- --------
Net cash (used) provided by operating activities........ 625 1,360
-------- -------
Cash flows from investing activities:
Payments for purchases of property and equipment........ (1,007) (720)
Additions to other assets............................... (3,264) (348)
-------- -------
Net cash used in investing activities................... (4,271) (1,068)
Cash flows from financing activities:
Net borrowings (repayments)on revolving credit facility. 3,000 (20)
Borrowings (repayments) of other long-term debt......... 717 (316)
Proceeds from issuance of stock ........................ 278 3
Net cash provided (used) by financing activities..... 3,995 (333)
------ -----
Net increase (decrease) in cash........................... 349 (41)
Cash and cash equivalents, beginning of period............ 389 231
------ -----
Cash and cash equivalents, end of period.................. $ 738 $ 190
======= =======
<FN>
See accompanying notes to condensed consolidated financial statements.<PAGE>
</TABLE>
<PAGE>
<TABLE>
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(In thousands, except share data)
(Unaudited)
<CAPTION>
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
------- -------- -------- ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995...... $ 100 $ 41,125 $ 1,334 $ 42,559
Net income....................... ----- ----- 1,589 1,589
Issuance of 12,340 shares of
common stock in conjunction
with exercise of employee
stock options and 65,888 shares
in conjunction with purchase of
minority interest.............. ----- 278 ----- 278
------- -------- -------- --------
Balances, June 30, 1996.......... $ 100 $ 41,403 $ 2,923 $ 44,426
<FN>
See accompanying notes to condensed consolidated financial statements.<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996 & 1995
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1995.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995. Any forward looking
statements in the following discussion relating to acquisitions or other
business development activities and to future competition or regulation involve
risks and uncertainties that could significantly affect anticipated results in
the future. These risks and uncertainties include, but are not limited to,
uncertainties relating to acquisitions and divestitures, sales and renewals of
franchises, government and regulatory policies, general economic conditions and
changes in the competitive environment in which the Company operates.
Discussion of Results of Operations for the Second Quarter Ended June 30, 1996.
For the second quarter ended June 30, 1996 Option Care, Inc. reported a 12%
increase in net income compared to net income for the similar period in 1995.
Total revenues increased $1.2 million or 8% over revenues for the same period in
1995.
Royalty fees and other revenues increased 7%, with royalty declines due to
franchise acquisitions and other closures offset by franchise sales revenue and
franchise termination fees. The Company has franchise contracts up for renewal
in 1996 and 1997. The terms of renewal agreements may not be identical to those
under existing agreements. The loss of larger, mature franchises reduces
royalties, which the Company seeks to offset through new franchise sales and
same store growth. Same store royalty growth for 1996 to date is essentially
unchanged. The Company continues to actively market new franchise territories,
and expects to recognize royalties from these new territories in future periods.
When a franchise is acquired by the Company, management expects increased
patient care service revenue to offset the decrease in royalty fees and product
sales revenue. In certain instances, franchise owners seek termination of the
agreement before expiration of the term. The franchise agreement calls for
termination fees related to the loss of future royalty streams upon early
termination.
Product sales were down $0.8 million or 27% due to a planned transition to
direct-billing of franchisees by selected manufacturers. The administrative
fees that the Company recognizes from such sales are recorded as other income
rather than as revenue. Management expects the transition to have a negative
effect on gross profit but an immaterial effect on net income. Management
believes that the full effect of the direct-billing change has been recognized
at this time.
Patient care services revenue was up $1.9 million or 18%, primarily as a result
of 1995 and 1996 acquisitions. Management expects additional revenue growth
from franchises and other health care businesses acquired in the second quarter.
Gross profit for the second quarter of fiscal 1996 increased $0.2 million or 4%
over gross profit for the same period in fiscal 1995. Gross profit as a
percentage of revenues ("gross margin") was 28.3% in the second quarter of
fiscal 1996 and 29.4% in the comparable period of fiscal 1995. The decline in
gross margin is due primarily to changes in the Company's revenue mix and cost
structure. Revenues from patient care services (associated with Company-owned
Option Care offices), have a higher cost of revenue than the Company's franchise
business and product sales to the franchise network.
<PAGE>
Operating expenses in the second quarter of fiscal 1996 increased $0.2 million
or 5% compared to the same period in fiscal 1995, due primarily to increased
amortization of intangibles and provision for doubtful accounts related to the
Company's acquisition program. The allowance for doubtful accounts as a
percentage of total accounts receivable was 6.8% at June 30, 1996 compared with
7.1% at December 31, 1995. Operating expenses as a percentage of revenue were
20% in the second quarter of fiscal 1996 and 20% in the comparable period of
fiscal 1995.
Other income (expense) consists primarily of vendor administration fees,
interest income on accounts and notes receivable and interest expense. For the
quarter and year to date, increased vendor administration fees relating to the
transition to direct product billing were substantially offset by increased
interest expense. The net increase in other income is due primarily to the gain
on sale of assets of the Company's Washington state long term care pharmacy.
Pretax income for the second quarter of fiscal 1996 increased $0.1 million or
10% over the comparable period of fiscal 1995, primarily as a result of the
increase in revenue.
The Company's effective tax rate was 45% in the second quarter of fiscal 1996
versus 46% for the second quarter of fiscal 1995. The effective tax rate is
higher than the federal statutory tax rate of 34% due to state income taxes and
non-deductible expenses, primarily goodwill amortization. The non-deductible
portion of the Company's expenses is essentially fixed, resulting in a
decreasing effective tax rate with increasing pretax income.
Discussion of Results of Operations for the Six Months Ended June 30, 1996.
For the first six months of fiscal 1996, Option Care, Inc. reported a 23%
increase in net income compared to net income for the similar period in 1995.
Total revenues for the first six months of fiscal 1996 increased $0.9 million or
3% over revenues for the same period in fiscal 1995.
Royalty fees and other revenues increased 7%, with royalty declines due to
franchise acquisitions and other closures offset by franchise sales revenue and
franchise termination fees. The Company has franchise contracts up for renewal
in 1996 and 1997. The terms of renewal agreements may not be identical to those
under existing agreements. The loss of larger, mature franchises reduces
royalties, which the Company seeks to offset through new franchise sales and
same store growth. Same store royalty growth for 1996 to date is essentially
unchanged. The Company continues to actively market new franchise territories,
and expects to recognize royalties from these new territories in future periods.
When a franchise is acquired by the Company, management expects increased
patient care service revenue to offset the decrease in royalty fees and product
sales revenue. In certain instances, franchise owners seek termination of the
agreement before expiration of the term. The franchise agreement calls for
termination fees related to the loss of future royalty streams upon early
termination.
Product sales were down $1.7 million or 27% due to a planned transition to
direct-billing of franchisees by selected manufacturers. The administrative
fees that the Company recognizes from such sales are recorded as other income
rather than as revenue. Management expects the transition to have a negative
effect on gross profit but an immaterial effect on net income. Management
believes that the full effect of the direct-billing change has been recognized
at this time.
<PAGE>
Patient care services revenue was up $2.2 million or 11%, primarily as a result
of 1995 and 1996 acquisitions. Management expects additional revenue growth
from franchises and other health care businesses acquired in the second quarter.
Gross profit for the first six months of fiscal 1996 increased $0.1 million or
1% over gross profit for the same period in fiscal 1995. Gross profit as a
percentage of revenues ("gross margin") was 29% for the first six months of
fiscal 1996 and 29% in the comparable period of fiscal 1995.
Operating expenses in the first six months of fiscal 1996 decreased $0.2 million
or 2% compared to the same period in fiscal 1995, due primarily to personnel
productivity increases offsetting increased amortization of intangibles and
provision for doubtful accounts related to acquisitions. Operating expenses as
a percentage of revenue were 20% in the first six months of fiscal 1996 and 21%
in the comparable period of fiscal 1995.
Other income (expense) consists primarily of vendor administration fees,
interest income on accounts and notes receivable and interest expense. For the
quarter and year to date, increased vendor administration fees relating to the
transition to direct product billing were substantially offset by increased
interest expense. The net increase in other income is due primarily to the gain
on sale of assets of the Company's Washington state long term care pharmacy.
Pretax income for the first six months of fiscal 1996 increased $0.5 million or
19% over the comparable period of fiscal 1995, as a result of both expense
controls and increased revenues.
The Company's effective tax rate was 46% in the first six months of fiscal 1996
versus 48% for the first six months of fiscal 1995. The effective tax rate is
higher than the federal statutory tax rate of 34% due to state income taxes and
non-deductible expenses, primarily goodwill amortization. The non-deductible
portion of the Company's expenses is essentially fixed, resulting in a
decreasing effective tax rate with increasing pretax income.
Liquidity and Capital Resources
The Company's working capital was $18.9 million at June 30, 1996, compared with
$15.4 million on December 31, 1995. This growth is due primarily to an increase
in accounts receivable. Management believes that cash flow from operations, in
conjunction with borrowing availability under its credit facility, will be
sufficient to meet the cash needs of the business for the immediate future.
Future acquisitions of franchised and non-franchised health care businesses may
require additional financing.
The existing credit facility, amended July 1, 1996, provides the Company with a
maximum borrowing capacity of $15.0 million through January 1998 subject to
certain financial covenants. The available balance at June 30, 1996 was $5.9
million. Management intends to refinance this debt and seek additional financing
for possible acquisitions of existing franchises and other independent
healthcare businesses during the remainder of 1996 and 1997, but there can be no
guarantee that capital will be available or available on acceptable terms.
There are currently various proposals under development to enact health care
reform on a national, state and local level. It is not possible at this time to
predict the impact which any such changes, including the pending third quarter
changes in the Medicare Certificate of Medical Necessity regulations, may have
on providers of home health care services and on the Option Care offices.
<PAGE>
PART II OTHER INFORMATION
Item 4 Submissions of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 16, 1996.
Two Directors, James G. Andress and Erick E. Hanson, were elected to
serve terms expiring in 1999. The following individuals will
continue to serve as Directors of the Company: John N. Kapoor,
Jerome F. Sheldon and Roger W. Stone. Of the 9,593,882 shares
represented at the meeting, Mr. Andress received 9,556,928 votes for
and 36,954 votes abstaining and Mr. Hanson received 9,557,261 votes
for and 36,621 votes abstaining. The shareholders also voted to
approve the 1996 Employee Stock Purchase Plan. Approval of the plan
received 8,464,689 votes in favor, 58,450 votes opposed, 37,721 votes
abstaining and 1,033,022 broker non-votes.
Item 5 Other Events
None.
Item 6 (a) Exhibits
11 Computations of Per Share Earnings
27 Financial Data Table
Item 6 (b) Reports on Form 8-K or Form 8
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
OPTION CARE, INC.
By: /s/ J. Jeffrey Fox
J. Jeffrey Fox
Vice President and Chief Financial
Officer
Date: August 12, 1996
<PAGE>
<TABLE>
Exhibit 11
OPTION CARE, INC. AND SUBSIDIARIES
COMPUTATIONS OF PER SHARE EARNINGS
(In thousands, except share data)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30
1996 1995 1996 1995
------------------ ----------------
<S> <C> <C> <C> <C>
Net income......................... $ 826 $ 736 $ 1,589 $ 1,291
Weighted average shares issued..... 9,983 9,936 9,982 9,936
Additional shares included assuming
exercise of stock options using
treasury stock method............ 258 20 199 14
Weighted average common shares and
common share equivalents......... 10,241 9,956 10,181 9,950
Net income per common and common
equivalent share................. $ 0.08 $ 0.07 $ 0.16 $ 0.13
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 738 738
<SECURITIES> 0 0
<RECEIVABLES> 18,784 18,784
<ALLOWANCES> 0 0
<INVENTORY> 1,328 1,328
<CURRENT-ASSETS> 26,241 26,241
<PP&E> 3,645 3,645
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 63,616 63,616
<CURRENT-LIABILITIES> 7,315 7,315
<BONDS> 0 0
0 0
0 0
<COMMON> 100 100
<OTHER-SE> 44,326 44,326
<TOTAL-LIABILITY-AND-EQUITY> 63,616 63,616
<SALES> 0 0
<TOTAL-REVENUES> 17,426 32,452
<CGS> 0 0
<TOTAL-COSTS> 12,492 23,068
<OTHER-EXPENSES> 2,862 5,632
<LOSS-PROVISION> 589 947
<INTEREST-EXPENSE> (15) (127)
<INCOME-PRETAX> 1,498 2,932
<INCOME-TAX> 672 1,343
<INCOME-CONTINUING> 826 1,589
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 826 1,589
<EPS-PRIMARY> .08 .16
<EPS-DILUTED> .08 .16
</TABLE>
