<PAGE>
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 third quarter ended September 30, 1998
Commission file number 80-19878
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 October 31,1998
---------------------------- ----------------------------------
Common Stock - .01 par value 11,006,386
1
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INDEX
OPTION CARE, INC. & SUBSIDIARIES
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited) PAGE NO.
Condensed Consolidated Balance Sheets - September 30, 1998
and December 31, 1997........................................ 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1998 and 1997...... 4
Condensed Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1998......................... 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997................ 6
Notes to Condensed Consolidated Financial Statements......... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................ 11
Item 2. Changes in Securities and Use of Proceeds.................... 11
Item 3. Defaults Upon Senior Securities.............................. 11
Item 4. Submission of Matters to a Vote of Security Holders.......... 11
Item 5. Other Information............................................ 11
Item 6. Exhibits and Reports on Form 8-K............................. 11
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
OPTION CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 1,039 $ -
Accounts receivable, net...................... 25,096 34,138
Inventories................................... 2,136 2,289
Other current assets.......................... 3,610 5,625
-------- --------
Total current assets...................... 31,881 42,052
Property and equipment, net..................... 5,868 5,865
Goodwill, net................................... 18,831 18,271
Other assets.................................... 1,897 2,451
-------- --------
Total assets.............................. $ 58,477 $ 68,639
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable........................ $ 6,664 $ 8,351
Revolving credit facility..................... 23,800 -
Other current liabilities..................... 4,067 9,495
-------- --------
Total current liabilities................. 34,531 17,846
Long-term debt, net of current portion.......... 319 28,801
Other liabilities............................... 499 -
Minority interest............................... 70 15
-------- --------
Total liabilities......................... 35,419 46,662
Stockholders' equity:
Common stock, $.01 par value, 30,000,000
shares authorized, 10,971,000 and
10,732,000 shares issued and outstanding
at September 30, 1998 and December 31, 1997. 110 108
Additional paid-in capital.................... 43,204 42,049
Accumulated deficit........................... (20,056) (20,180)
-------- --------
Total stockholders' equity................ 23,058 21,977
Total liabilities and stockholders'
equity.................................. $ 58,477 $ 68,639
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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OPTION CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 30,261 $ 27,690 $ 85,220 $71,364
Cost of revenues 24,747 22,395 70,115 56,200
-------- -------- -------- -------
Gross profit 5,514 5,295 15,105 15,164
Selling, general and
administrative expenses 4,082 3,354 10,243 9,589
Provision for doubtful accounts 1,390 612 3,168 1,574
Amortization of goodwill 137 110 394 282
-------- -------- -------- -------
Total operating expenses 5,609 4,076 13,805 11,445
Operating (loss) income (95) 1,219 1,300 3,719
Other expense, net (525) (414) (1,223) (577)
-------- -------- -------- -------
Income (loss) before income taxes (620) 805 77 3,142
Income tax expense (benefit) (264) 352 153 1,333
-------- -------- -------- -------
Net income (loss) $ (356) $ 453 $ (76) $ 1,809
======== ======== ======== =======
Net income (loss) per common shares
outstanding (basic EPS) $ (0.03) $ 0.04 $ (0.01) $ 0.17
======== ======== ======== =======
Net income (loss) per common and common
equivalent shares (diluted EPS) $ (0.03) $ 0.04 $ (0.01) $ 0.17
======== ======== ======== =======
Weighted average common shares
outstanding 10,982 10,698 10,880 10,633
======== ======== ======== =======
Weighted average common and common
equivalent shares outstanding 10,982 10,766 10,880 10,781
======== ======== ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity
------ ------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1997........ $108 $42,049 $(20,180) $21,977
Net loss........................... --- --- (76) (76)
Issuance of common stock........... 2 1,155 --- 1,157
---- ------- --------- --------
Balances, September 30, 1998....... $110 $43,204 $(20,256) $23,058
==== ======= ========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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OPTION CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ (76) $ 1,809
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization.............................. 2,158 1,801
Provision for doubtful accounts............................ 3,167 1,574
Change in assets and liabilities net of effects
from purchases of businesses.............................. 4,261 (7,761)
-------- ---------
Net cash provided (used) by operating activities................. 9,510 (2,577)
-------- ---------
Cash flows from investing activities:
Payments for purchases of property and equipment, net......... (1,079) (2,290)
Additions to other assets, net................................ (1,791) (1,111)
Payments for acquisitions, net of cash acquired............... (1,374) (10,141)
-------- ---------
Net cash (used) in investing activities.......................... (4,244) (13,542)
Cash flows from financing activities:
Net borrowings (repayments) on revolving credit facility...... (4,400) 16,600
Net (payments) of other long-term debt........................ (57) (881)
Proceeds from issuance of stock............................... 230 347
-------- ---------
Net cash provided (used) by financing activities................. (4,227) 16,066
Net increase (decrease) in cash and cash equivalents............. 1,039 (53)
Cash and cash equivalents, beginning of period................... --- 1,223
-------- ---------
Cash and cash equivalents, end of period......................... $ 1,039 $ 1,170
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998 and 1997
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 nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. 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, 1997.
2. Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130,"Reporting Comprehensive Income." This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The standard requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. The Company adopted the standard as of January 1, 1998. As
of September 30, 1998, the Company has no items of other comprehensive income
and, accordingly, is not required to report comprehensive income.
In June, 1997, the Financial Accounting Standards Board also issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company is required to adopt this new
standard for periods ending after fiscal 1997; however, adoption is not required
for interim financial reporting. This statement establishes standards for the
way companies are to report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company has evaluated the impact of
the disclosure requirements of this standard and has concluded that the standard
does not have any material impact on the financial position of the Company or
results of its operations.
7
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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, 1997. Any forward looking
statements in the following discussion relating to financial results and
performance, 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, availability of capital to fund operations and
acquisitions, sales and renewals of franchisees, government and regulatory
policies, general economic conditions and change in the competitive environment
in which the Company operates.
Discussion of Results of Operations for the Third Quarter and Nine Months ended
September 30, 1998
Revenues for the three months ended September 30, 1998 were $30.3 million, an
increase of $2.6 million or 9.3% from the revenues of $27.7 million reported for
the three months ended September 30, 1997. For the nine months ended September
30, 1998, revenues were $85.2 million compared to $71.4 million for the nine
months ended September 30, 1997, an increase of $13.9 million or 19.4%. These
increases were due primarily to a full period's operation from the acquisitions
completed during the second quarter of 1997, year-to-date internal growth from
company-owned locations of 11.1%, and the start-up on May 1, 1998 of a
coordinated care center to operate as the exclusive provider/coordinator for
Health Net, a subsidiary of Foundation Health Systems. These increases were
partially offset by decreases in product sales of $5.2 million for the nine
months ended September 30, 1998 due to management's continued transition to
direct billing of franchisees by selected manufacturers. Revenues for patient
care services through the company-owned locations for the nine months ended
September 30, 1998 represented 90.1% of total revenues, while royalty fees and
product sales represented 9.9% of total sales.
Gross profit as a percentage of revenue (gross margin) for the three months
ended September 30, 1998 was 18.2% compared to 19.1% for the three months ended
September 30, 1997. Gross margin was 17.7% for the nine months ended September
30, 1998 compared to 21.2% in the corresponding period in the prior year. These
declines in gross margin for the three and nine month periods ended September
30, 1998 were due primarily to the start-up of the coordinated care center and a
drug replacement program, which generate lower margin revenue.
Total operating expenses for the three months ended September 30, 1998 were $5.6
million, an increase of $1.5 million or 37.6% from operating expenses of $4.1
million for the three months ended September 30, 1997. During this period,
operating expenses were 18.5% of revenue compared to 14.7% for the comparable
period in the prior year. For the nine months ended September 30, 1998, total
operating expenses increased $2.4 million, or 20.6%, to $13.8 million as
compared to $11.4 million for the nine months ended September 30, 1997. During
this period, operating expenses were 16.2% of revenue compared to 16.0% for the
comparable period in the prior year. The increase resulted primarily from costs
associated with the start-up of the coordinated care center, charges associated
with the restructuring of the senior management team and additions to the
Company's provision for doubtful accounts. Year-to-date, the provision for
doubtful accounts percentage has increased to 3.7 % of revenues from 2.2% for
the comparable period in 1997. This was primarily due to the Company's adoption
in January, 1998, of a more conservative provision policy on aged receivables
and a deterioration of
8
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certain of the Company's outstanding receivables. In the third quarter, new
reporting procedures have been enacted by the Company to ensure reimbursement
processes are being completed in a timely manner.
Interest expense increased to $0.7 million for the three months ended September
30, 1998 from $0.5 million for the corresponding period in the prior year. For
the nine months ended September 30, 1998, interest expense increased to $1.8
million from $1.1 million for the corresponding period in the prior year.
Interest expense for the three and nine months ended September 30, 1998
consisted primarily of interest on the Company's revolving credit facility. As
of September 30, 1998 there were outstanding line of credit borrowings of $23.8
million.
The Company recorded an income tax benefit of $0.3 million for the three months
ended September 30, 1998 as compared to income tax expense of $0.4 million for
the comparable period in the prior year. Income tax expense was $0.2 million for
the nine months ended September 30, 1998 and $1.3 million for the nine months
ended September 30, 1997.
Net loss for the three months ended September 30, 1998 was $0.4 million compared
to net income of $0.5 million for the three months ended September 30, 1997. Net
loss for the nine months ended September 30, 1998 was $0.1 million compared to
net income of $1.8 million for the nine months ended September 30, 1997. Net
loss per common share for the three and nine months ended September 30, 1998 was
$0.03 and $0.01, respectively, compared to net income per common share for the
three and nine months ended September 30, 1997 of $0.04 and $0.17, respectively.
Liquidity and Capital Resources
The Company is a party to a $35 million revolving credit facility, which
contains certain financial covenants. As of June 30, 1998, the Company is out of
compliance with the interest coverage covenant. The Company is currently
negotiating with its lenders to secure a forbearance with respect to such
covenant and to modify the existing agreement. Also, the Company is not able to
make draw downs on its facility for working capital purposes. Management
believes that cash flow from operations, in conjunction with cash on hand, will
be sufficient to meet the cash needs of the business for the immediate future,
but there can be no assurances in this regard. As of September 30, 1998, the
Company had cash on hand of $1.0 million. Net cash flow provided by operating
activities for the nine months ended September 30, 1998 was $9.5 million.
In addition, the Company is currently negotiating with a new lender to secure a
long-term financing facility to replace the existing credit agreement.
Management anticipates that its efforts will be successful, however, it can
offer no assurances that the Company will be able to secure such financing on
acceptable terms and conditions. As of September 30, 1998, there were
outstanding borrowings under the facility of $23.8 million, which have been
classified as current liabilities.
Contingency Matters
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer equipment,
software and devices with imbedded technology that are time sensitive may treat
years as occurring between 1900 and the end of 1999 and may not self-convert to
reflect the upcoming change in the century. If not corrected, this problem could
result in system failures or miscalculations and erroneous results by, or at,
Year 2000.
The Company has undertaken, but not yet completed, a program to understand the
nature and extent of the work required to make its systems Year 2000
9
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compliant. This program encompasses the Company's operating information and
facilities systems, and the readiness of customers, third-party payers, vendors
and other third parties with which the Company does business. The program
includes the following phases : awareness and inventory, detailed assessment and
resolution, testing, deployment and contingency plan development for all areas.
To date, the Company has substantially completed an internal review of its
computer equipment and software systems and other equipment with imbedded
technology, and is in the early stages of completion of the other phases of its
program, including the implementation of remediation measures for certain
identified systems, ordinary course replacement of equipment and software with
replacements which are Year 2000 complaint, and a comprehensive review of
customers, vendors and other third parties to determine the extent to which
interfaces with such entities are vulnerable to Year 2000 issues. The Company's
objective is to become Year 2000 compliant with its critical systems during
1999, with substantial time for further testing, verification and conversion of
less important activities and systems.
The total cost of the Year 2000 project to date has not been material. Based on
the program to date, the Company does not expect that future costs of
modifications will have a material adverse effect on the Company's financial
position or results of operations and that currently anticipated costs to be
incurred by the Company with respect to Year 2000 issues will be funded from
operating cash flows. However, if all Year 2000 issues are not properly
identified, or assessment, remediation and testing are not effected timely with
respect to Year 2000 problems that are identified, there can be no assurance
that the Year 2000 issue will not materially adversely impact the Company's
results of operations or adversely affect the Company's relationships with
customers, vendors, or others. Additionally, there can be no assurance that the
Year 2000 issues of other entities will not have a material adverse impact on
the Company's systems or results of operations.
Because the Company expects that its internal systems will become Year 2000 in a
timely manner, the Company believes that the most likely worst case scenario
would result from vendors or other third parties failing to achieve Year 2000
compliance. Depending upon the number of third parties, their identity and the
nature of the noncompliance, the Year 2000 issue could have a material adverse
effect on the Company's financial position or results of operations. The Company
has not yet developed full contingency plans for any critical problems which may
occur in any of the assessment areas noted above, but anticipates that such
plans will be completed in 1999.
In addition, 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 cash flow impact, if any, which such changes may have
on providers of health care services and on the Option Care locations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
10
<PAGE>
PART II OTHER INFORMATION
Item 1 Lease Proceedings
- ------ -----------------
Not Applicable.
Item 2 Changes in Securities and Use of Proceeds
- ------ -----------------------------------------
Not Applicable.
Item 3 Defaults Upon Senior Securities
- ------- -------------------------------
The Company is currently in violation of the interest coverage
covenant on its $35 million revolving credit facility. There have
been no defaults on principal or interest payments under the
facility. See "Liquidity and Capital Resources".
Item 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Not Applicable.
Item 5 Other Information
- ------ -----------------
Not Applicable.
Item 6 (a) Exhibits
- ---------- --------
11 Computations of Per Share Earnings
27 Financial Data Schedule
Item 6 (b) Reports on Form 8-K or Form 8
- ---------- -----------------------------
No reports on Form 8-K were filed by the Registrant for the
quarter ended September 30, 1998.
11
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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/ Michael A. Siri
Michael A. Siri
Chief Financial Officer
Date: November 12, 1998
12
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Exhibit 11
OPTION CARE, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ (356) $ 453 $ (76) $ 1,809
======== ======= ======== =======
Average shares outstanding 10,847 10,600 10,827 10,517
Weighted average shares issued 135 60 53 116
-------- ------- -------- -------
Weighted average common shares outstanding 10,982 10,698 10,880 10,633
Net effect of dilutive stock options based on
treasury stock method - 78 - 148
-------- ------- -------- -------
Weighted average common and
common equivalent shares 10,982 10,776 10,880 10,781
======== ======= ======== =======
Net income (loss) per common
shares outstanding (basic) $ (0.03) $ 0.04 $ (0.01) $ 0.17
======== ======= ======== =======
Net income (loss) per common and
common equivalent shares (diluted) $ (0.03) $ 0.04 $ (0.01) $ 0.17
======== ======= ======== =======
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 1,039,000 0
<SECURITIES> 0 0
<RECEIVABLES> 29,523,000 37,892,000
<ALLOWANCES> 4,427,000 3,753,000
<INVENTORY> 2,136,000 2,289,000
<CURRENT-ASSETS> 31,881,000 42,052,000
<PP&E> 13,260,000 11,851,000
<DEPRECIATION> 7,392,000 5,986,000
<TOTAL-ASSETS> 58,477,000 68,639,000
<CURRENT-LIABILITIES> 34,531,000 17,846,000
<BONDS> 0 0
0 0
0 0
<COMMON> 110,000 108,000
<OTHER-SE> 22,948,000 21,869,000
<TOTAL-LIABILITY-AND-EQUITY> 58,477,000 68,639,000
<SALES> 428,000 1,708,000
<TOTAL-REVENUES> 30,261,000 85,220,000
<CGS> 14,393,000 38,049,000
<TOTAL-COSTS> 24,747,000 70,115,000
<OTHER-EXPENSES> 525,000 1,223,000
<LOSS-PROVISION> 1,390,000 3,168,000
<INTEREST-EXPENSE> 672,000 1,758,000
<INCOME-PRETAX> (620,000) 77,000
<INCOME-TAX> (264,000) 153,000
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (356,000) (76,000)
<EPS-PRIMARY> (0.03) (0.01)
<EPS-DILUTED> (0.03) (0.01)
</TABLE>
