<PAGE>
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 0-19878
------------------------
OPTION CARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-3791193
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 CORPORATE NORTH, SUITE 212, 60015
BANNOCKBURN, ILLINOIS (Zip Code)
(Address of principal executive
offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(847) 615-1690
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
TITLE OF EACH CLASS
------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 17, 2000 was approximately $34,006,921 (based on closing
sale price of $6.50 per share as reported by the Nasdaq National Market and
published in the Wall Street Journal.) Solely for purposes of the foregoing
calculation of aggregate market value of voting stock held by non-affiliates,
the registrant has assumed that all Directors and executive officers of the
registrant are affiliates of the registrant. Such assumption shall not be deemed
as determination by the registrant that such persons are affiliates of the
registrant for any purposes.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 17, 2000 was approximately 11,686,658.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2000 Annual
Shareholders Meeting are incorporated by reference into Items 10-13 in Part III
of this Report.
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<PAGE>
OPTION CARE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I:
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 8
Item 3. Legal proceedings........................................... 8
Item 4. Submission of matters to a vote of security holders......... 8
Item 4(A). Executive officers of registrant............................ 9
PART II:
Item 5. Market for registrant's common equity and related
stockholders matters........................................ 11
Item 6. Selected financial data..................................... 11
Item 7. Management's discussion and analysis of financial condition
and results of operations................................... 13
Item 7(A). Quantitative and qualitative disclosures about market
risk........................................................ 18
Item 8. Financial statements and supplementary data................. 18
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure.................................... 18
PART III:
Item 10. Directors and executive officers of the registrant.......... 19
Item 11. Executive compensation...................................... 19
Item 12. Security ownership of certain beneficial owners and
management.................................................. 19
Item 13. Certain relationships and related transactions.............. 19
PART IV:
Item 14. Exhibits, financial statement schedule, and reports on Form
8-K......................................................... 20
</TABLE>
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report on Form 10-K and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contains statements that are or will be forward-looking, such as
statements relating to acquisitions and other business development activities,
future capital expenditures and the effects of future regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by, or on behalf of, the Company. These risks
and uncertainties include, but are not limited to, uncertainties affecting
businesses of the Company and its franchisees relating to acquisitions and
divestitures (including continuing obligations with respect to completed
transactions), sales and renewals of franchises, government and regulatory
policies (including federal, state and local efforts to reform the delivery of
and payment for healthcare services), general economic conditions (including
economic conditions affecting the healthcare industry in particular), the
pricing and availability of equipment and services, technological developments
and changes in the competitive environment in which the Company operates.
2
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Option Care, Inc. (together with its subsidiaries, collectively "the
Company") is a provider of specialty pharmaceutical products and services for
intravenous delivery. The Company contracts with managed care organizations and
other third party payors to provide pharmaceutical products and complex
compounded solutions through its national network of 140 offices for
administration to patients in alternative site settings. In addition, the
Company markets specialty drugs and pharmacy consulting services directly to
physicians and patients. The Company also supplies state-of-the-art data
management products and services to the home healthcare industry. The Company
was incorporated in Delaware on July 9, 1991. The Company's predecessor was
incorporated in California in January 1984.
The Company has an established nationwide presence with a strong brand
identity and broad accessibility for managed care payors and customers. As of
December 31, 1999, 140 Option Care offices were operating in 34 states, with 117
offices owned and operated by franchise owners and 23 offices owned and operated
by the Company. Certain of the Company-owned offices also operate other
ancillary healthcare businesses, which provide nursing, respiratory therapy and
durable medical equipment. Revenue generated from patient care services from all
140 Option Care offices grew by $14 million to $285 million in 1999 from
$271 million realized in 1998.
The Company and its franchises have formed networks to provide managed care
companies and payors with infusion therapy, respiratory services, nursing
services and durable medical equipment. Many referral sources, such as
hospitals, physicians, third-party payors and case management companies, may
prefer making patient referrals to multi-office companies or systems, such as
the Option Care system. Under the Company's Optionet-Registered Trademark-
program, the Company has contracted with certain regional and national
third-party payors and case management companies to refer patients to Company
and franchise offices.
The Company is committed to the providing of superior quality care and
believes that an important measure of quality in the healthcare industry is
accreditation by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") or similar organizations. As of December 31, 1999, over
90% of the franchise and Company owned offices were accredited and a total of 24
or 17% received commendations. Since 1990, all new franchises have been required
by the Company to apply for accreditation within their first year of operation.
The Company's goal is for all Option Care offices to become accredited.
The Company's business consists of the following components:
- - HEALTHCARE SERVICES
The Company is a direct provider of alternate site infusion therapy,
specialty pharmacy and drug distribution and other healthcare services.
Option Care offices compound, dispense and administer pharmaceuticals, sell
medical supplies, sell or rent associated durable medical equipment, provide
skilled nursing services, train patients and their caregivers, consult with
attending physicians, and process reimbursement claims. The decision to
proceed with alternate site therapies is generally made jointly by the
patient, the attending physician and a representative of the Option Care
office involved. The decision involves obtaining and evaluating information
about the patient's medical history, care environment and insurance
coverage, as well as discussing the patient's or caregiver's willingness and
ability to participate in the management of care in an alternate site
setting.
Through its owned offices in Florida and Michigan, the Company contracts
with managed care organizations and physician groups to provide biotech
injectable drugs for administration to patients in physicians' offices and
other alternative sites. The Company also markets injectable drugs and
provides pharmacy consulting services directly to physicians and patients.
In January 2000, the
3
<PAGE>
Company repositioned the specialty pharmacy and drug distribution business
into a separate division doing business as OptionMed-TM-.
The Company's nursing services include providing support for infusion
therapies, providing traditional home health nursing services, skilled
nursing services and private duty services. These nursing services include
patient assessment, training, monitoring, documentation and physician
communication.
- - FRANCHISING PROGRAM
As of December 31, 1999, the Company had 117 franchise offices that also are
providers of in-home or alternative site infusion therapy and other
healthcare services. Effective January 1, 1999 any new franchise granted by
the Company provides the franchise owner the authority to own and operate an
Option Care office within a granted territory for up to a 10-year term. The
initial franchise fee for start-up franchises is payable by the franchise
owner upon execution of the franchise agreement. The exact amount of the
initial franchise fee is determined by the Company based on the population
in the territory granted to the franchise owner. The Company's franchise
agreements generally provide for royalties on a sliding scale ranging from a
high of 9% to a low of 2% of annual gross cash receipts.
Each franchise office is required to maintain a licensed pharmacy equipped
to compound sterile patient medications and parenteral solutions as
prescribed by the patient's physician. Each location operates under a
confidential, proprietary system developed by the Company, which includes
procedures for quality assurance, patient care, consistency and uniformity
of pharmaceuticals and offered services, initial training and ongoing
assistance.
Key employees of each franchise office, including the director of pharmacy,
director of nursing, and general manager, must complete initial training
programs provided by the Company. In addition to required initial training,
the Company may offer additional programs on selected topics to franchise
owners and their employees. The Company's initial training stresses the
importance of responsive service. In addition, the Company may make
available to franchisees additional programs for marketing and operating
support services.
The Company's franchise agreements require, among other things, that
franchise owners meet the Company's policies on quality assurance, clinical
services and local marketing and to obtain specified liability insurance
protecting the franchise owner against claims arising from the operation of
the franchised business.
The Company conducts an annual meeting for franchise owners and their key
employees to offer information on new and existing Option Care programs and
procedures. The Company works with a National Advisory Council to discuss
and communicate recommendations concerning the franchise system.
The following table indicates the number of Option Care franchise offices at
the beginning of the year, the number of new franchises sold, the number of
franchises terminated, consolidated or purchased and the number of
franchises at the end of each year for the three-year period ended
December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Number of franchise offices at beginning of year............ 121 138 164
New franchises opened....................................... 4 3 4
Franchises terminated, consolidated or purchased............ (8) (20) (30)
--- --- ---
Number of franchise offices at end of year.................. 117 121 138
=== === ===
</TABLE>
4
<PAGE>
- - DATA MANAGEMENT SYSTEMS
Management by Information, Inc. (MBI) supplies state-of-the-art data
management products and services to the healthcare industry through such
products as MBI HomeCare V5.0, which was introduced in 1999. MBI specializes
in home infusion and home medical equipment software products which are
designed with the ability to integrate with other key information systems to
provide a seamless business solution to healthcare companies.
The Company plans to continue to investigate expanding, growing and
developing its business through (i) selective entry into new geographic markets
through alliances, acquisition or start-ups, (ii) expanding the specialty
pharmacy and distribution division, OptionMed-TM-, into additional geographic
markets, and (iii) increasing the volume of current therapies and expanding
coverage of new therapies and services. To meet the Company's objectives,
additional financing sources may be required, for which the Company can give no
guarantees that such financing will be available or available at an acceptable
cost.
REIMBURSEMENT FOR SERVICES
Most patient care service revenue of Company-owned offices are derived from
third-party payors, such as insurance companies, health maintenance
organizations, self-insured employers, Medicare and state Medicaid programs.
Where permitted by law or contract, patients are billed for amounts not
reimbursed by third-party payors. Reimbursement from Medicare and Medicaid
programs is subject to statutory and regulatory requirements, administrative
rulings, interpretations of policy, implementation of reimbursement procedures,
retroactive payment adjustments and governmental funding restrictions, all of
which may materially affect payments to home healthcare providers.
The following table sets forth the approximate percentages of revenue
attributable to private and government reimbursement sources for Company-owned
offices for the three year period as indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Private insurance and other private payors................. 82% 75% 60%
Medicare, Medicaid and other governmental programs......... 18 25 40
--- --- ---
Total.................................................. 100% 100% 100%
=== === ===
</TABLE>
SALES AND MARKETING
Generating patient referrals is vital to the success of any alternative site
healthcare business. Option Care offices are required to employ sales personnel
whose primary responsibility is to market Option Care services to potential
referral sources. Marketing efforts focus on area hospitals, physicians,
managed-care and other payors and case management companies. The active role
which general managers and franchise owners typically play in the operation of
the business also helps create a focused effort on developing the market for
each location.
The Company has established a program called Optionet-Registered Trademark-,
through which the Company contracts with certain regional and national
third-party payors (e.g., insurance companies, health maintenance organizations
and large self-insured employers) to receive referrals of their covered members
to participating Option Care offices. Based on payor preference or requirements,
Option Care offices bill the payor directly for services rendered, or
Optionet-Registered Trademark- arranges for a third-party billing service to
bill the payor for a billing fee.
5
<PAGE>
SUPPLIERS
Option Care offices purchase pharmaceuticals and supplies relating to their
Option Care business from suppliers specified by the Company. The Company may
derive revenue through administrative fees received from contracted
manufacturers.
Neither the Company nor its franchises have experienced significant
difficulty in purchasing pharmaceuticals, supplies or equipment. In the event
that current suppliers cease or are unable to sell pharmaceuticals and supplies
to the Company or its franchises, the Company believes that alternate sources
can be located which would adequately meet their needs without undue burden.
GOVERNMENT REGULATION
HEALTH CARE REGULATION
Healthcare is subject to regulation by the various states in which the
Company and its franchise owners conduct their businesses, as well as by the
federal government. Option Care offices are subject to federal, state and local
laws (including licensing laws) governing pharmacies, home health agencies,
nursing services, health planning and professional conduct. Each Option Care
office must be appropriately registered with the United States Food and Drug
Administration and Drug Enforcement Administration and comply with record
keeping and inventory requirements for the dispensing of controlled substances.
Although the Company provides its franchise offices guidance in compliance with
regulatory requirements, it is not responsible for such compliance. The failure
of an Option Care office to obtain, renew or maintain any required regulatory
approvals or licenses could adversely affect that location and could prevent
such location from offering services to patients.
To the extent an Option Care office provides service under the Medicare,
Medicaid and other governmental programs, it is subject to a broad body of laws
regulating those programs, including federal "fraud and abuse" laws. Among other
things, these laws prohibit any bribe, kickback or rebate in return for the
referral of Medicare or Medicaid patients. In addition, many of the states in
which Option Care offices operate have laws that prohibit certain direct or
indirect payments or fee-splitting arrangements between health care providers
that are designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products and services.
Several states restrict or prohibit referrals where a physician has a financial
relationship with the provider. In addition, some states restrict certain
business relationships between physicians and pharmacies. State laws vary from
state to state. The Company exercises care in structuring its arrangements with
health care providers and referral sources to comply with the relevant statutes,
but there can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the practices of the Company or the franchise owners.
Other state and federal laws and regulations could also adversely affect
existing or future financial relationships between physicians and health care
businesses, including franchised businesses. The Omnibus Reconciliation Act of
1993 ("Act") prohibits physicians, subject to certain exceptions, who have a
"financial relationship" with an entity from referring patients to that entity
for the provision of "designated health services" which may be reimbursed by
Medicare or Medicaid. The "designated health services" include parenteral and
enteral nutrients; equipment and supplies; outpatient prescription drugs; and
durable medical equipment. With certain exceptions, this Act also requires
entities seeking payment from the Medicare and Medicaid programs to report any
ownership and compensation arrangements with physicians. This federal law bars,
with limited exceptions, physician ownership of an Option Care franchise office.
The United States Department of Health and Human Services, Office of the
Inspector General ("OIG"), has been utilizing a civil statute, the False Claims
Act, in challenging Medicare billing practices. In particular, the False Claims
Act provides that any person who knowingly presents, or causes to be presented,
to an officer or employee of the United States Government or a member of the
Armed Forces
6
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of the United States a false or fraudulent claim for payment or approval may be
subject to a civil penalty of $10,000, plus treble damages for each fraudulent
claim. It is the Company's understanding that the OIG considers each claim that
is submitted for reimbursement to the Medicare program to be a claim for
purposes of the False Claims Act.
New healthcare legislation is promulgated on an ongoing basis and could
impact providers of Option Care services, although it is not possible at this
time to predict the nature or extent of any impact upon Option Care offices.
The Company is unable to predict whether any new legislation or regulations
may be enacted in the future which may affect the business of the Company,
Option Care offices or the health care industry, including third-party
reimbursement. Accordingly, the Company cannot predict whether any such new
legislation or regulations would have a material adverse impact on the Company.
FRANCHISE REGULATION
The Company's franchising operations are subject to Federal Trade Commission
("FTC") regulation and state laws which regulate the offer and sale of
franchises. The Company is also subject to a number of state laws which regulate
substantive aspects of the relationship between franchisors and franchise
owners.
The FTC's Trade Regulation Rule on Franchising (the "FTC Rule") requires the
Company to furnish prospective franchise owners with a uniform franchise
offering circular containing information prescribed by the FTC Rule. At least 12
states presently regulate the offer and sale of franchises and, in almost all
cases, require registration of the franchise offering with state authorities.
State laws which regulate the relationship between franchisors and franchise
owners presently exist in a substantial number of states. Such laws regulate the
franchise relationship by, for example, requiring the franchisor to deal with
its franchise owners in good faith, prohibiting interference with the right of
free association among franchise owners, and limiting the imposition of standard
charges, royalties or fees. These laws have not precluded the Company from
seeking franchise owners in any given area and have not had a significant effect
on the Company's operations.
The Company is not aware of any pending franchise legislation which in its
view is likely to significantly affect the operations of the Company. The
Company believes that its operations comply substantially with the FTC Rule and
applicable state franchise laws.
SERVICE MARKS
The Company has registered with the federal government OPTION
CARE-Registered Trademark-, among others, as a service mark. The Company
believes that this service mark is becoming increasingly recognized by many
referral sources as representing a reliable, cost-effective source of home
healthcare services. The Company believes that its use of this service mark does
not violate or otherwise infringe on the rights of others.
EMPLOYEES
As of December 31, 1999, the Company employed 613 persons on a full-time
basis and 405 persons on a part-time basis. Of the Company's full-time
employees, 62 were corporate management and administrative personnel and the
remaining 551 were employees of Company owned offices, primarily in clinical,
management and administrative positions.
The Company considers its employee relations to be good. None of the
Company's employees are covered by a collective bargaining agreement.
7
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INSURANCE
The Company currently maintains insurance for general and professional
liability claims in an aggregate amount which it believes to be sufficient given
the nature of its business. In addition, the Company maintains insurance for
vicarious liability of the Company, if any, for the acts and omissions of its
franchises, and the Company requires each franchise to maintain general
liability insurance and professional liability insurance on each of its
professionals, in each case covering both the franchise and the Company, with
coverage at levels which the Company believes to be sufficient. These policies
generally provide coverage on a claims-made or occurrence basis and have certain
exclusions from coverage. These insurance policies must generally be renewed
annually. There can be no assurance that insurance coverage will be adequate to
cover liability claims that may be asserted against the Company or that adequate
insurance will be available in the future at acceptable cost. To the extent that
liability insurance is not adequate to cover liability claims against the
Company, the Company will be responsible for the excess.
ITEM 2. PROPERTIES
The Company maintains executive offices at 100 Corporate North, Suite 212,
Bannockburn, IL, consisting of approximately 18,845 square feet of leased space.
At December 31, 1999, the Company had operations located in Little Rock, AR,
Bullhead City, AZ, Chico, Victorville and Vista, CA, Grand Junction and Denver,
CO, Brandon and Miami, FL, Ann Arbor and Grand Haven, MI, Columbia and Jefferson
City, MO, Grand Island, Lincoln and Omaha, NE, Milford, OH, Oklahoma City, OK,
Bethlehem and Horsham, PA, Houston, TX, Bellingham, Everett and Kennewick, WA.
These locations consist of approximately 148,294 square feet in total.
At December 31, 1999, all Company owned offices have ongoing leases for
office space with remaining terms ranging from six months to five years. The
Company owned offices are in good condition, well maintained, and are adequate
to fulfill the operational needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain legal proceedings incidental to its
business. The Company does not believe that the outcome of such legal
proceedings will have a material adverse impact on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through the
solicitation of proxies, or otherwise during the fourth quarter of the fiscal
year ended December 31, 1999.
8
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ITEM 4(A). EXECUTIVE OFFICERS
The names, ages and positions of the executive officers of the Company are
set forth below. Executive officers of the Company serve at the discretion of
the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Dr. John N. Kapoor........................ 56 Chairman of the Board and Director
Michael A. Rusnak......................... 44 President, Chief Executive Officer and
Director
Cathy Bellehumeur......................... 49 Senior Vice President, Secretary,
Corporate Compliance Officer and General
Counsel
Rajat Rai................................. 33 Chief Operating Officer
Michael A. Siri........................... 45 Vice President and Chief Financial Officer
</TABLE>
All executive officers are elected annually and serve for a one-year term.
There are no family relationships between any of the Company's executive
officers and Directors and there are no arrangements or understandings between
any of the executive officers and any other person pursuant to which the
executive officer was selected as an officer.
John N. Kapoor, Ph.D., is currently the Company's Chairman of the Board. He
has been Chairman of the Board of Directors since October 1990. He served as the
Company's Chief Executive Officer from August 1993 to April 1996 and served as
President from August 1993 through October 1993 and from January 1995 through
February 1996. Dr. Kapoor also served as Chief Executive Officer and President
from March 1991 to May 1991. In addition, Dr. Kapoor is President of E. J.
Financial Enterprises, Inc., a position he has held since April 1990. From
June 1982 to April 1990, Dr. Kapoor held several positions with Lyphomed, Inc.,
including Chairman, Chief Executive Officer and President. Dr. Kapoor is also a
Director of Integrated Surgical Systems, Inc. and the Chairman of the Board and
Director for each of Akorn, Inc., and NeoPharm, Inc. Dr. Kapoor received his
Ph.D. in medicinal chemistry from the State University of New York and a B.S. in
pharmacy from Bombay University.
Mr. Michael A. Rusnak has been the Company's President and Chief Executive
Officer since October 1998 and a member of the Board of Directors since
November 1998. From June 1998 to October 1998, Mr. Rusnak was Executive Vice
President and Chief Operating Officer. Prior to such time he was Senior Vice
President of Option Care, Inc. and President of Option Care Enterprises, Inc.
from May 1998 to June 1998. Mr. Rusnak was also the Company's Vice
President-Franchise Services from November 1997 to May 1998. Prior to joining
the Company, he was employed by Columbia Home Care Group, a division of Columbia
HCA, from October 1996 to October 1997 as the Senior Vice President of
Operations. From 1992 to 1997 he was the Vice President of Operations for Staff
Builders Services, Inc. From 1982 to 1992 he was the Operations Manager for
Interim Systems Corporation. He has a B.S. degree from St. Francis University
and a Nursing and Respiratory degree from Northwestern University/Wesley
Passavant School of Nursing.
Ms. Cathy Bellehumeur has been Secretary and General Counsel since
February 1994, a Vice President since March 1994, Corporate Compliance Officer
since May, 1995 and Senior Vice President since January 1997. Prior to joining
the Company, Ms. Bellehumeur was an attorney in private practice with Godfrey &
Cahn, S.C., Milwaukee WI from May 1987 to August 1991 and with Ross & Hardies,
Chicago, Illinois from August 1991 to January 1994. Ms. Bellehumeur graduated
Magna Cum Laude from Marquette University Law School and also has a Masters
Degree in Education.
9
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Mr. Rai has been Chief Operating Officer since August 1999. He had
previously been Executive Vice President of Option Care Enterprises, Inc. since
October 1998. Mr. Rai has been with the Company since August 1992, and has
served in many positions ranging from Senior Vice President to General Manager
and has held a variety of finance positions. Prior to joining the Company, he
received his MBA in Finance from Wayne State University and also has a B.S.
degree from Mechanical Engineering College in Warangal, India.
Mr. Michael A. Siri has been Vice President and Chief Financial Officer
since October 1998. Prior to such time, Mr. Siri was the Company's Vice
President-Finance from July 1998 to October 1998. From November 1986 to
January 1998, Mr. Siri was employed by Culligan Water Technologies, Inc., where
he was their Executive Director Finance and Treasurer. Mr. Siri has a B.S. in
Accounting from Indiana University and a M.B.A. in Finance from the University
of Chicago.
10
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "OPTN". The following table sets forth, for the periods indicated the
high and low sales prices for the Company's Common Stock.
<TABLE>
<CAPTION>
CALENDAR QUARTER HIGH LOW
- ---------------- -------- --------
<S> <C> <C>
1999
First Quarter............................................... $5.88 $1.00
Second Quarter.............................................. $3.50 $1.50
Third Quarter............................................... $5.00 $2.69
Fourth Quarter.............................................. $4.00 $2.63
1998
First Quarter............................................... $4.94 $3.25
Second Quarter.............................................. $4.38 $2.69
Third Quarter............................................... $3.06 $1.13
Fourth Quarter.............................................. $2.00 $0.75
</TABLE>
As of March 17, 2000, there were approximately 283 holders of record of the
Company's Common Stock. The closing price of the Company's Common Stock on
March 17, 2000 was $6.50 per share, as reported by the Nasdaq National Market.
The Company did not pay cash dividends in 1999 or 1998. The payment of
dividends by the Company is restricted under the Company's revolving credit
facility. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 4 to the Company's Consolidated
Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for the
Company for each of the five years in the period ended December 31, 1999. The
selected consolidated financial data reflects the Company's acquisitions, all of
which were accounted for using the purchase method of accounting, except for the
acquisition of Addison Home Care, Inc. on September 19, 1996, which was treated
as a pooling of interests. This summary should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, contained
elsewhere in this Annual Report on Form 10-K.
11
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenue:
Patient care services..................... $108,613 $96,119 $ 81,104 $ 49,035 $41,989
Product sales and network management...... 3,134 10,121 9,423 9,865 11,513
Royalty fees and other.................... 8,702 8,700 9,966 12,193 12,517
-------- ------- -------- -------- -------
Total revenue......................... 120,449 114,940 100,493 71,093 66,019
-------- ------- -------- -------- -------
Cost of revenue:
Cost of goods sold........................ 53,864 51,366 36,875 22,160 22,275
Cost of services provided................. 16,890 17,743 20,634 12,919 11,918
-------- ------- -------- -------- -------
Total cost of revenue................. 70,754 69,109 57,509 35,079 34,193
-------- ------- -------- -------- -------
Gross profit................................ 49,695 45,831 42,984 36,014 31,826
Operating expenses:
Selling, general and administrative....... 36,888 37,853 34,623 26,795 23,629
Provision for doubtful accounts........... 2,970 4,936 5,750 1,861 1,653
Amortization of goodwill.................. 553 504 386 960 914
Asset write-offs and other charges........ -- -- 3,902 24,164 --
-------- ------- -------- -------- -------
Total operating expenses.............. 40,411 43,293 44,661 53,780 26,196
-------- ------- -------- -------- -------
Operating income (loss)..................... 9,284 2,538 (1,677) (17,766) 5,630
Other expense, net.......................... (1,528) (2,387) (1,660) (192) (423)
-------- ------- -------- -------- -------
Income (loss) before income taxes........... 7,756 151 (3,337) (17,958) 5,207
Provision (benefit) for income taxes........ 3,129 842 (1,240) 2,298 2,219
-------- ------- -------- -------- -------
Net income (loss)........................... $ 4,627 $ (691) $ (2,097) $(20,256) $ 2,988
======== ======= ======== ======== =======
Net income (loss) per common share:
Basic..................................... $ 0.40 $ (0.06) $ (0.19) $ (1.93) $ 0.29
======== ======= ======== ======== =======
Diluted................................... $ 0.39 $ (0.06) $ (0.19) $ (1.93) $ 0.28
======== ======= ======== ======== =======
Shares used in computing net income (loss)
per common share:
Basic..................................... 11,483 11,071 10,879 10,494 10,431
======== ======= ======== ======== =======
Diluted................................... 11,926 11,071 10,879 10,494 10,500
======== ======= ======== ======== =======
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Trade accounts receivable, net................. $22,697 $23,544 $34,138 $20,558 $16,558
Working capital................................ 11,676 19,796 25,901 21,458 16,131
Intangible assets, net......................... 22,067 20,060 19,895 9,832 30,328
Total assets................................... 57,634 59,392 68,639 44,041 58,997
Total long-term debt........................... 8,590 22,358 29,115 12,461 6,696
Stockholders' equity........................... 29,306 23,739 23,402 23,540 43,506
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Option Care, Inc. (together with its subsidiaries, collectively "the
Company") is a provider of specialty pharmaceutical products and services for
intravenous delivery. The Company contracts with managed care organizations and
other third party payors to provide pharmaceutical products and complex
compounded solutions through its national network of more than 140 offices for
administration to patients in alternative site settings. In addition, the
Company markets specialty drugs and pharmacy consulting services directly to
physicians and patients. The Company also supplies state-of-the-art data
management products and services to the home health industry.
RESULTS OF OPERATIONS
The Company's revenues are derived primarily from three sources:
(i) patient care services from Company-owned offices; (ii) product sales and
network management services; and (iii) royalty fees from franchise offices. The
following table sets forth the percentage relationships that certain items from
the Company's Consolidated Statements of Operations bear to total revenue for
the years ended December 31, 1999, 1998, and 1997, and should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto contained elsewhere in this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue
Patient care services..................................... 90.2% 83.6% 80.7%
Product sales and network management...................... 2.6 8.8 9.4
Royalty fees and other.................................... 7.2 7.6 9.9
----- ----- -----
Total revenue............................................... 100.0 100.0 100.0
Gross profit................................................ 41.3 39.9 42.8
Selling, general & administrative expenses.................. 30.6 32.9 34.5
Provision for doubtful accounts............................. 2.5 4.3 5.7
Operating income (loss)..................................... 7.7 2.2 (1.7)
Net income (loss)........................................... 3.8% (0.6)% (2.1)%
</TABLE>
1999 COMPARED TO 1998
REVENUE--
Revenue for the year ended December 31, 1999 was $120.4 million, an increase
of $5.5 million, or 4.8%, over 1998. Revenue from patient care services for 1999
was $108.6 million, an increase of $12.5 million over 1998. The increase was due
primarily to same-store growth of 12.5% realized at the Company-owned offices
for 1999. Product sales and network management revenue for 1999 declined by
$7.0 million, due primarily to the Company's decisions, made in the second and
third quarters of 1998, to terminate its participation under contracts to
perform network management services. The current year revenue amount of
$3.1 million consists mainly of sales of software made through the Company's
wholly-owned subsidiary, MBI. Excluding the revenue recognized during 1998 under
the terminated contracts, product sale revenue in 1999 increased by
$0.6 million as MBI successfully rolled out its MBI Home IV Manager V5.0
software during 1999. Royalty fees and other revenue of $8.7 million for 1999
equaled the $8.7 million reported for 1998.
13
<PAGE>
GROSS PROFIT--
Gross profit of $49.7 million for 1999 represented an increase of
$3.9 million, or 8.4%, from the $45.8 million realized in 1998. Gross profit
margin for 1999 increased to 41.3% compared to 1998's gross margin of 39.9% due
in part to the 13.0% increase in patient care services revenue. In addition, the
1999 gross margin did not include any impact from the terminated network
management service contracts, which in 1998 provided little or no gross margin
on over $6 million of network management revenue. Also, the revenue mix realized
in 1999, compared to 1998, consisted of significantly increased specialty
pharmacy and drug distribution revenue, which realizes a lower gross margin than
the Company's core infusion therapies. This revenue increased by 46.1% or
$9.5 million from $20.6 million in 1998 to $30.1 million in 1999.
During the first quarter of 1999, the Company changed its methodology for
reporting gross profit. Costs deemed to be directly related to the production of
revenues, such as pharmacy and nursing, remained in the cost of service, while
all other costs, previously reported as patient care services operations were
reclassified into selling, general and administrative. The Company determined
that the new method of reporting was more appropriate and provided a better
indication of the actual gross profit provided by the revenue. Certain amounts
from prior years have been reclassified to conform to the 1999 presentation.
OPERATING EXPENSES--
Operating expenses for 1999 declined by $2.9 million, or 6.7%, to
$40.4 million from $43.3 million in 1998. Operating expenses as a percentage of
revenue declined from 37.7% in 1998 to 33.6% in 1999. Selling, general and
administrative expenses decreased by $1.0 million or 2.5%, primarily due to
better productivity. The provision for doubtful accounts declined by
$2.0 million, or 39.8%, due to the strong cash collections realized in 1999 of
outstanding accounts receivable. Amortization of goodwill for 1999 was
consistent with 1998 amortization.
INTEREST EXPENSE--
Interest expense declined by $1.4 million or 58% as overall debt was reduced
from $22.4 million at December 31, 1998 to $8.6 million at December 31, 1999.
The decline came in part from the Company's use of cash on hand to reduce debt
upon signing its new debt facility in the first quarter of 1999. In the third
quarter of 1998, the Company discontinued its policy of using excess cash flow
to pay down on its revolver debt. Once the new debt facility was in place, the
Company re-instituted its policy and used cash-on-hand to retire debt. In
addition, in 1999 the Company used its operating cash flow of $7.7 million,
generated by strong cash collections of outstanding accounts receivable and
proper management of accounts payable, to minimize outstanding amounts under its
revolver facility.
INCOME TAXES--
Income taxes were provided for at a 40.3% rate reflecting the Company's
profitability during 1999. Comparisons to prior year are not meaningful because
the Company in 1998 settled outstanding audits and recognized additional tax
expense.
EARNINGS PER SHARE--
As a result of the forgoing, the Company for the full year of 1999 recorded
net income of $4.6 million or 3.8% of revenue, an increase of $5.3 million over
the net loss of ($0.7) million recorded in 1998. Earnings per diluted share
increased for the year from a loss of $(0.06) in 1998 to $0.39 for 1999, due to
the increase in net income, offset by an 855,000 increase, or 7.7%, of diluted
shares outstanding. The increase in the diluted shares is due to the 81.5%
increase in the market price of the Company's stock at December 31, 1999
compared to December 31, 1998 and to issuance of shares under certain of the
Company's 1996 and 1997 acquisition agreements.
14
<PAGE>
1998 COMPARED TO 1997
REVENUE--
Revenue for the year ended December 31, 1998 was $114.9 million, an increase
of $14.4 million or 14.4 percent over 1997. The $14.4 million increase in
revenue is due to: $9.6 million of internal growth from the Company's owned
operations; $8.6 million from a full year of results from the Company's 1997
acquisitions; $6.0 million of network management revenue from the Company's
administration of the Health Net contract at the Company's West Coast
Coordinated Care Center; offset by a net $9.8 million decline in other revenues.
Other revenues declined primarily due to reductions in product sales as a result
of management's decision during the second quarter of 1998 to end its program of
product distribution to the franchise network. Revenues from patient care
services for 1998 were $96.1 million, representing an increase of 18.5% over
1997. Product sales and network management revenue of $10.1 million increased
7.4% due to the Company's administration of the Health Net contract in 1998,
which more than offset the decline in products sales. Royalty fees and other
revenue of $8.7 million in 1998 declined 12.7% from the 1997 period due to
replacement of royalty fees with patient care services revenue due to the
acquisition by the Company of several large franchises during 1997.
GROSS PROFIT--
Gross profit of $45.8 million for 1998 increased by $2.8 million, or 6.6%,
over the $43.0 million realized in 1997 due mostly to the $15.0 million or 18.5%
increase in patient care services revenue. Gross profit margin for 1998 of 39.9%
declined from 1997's margin of 42.8% due mainly to the effects of the
administration of the Healthnet contract in 1998 which provided a negative gross
margin of $(0.3) million on a revenue base of $6.5 million, excluding the
Healthnet contract, gross margin percentage for 1998 was 42.5%.
OPERATING EXPENSES--
Operating expenses declined by $1.4 million to $43.3 million for 1998 due in
part to the inclusion of a $3.9 million asset write-off and other charges taken
by the Company in 1997. Excluding such charge, the Company's operating expenses
increased by $2.5 million, largely due to increased administrative costs of
$3.2 million due to the cost of integrating the newly acquired offices made in
1996 and 1997. This increase was offset by a decline in the provision for
doubtful accounts of $0.8 million. In addition, during the fourth quarter of
1998, the Company ended its participation under the HealthNet contract and
accrued $0.4 million of expenses for the run-off costs associated with such
close-out.
INTEREST EXPENSE--
Interest expense for 1998 increased by 39.8% or $0.7 million over the 1997
period as a result of higher interest rates incurred by the Company during the
third and fourth quarters of 1998 due to the Company's default under certain
interest coverage covenant in the revolving credit facility.
INCOME TAXES--
Income tax expense recognized in fiscal 1998 includes the recognition of
$0.7 million of expense due to tax adjustments and changes in reserves related
to the settlement of an IRS audit of prior years tax returns for the 1992
through 1995 periods.
As a result of the forgoing, the Company recorded a net loss of
$0.7 million in 1998 compared to a net loss of $2.1 million in 1997.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS--
As of December 31, 1999, the Company had no cash and cash equivalents,
compared to $3.7 million of cash and cash equivalents at December 31, 1998. At
year-end 1998, the Company was engaged in negotiations with its bank group and
concurrently negotiated the terms of a replacement facility and had temporarily
discontinued its policy of reducing its outstanding debt with its excess cash
flow from operations. This generated a large net cash balance of $3.7 million at
December 31, 1998 in relation to historical practices. In 1999, after the
signing of the new facility, the Company continued its prior practice of using
its excess cash flow from operation to retire amounts outstanding under its
revolver facility.
NET CASH FLOWS--
Net cash flow provided by operations for 1999 was $7.7 million, a decrease
of $5.2 million from 1998 due to the reduction in the improvement in accounts
receivable and an increase in inventory balances. The reduced improvement from
account receivable is due in part to the 12.5% increase in same store sales
realized in 1999 and the impact of the significant reduction of accounts
receivables that occurred in 1998. The inventory balance increased in 1999 due
to the purchase at year-end of selected high cost pharmaceuticals due to Year
2000 planning and the ability to obtain favorable price reductions based on
volume purchases.
Net cash flow used in investing activities for 1999 of $1.8 million
represented a $1.6 million decrease from the $3.4 million used in 1998 as
purchases of equipment declined by $1.4 million. Net cash flow used by financing
activities in 1999 of $9.6 million, increased by $3.7 million over the 1998
usage of $5.9 million mainly due to increased payments made under the Company's
revolving agreement.
REVOLVING DEBT FACILITY--
During 1998, the Company was a party to a $35 million revolving credit
facility, which contained certain financial covenants. As of June 30, 1998, the
Company was out of compliance with the interest coverage covenant. As a result,
the Company was not able to make draw downs on its facility for working capital
purposes. The Company was in negotiations with its lenders to secure forbearance
with respect to such covenant as of December 31, 1998. The forbearance was
secured on January 15, 1999.
On February 5, 1999, the Company entered into a $25 million Loan and
Security Agreement ("Agreement") with Banc of America Commercial Finance that
replaced the former facility. All amounts outstanding under the former facility
were repaid using cash on hand and proceeds from the Agreement. The Agreement
provides for borrowings up to $25 million and requires the Company to meet
certain financial covenants including, but not limited to: fixed charge coverage
ratio; debt ratio; and limitation on annual capital expenditures. The Agreement
provides for, among other things, the ability to meet working capital needs and
to retire in its entirety the Company's former facility. The Company is subject
to an early termination fee if the loan is terminated prior to its natural
expiration of February 2002. The Company paid a facility fee of $0.2 million at
the time of signing the Agreement. The Agreement prohibits the Company from
declaring any cash dividends on its common stock. The Company may elect interest
rates ranging from various LIBOR periods plus a 2.125% margin, to the bank's
reference rate. During 1999, the Company paid an average interest rate of 7.7%
on its outstanding amounts under the Agreement.
Availability under the facility is related to a percentage of the Company's
net outstanding accounts receivable and inventory balances, less certain
ineligible amounts, as defined in the Agreement. The facility is secured by all
of the issued and outstanding Common Stock of each of the Company's
subsidiaries. Overall borrowings allowable under the Agreement are limited to
the lessor of $25 million or, the total allowable collateral base.
16
<PAGE>
Management believes that cash flow from operations and amounts available
under the Agreement will be sufficient to meet the cash needs of the business
for the immediate future. In the event that additional capital is required,
management cannot assure that such capital can be obtained on terms acceptable
to the Company.
There are currently various proposals under development to enact healthcare
reform on a national, state and local level. It is not possible at this time to
predict the cash flow impact, if any, which any such changes may have on
providers of home healthcare services and on the Option Care offices.
GOODWILL AND OTHER INTANGIBLE ASSETS--
Goodwill and other intangible assets, net, at December 31, 1999 of
$22.1 million, rose by $2.0 million or 10% over the $20.1 million at
December 31, 1998. The increase was due to payments made under certain of the
Company's purchase agreements for acquisitions made in 1997 and 1996. These
agreements obligate the Company, upon the acquired businesses meeting of
determined milestones, the attainment of certain financial results or
contractually, to pay additional consideration to former owners representing
additional purchase price for these acquisitions. Total net goodwill and other
intangible assets increased as a percentage of total assets from 33.8% at
December 31, 1998 to 38.3% at December 31, 1999, due mainly to the additional
payments made and a $2.4 million reduction in current assets in 1999 from 1998
levels. Total net goodwill and other intangible assets reduced as a percentage
of stockholders' equity from 84.5% at December 31, 1998 to 75.3% at
December 31, 1999, due mainly to the $5.6 million increase in stockholders'
equity due to the net income realized in 1999 and from increases due to shares
issued by the Company, offset by the aforementioned increase in net goodwill.
YEAR 2000 ISSUE
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 completed its program to make its systems Year 2000
compliant. This program encompassed 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
included the following phases: awareness and inventory, detailed assessment and
resolution, testing, deployment and contingency plan development for all areas.
Prior to the end of 1999, the Company completed an internal review of its
computer equipment and software systems and other equipment with imbedded
technology. Other phases of its program, included 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 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, if any, 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 have not been
properly 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.
17
<PAGE>
Because the Company's internal systems have become Year 2000 compliant 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.
QUARTERLY INFORMATION
Below is a summary of unaudited consolidated quarterly financial information
for the years ended December 31, 1999 and 1998 (in thousands, except per share
data). Certain amounts have been restated from previously published amounts.
QUARTER
<TABLE>
<CAPTION>
1999: FIRST SECOND THIRD FOURTH
- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................................. $29,029 $29,572 $30,197 $31,651
Gross profit............................................ 11,661 12,250 12,685 13,099
Income before income taxes.............................. 1,315 1,865 2,318 2,258
Net income.............................................. 763 1,081 1,336 1,447
Basic earnings per share................................ $ 0.07 $ 0.09 $ 0.12 $ 0.12
------- ------- ------- -------
Diluted earnings per share.............................. $ 0.07 $ 0.09 $ 0.11 $ 0.12
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
1998: FIRST SECOND THIRD FOURTH
- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................................. $26,752 $28,476 $30,395 $29,317
Gross profit............................................ 11,540 10,597 11,688 12,006
Income (loss) before income taxes....................... 1,585 (888) (620) 74
Net income (loss)....................................... 865 (585) (356) (614)
Basic earnings (loss) per share......................... $ 0.08 $ (0.05) $ (0.03) $ (0.06)
------- ------- ------- -------
Diluted earnings (loss) per share....................... $ 0.08 $ (0.05) $ (0.03) $ (0.06)
------- ------- ------- -------
</TABLE>
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiaries
and the Independent Auditors' Reports thereon are included at Item 14(a) (1) &
(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As of December 1, 1998, the Board of Directors of Option Care, Inc. (the
"Registrant"), upon recommendation of its Audit Committee, engaged Ernst & Young
LLP ("E&Y") as the Registrant's independent auditors for the year ending
December 31, 1998. The Board of Directors of the Registrant retained E&Y based
upon the Board's determination that the Registrant would benefit from E&Y's
competitive fee structure. The engagement of E&Y arose from the Registrant's
decision to request proposals for audit services from multiple firms, including
KPMG Peat Marwick LLP ("KPMG").
The KPMG audit reports on the consolidated financial statements of the
Registrant as of and for the two years ended December 31, 1997 did not contain
an adverse opinion or disclaimer of opinion, and were
18
<PAGE>
not qualified or modified as to uncertainty, audit scope or accounting
principles. During the two year period ended December 31, 1997 and through the
period ended December 1, 1998, there were no disagreements between the
Registrant and KPMG on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to the satisfaction of KPMG, would have caused it
to make references to the subject matter of such disagreements in connection
with its report.
In its management letter to the audit committee of the Registrant, dated
May 13, 1998, KPMG identified two reportable conditions: (1) excessive turnover
in the Registrant's Chief Financial Officer position and (2) a lack of
segregation of duties between the treasury and the controller functions of the
Registrant. The Registrant believes it has implemented steps to correct the
deficiencies noted, including (1) the hiring of Michael A. Siri as Chief
Financial Officer, who has 22 years experience in accounting and finance and
(2) the Registrant's implementation of alternative internal controls to mitigate
the risk of asset misappropriation.
The Registrant has authorized KPMG to respond to any inquiries of E&Y
concerning its audit. During the two years ended December 31, 1997 and through
the dated appointment, E&Y did not provide any consultations to the Registrant
regarding the application of accounting principles to specific transactions or
the type of opinion that they may have rendered on the financial statements.
PART III
ITEMS 10. THROUGH 13.
Information regarding executive officers is contained in Item 4(A) of
Part I of this Report and is incorporated herein by reference. Information on
Directors of the Registrant, executive compensation, security ownership of
certain beneficial owners and management and certain relationships and related
transactions is set forth under the Election of Directors, Security Ownership of
Certain Beneficial Owners and Management, Executive Compensation and Certain
Transactions with Management and Directors captions of the Registrant's
definitive proxy statement dated April 7, 2000 for its May 12, 2000 Annual
Shareholders' Meeting, to be filed with the Securities and Exchange Commission
in April 2000, and such information is incorporated herein by reference;
provided, however the report of the compensation committee on executive
compensation and the stock performance graph shall not be deemed to be so
incorporated by reference. The information under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" of the 2000 Proxy Statement is
incorporated herein by reference.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) & (2) The Consolidated Financial Statements and Schedule of the
Company and its subsidiaries and independent auditors' reports thereon are
included on pages 21 through 40 of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report--Ernst & Young LLP............. 21
Independent Auditors' Report--KPMG LLP...................... 22
Consolidated Balance Sheets--December 31, 1999 and 1998..... 23
Consolidated Statements of Operations--Years Ended December
31, 1999, 1998 and 1997................................... 24
Consolidated Statements of Stockholders' Equity--Years Ended
December 31, 1999, 1998 and 1997.......................... 25
Consolidated Statements of Cash Flows--Years Ended December
31, 1999, 1998 and 1997................................... 26
Notes to Consolidated Financial Statements.................. 27
Schedule II--Valuation and Qualifying Accounts.............. 40
</TABLE>
All other Schedules are omitted because the required information is not
applicable or information is presented in the Consolidated Financial Statements
or related notes.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Option Care, Inc.
We have audited the accompanying consolidated balance sheets of Option
Care, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Option Care, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects,
the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
March 10, 2000
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Option Care, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Option Care, Inc. and subsidiaries for
the year ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Option Care, Inc. and subsidiaries for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
March 26, 1998
22
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 3,665
Trade accounts receivable, less allowance of $4,113 and
$3,576, respectively.................................... 22,697 23,544
Current portion of notes receivable, less allowance of
$119 and $29, respectively.............................. 112 240
Inventory, net............................................ 3,608 2,097
Deferred income tax benefit............................... 2,889 1,963
Prepaid expenses.......................................... 795 519
Other current assets...................................... 342 820
-------- --------
Total current assets.................................... 30,443 32,848
Notes receivable, less allowance of $239 and $0,
respectively............................................ 121 168
Equipment and other fixed assets, net..................... 4,808 6,085
Goodwill, net............................................. 21,395 19,025
Other intangible assets, net.............................. 672 1,035
Deferred income tax benefit............................... -- 9
Other long-term assets.................................... 195 222
-------- --------
Total assets.......................................... $ 57,634 $ 59,392
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 3,964 $ --
Current portion of long-term debt......................... 142 262
Trade accounts payable.................................... 5,747 6,493
Income tax payable........................................ 623 60
Accrued wages and related employee benefits............... 3,595 2,665
Deferred purchase price liability......................... 1,210 1,123
Accrued expenses.......................................... 3,486 2,449
-------- --------
Total current liabilities............................. 18,767 13,052
Long-term debt, less current portion...................... 8,448 22,096
Long-term deferred income tax liability................... 714 --
Minority interest......................................... 163 55
Other long-term liabilities............................... 236 450
-------- --------
Total liabilities..................................... 28,328 35,653
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares
authorized, 11,492,853 and 11,006,386 shares issued and
outstanding, respectively............................... 115 110
Common stock to be issued, 234,701 and 439,627 shares,
respectively............................................ 740 1,227
Additional paid-in capital................................ 44,695 43,273
Accumulated deficit....................................... (16,244) (20,871)
-------- --------
Total stockholders' equity............................ 29,306 23,739
-------- --------
Total liabilities and stockholders' equity............ $ 57,634 $ 59,392
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Patient care services..................................... $108,613 $ 96,119 $ 81,104
Product sales and network management...................... 3,134 10,121 9,423
Royalty fees and other.................................... 8,702 8,700 9,966
-------- -------- --------
Total revenue........................................... 120,449 114,940 100,493
Cost of revenue:
Cost of goods sold........................................ 53,864 51,366 36,875
Cost of services provided................................. 16,890 17,743 20,634
-------- -------- --------
Total cost of revenue................................... 70,754 69,109 57,509
-------- -------- --------
Gross profit................................................ 49,695 45,831 42,984
Operating expenses:
Selling, general and administrative expense............... 36,888 37,853 34,623
Provision for doubtful accounts........................... 2,970 4,936 5,750
Amortization of goodwill.................................. 553 504 386
Asset write-offs and other charges........................ -- -- 3,902
-------- -------- --------
Total operating expenses................................ 40,411 43,293 44,661
-------- -------- --------
Operating income (loss)..................................... 9,284 2,538 (1,677)
Other income (expense), net:
Interest expense.......................................... (1,004) (2,392) (1,711)
Other, net................................................ (524) 5 51
-------- -------- --------
Total other income (expense), net........................... (1,528) (2,387) (1,660)
-------- -------- --------
Income (loss) before income taxes........................... 7,756 151 (3,337)
Provision (benefit) for income taxes........................ 3,129 842 (1,240)
-------- -------- --------
Net income (loss)......................................... $ 4,627 $ (691) $ (2,097)
======== ======== ========
Net income (loss) per common share:
Basic..................................................... $ 0.40 $ (0.06) $ (0.19)
======== ======== ========
Diluted................................................... $ 0.39 $ (0.06) $ (0.19)
======== ======== ========
Shares used in computing net income (loss) per common share:
Basic..................................................... 11,483 11,071 10,879
======== ======== ========
Diluted................................................... 11,926 11,071 10,879
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON RETAINED
COMMON STOCK STOCK TO ADDITIONAL EARNINGS/
------------------- BE PAID-IN (ACCUMULATED STOCKHOLDERS
SHARES AMOUNTS ISSUED CAPITAL DEFICIT) EQUITY
-------- -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996........................ 10,527 $ 106 $ 126 $41,517 $(18,083) $23,666
------ ----- ----- ------- -------- -------
Net Loss................................. -- -- -- -- (2,097) (2,097)
Common Stock to be issued................ -- -- 1,299 -- -- 1,299
Issuance of Common Stock................. 205 2 -- 532 -- 534
------ ----- ----- ------- -------- -------
December 31, 1997........................ 10,732 108 1,425 42,049 (20,180) 23,402
------ ----- ----- ------- -------- -------
Net Loss................................. -- -- -- -- (691) (691)
Common Stock to be issued, net........... -- -- (198) -- -- (198)
Issuance of Common Stock................. 274 2 -- 1,224 -- 1,226
------ ----- ----- ------- -------- -------
December 31, 1998........................ 11,006 110 1,227 43,273 (20,871) 23,739
------ ----- ----- ------- -------- -------
Net Income............................... -- -- -- -- 4,627 4,627
Common Stock to be issued, net........... -- -- (487) -- -- (487)
Issuance of Common Stock................. 487 5 -- 1,422 -- 1,427
------ ----- ----- ------- -------- -------
December 31, 1999........................ 11,493 $ 115 $ 740 $44,695 $(16,244) $29,306
====== ===== ===== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 4,627 ($ 691) ($ 2,097)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization........................... 2,768 3,473 3,108
Provision for doubtful accounts......................... 2,970 4,936 5,750
Asset write-offs and other charges...................... -- -- 3,902
Changes in assets and liabilities, net of effects from
acquisitions:
Trade accounts and notes receivable..................... (1,948) 5,985 (12,590)
Inventory............................................... (1,511) 192 17
Deferred income tax benefit............................. (926) 145 (1,591)
Prepaid expenses and other current assets............... (297) 2,090 (1,073)
Trade accounts payable.................................. (746) (1,713) 2,423
Accrued wages and related benefits...................... 930 (169) 996
Income tax payable...................................... 1,072 -- --
Accrued expenses and other liabilities.................. 744 (1,331) (1,852)
-------- ------- --------
Net cash provided by (used in) operating activities... 7,683 12,917 (3,007)
-------- ------- --------
Cash flows from investing activities:
Purchases of equipment and other, net..................... (667) (2,120) (3,878)
Other assets, net......................................... 119 -- (2,331)
Payments for acquisitions, net of stock to be issued...... (1,204) (1,258) (9,210)
-------- ------- --------
Net cash used in investing activities................. (1,752) (3,378) (15,419)
-------- ------- --------
Cash flows from financing activities:
Cash overdraft............................................ 3,964 (145) 145
Net (payments) borrowings under revolving credit
agreement............................................... (13,483) (6,400) 16,300
Payments on capital leases................................ (226) (142) (1,033)
Payments of notes payable................................. (59) (215) (168)
Issuance of common stock.................................. 208 1,028 1,959
-------- ------- --------
Net cash (used in) provided by financing activities... (9,596) (5,874) 17,203
-------- ------- --------
Net (decrease) increase in cash and cash equivalents........ (3,665) 3,665 (1,223)
Cash and cash equivalents, beginning of year................ 3,665 -- 1,223
-------- ------- --------
Cash and cash equivalents, end of year...................... $ -- $ 3,665 --
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Option Care, Inc. (together with its subsidiaries, collectively "the
Company") is a provider of specialty pharmaceutical products and services for
intravenous delivery. The Company contracts with managed care organizations and
other third party payors to provide pharmaceutical products and complex
compounded solutions through its national network of more than 140 offices for
administration to patients in alternative site settings. In addition, the
Company markets specialty drugs and pharmacy consulting services directly to
physicians and patients. The Company also supplies state-of-the-art data
management products and services to the home health industry.
The Company was incorporated in Delaware on July 9, 1991. The Company's
predecessor was incorporated in California in January 1984. As of December 31,
1999, 140 Option Care offices, including satellite offices, were operating in
assigned territories in 34 states. Existing offices include 117 offices owned
and operated by franchise owners and 23 offices owned and operated by the
Company.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its
50 percent or more owned subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation.
(c) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(e) FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments approximates their
carrying value.
(f) INVENTORY
Inventory, which consists primarily of finished goods, mainly
pharmaceuticals, are stated at their cost, which approximates market, and are
accounted on the first-in, first-out (FIFO) basis.
(g) LONG-LIVED ASSETS
Equipment and other fixed assets are stated at cost. Equipment purchased
under capital leases is stated at the lower of the present value of minimum
lease payments at the beginning of the lease term or fair value at the inception
of the lease. Depreciation on equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements and
equipment purchased
27
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
under capital leases are amortized on the straight-line method over the shorter
of the lease term or estimated useful life of the asset.
Goodwill, which represents the excess of fair market value over the cost of
net assets acquired, is amortized on a straight-line basis over 40 years.
Accumulated amortization was $2,036 and $1,483 at December 31, 1999 and 1998,
respectively.
Intangible assets, arising from certain of the Company's 1996 and 1997
acquisitions, are being amortized on a straight-line basis over the estimated
useful life of each asset, ranging from 3 to 15 years. Accumulated amortization
was $1,094 and $1,382 at December 31, 1999 and 1998, respectively. Certain fully
amortized intangible assets were removed from the balance sheet in 1999.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment in value based upon non-discounted future cash flows, and appropriate
losses are recognized, whenever the carrying amount of an asset may not be
recovered.
(h) INCOME TAXES
The Company files a consolidated federal income tax return with all of its
80 percent or more owned subsidiaries. Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the consolidated financial statements in the period that includes the enactment
date.
(i) COMMON STOCK TO BE ISSUED
The Company has recorded the approximate number of shares to be issued due
to certain of the Company's purchase agreements for acquisitions made in 1997
and 1996. These agreements obligate the Company to pay additional consideration
to former owners representing additional purchase price for these acquisitions.
Certain amounts to be paid out under these agreements will be paid out in Common
Stock of the Company and are recorded as part of the equity section until the
shares are issued. In addition, the amount withheld from the Company's employees
for the purchase of shares under the Employee Stock Purchase Plan are also
recorded in this account until the shares are issued.
(j) REVENUE RECOGNITION
(i) Patient care service revenue is reported at the estimated realized
amounts from patients, third-party payors and others for services rendered.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. Provisions for estimated third-party payor settlements
and adjustments are estimated in the period the related services are rendered
and are adjusted in future periods as final settlements are determined.
During 1999 and 1998, approximately 18% and 25%, respectively, of patient
care service revenue and patient account receivables was from governmental
programs. Governmental programs pay for services
28
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
based on fee schedules and rates which are determined by the related
governmental agency. The Company's concentration of credit risk relating to
trade account receivables is limited due to the diversity of patients and
payors.
Laws and regulations governing government programs are complex and subject
to interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties and exclusion from the
government programs.
(ii) Royalty fees are recognized when cash is reported as received by the
franchises. Franchise agreements provide for royalties on either 9% of gross
cash receipts (subject to certain minimums and discounts), or on a sliding scale
ranging from 9% to 2% depending on the levels of such receipts and other certain
factors. Initial franchise fees are recognized when franchise training and
substantially all other services have been provided.
(k) COST OF REVENUE
The Company has revised reporting for cost of revenue on the statements of
operations. Costs directly related to the production of revenues, such as
pharmacy and nursing, are classified as cost of services provided, while all
other costs, previously reported as patient care services operations were
reclassified into operating expenses as selling, general and administrative
expense. The Company determined that the new method of reporting was more
appropriate and provided a better indication of the actual gross profit provided
by the revenue. Prior years amounts in the consolidated financial statements
have been reclassified to conform to the current year presentation.
29
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(l) NET INCOME (LOSS) PER COMMON SHARE
The reconciliation of net income (loss) per common share for the years ended
December 31, 1999, 1998 and 1997 is as follows: (in thousands, except for per
share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1999
-------------------------------
INCOME SHARES PER SHARE
-------- -------- ---------
<S> <C> <C> <C>
Basic earnings per share.................................... $4,627 11,483 $0.40
Effect of dilutive securities............................... -- 443 (0.01)
------ ------ -----
Diluted earnings per share.................................. $4,627 11,926 $0.39
------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1998
-------------------------------
LOSS SHARES PER SHARE
-------- -------- ---------
<S> <C> <C> <C>
Basic loss per share........................................ $(691) 11,071 $(0.06)
Effect of dilutive securities............................... -- -- --
----- ------ ------
Diluted loss per share...................................... $(691) 11,071 $(0.06)
----- ------ ------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997
-------------------------------
LOSS SHARES PER SHARE
-------- -------- ---------
<S> <C> <C> <C>
Basic loss per share........................................ $(2,097) 10,879 $(0.19)
Effect of dilutive securities............................... -- -- --
------- ------ ------
Diluted loss per share...................................... $(2,097) 10,879 $(0.19)
------- ------ ------
</TABLE>
The effect of dilutive securities is primarily from stock options. Such
securities were not included in the calculation of diluted loss per share in
1998 and 1997 as the impact would have been anti-dilutive.
30
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(m) COMPREHENSIVE INCOME
The Company has no significant components of comprehensive income.
(n) RECLASSIFICATIONS
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to the current year presentation.
(2) BUSINESS COMBINATIONS
At various dates during 1997, the Company purchased the assets of franchises
located in Vista and Victorville, CA, Miami, FL, Ann Arbor and Grand Haven, MI
and Lincoln and Grand Island, NE. The Company also purchased the assets of other
healthcare related businesses in Victorville, CA and Miami, FL. The aggregate
purchase price for these transactions was $10,689, of which $9,129 was paid in
cash, $1,260 in short-term obligations and $300 in forgiveness of accounts
receivable. The purchase method of accounting was used and $9,026 of goodwill
was recorded. The accompanying consolidated financial statements include the
results of operations of all acquired businesses from the date of acquisition.
The Company recorded an additional $2,923 and $1,257 of goodwill, in 1999
and 1998, respectively, from payments made under certain of the Company's
purchase agreements due to the meeting of certain financial milestones. The
obligations due to contractual commitments that will be paid in shares of the
Company's Common Stock has been recorded as common stock to be issued in the
equity section of the consolidated financial statements.
The unaudited pro-forma results of operations, affected by the acquisitions
accounted for as purchases as if they had occurred as of January 1, 1997, were
as follows:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Net revenue................................................. $104,008
Net loss.................................................... (2,040)
Net loss per common share................................... (0.19)
</TABLE>
(3) EQUIPMENT AND OTHER FIXED ASSETS
Equipment and other fixed assets consists of:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Equipment................................................... 12,833 $12,189
Capitalized computer software............................... 613 613
Leasehold improvements...................................... 1,162 1,140
------ -------
14,608 13,942
Less accumulated depreciation and amortization.............. 9,800 7,857
------ -------
$4,808 $ 6,085
====== =======
</TABLE>
31
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) EQUIPMENT AND OTHER FIXED ASSETS (CONTINUED)
Capitalized computer software is being amortized over a three year period,
the estimated life of the product. Amortization expense for capitalized software
was $204 and $0 in 1999 and 1998, respectively.
(4) LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revolving credit facility, due February, 2002............... $8,317 $21,800
Notes payable, secured by various assets, with maturities
through 2005 at interest rates ranging from 8% to 10%..... 151 210
Capital lease obligations................................... 122 348
------ -------
8,590 22,358
Less current portion........................................ 142 262
------ -------
Long-term debt.............................................. $8,448 $22,096
====== =======
</TABLE>
Maturities of long-term debt and capital lease obligations are:
<TABLE>
<CAPTION>
CAPITAL
YEAR ENDING LONG-TERM LEASE
DECEMBER 31, DEBT OBLIGATIONS
- ------------ --------- -----------
<S> <C> <C>
2000........................................................ $ 29 $121
2001........................................................ 33 8
2002........................................................ 8,345 --
2003........................................................ 25 --
2004 and beyond............................................. 36 --
------ ----
$8,468 129
======
Less amounts representing interest.......................... 7
-----------
Present value of net minimum lease payments................. $122
====
</TABLE>
32
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(4) LONG-TERM DEBT (CONTINUED)
On February 5, 1999, the Company entered into a $25,000 Loan and Security
Agreement ("Agreement") with Banc of America Commercial Finance that replaced
the former facility. The Agreement provides for borrowings up to $25,000 and
requires the Company to meet certain financial covenants including, but not
limited to: fixed charge coverage ratio; debt ratio; and limitation on annual
capital expenditures. The Agreement provides for, among other things, the
ability to meet working capital needs and to retire in its entirety the
Company's existing facility. The Company is subject to an early termination fee
if the loan is terminated prior to its natural expiration of February 2002. The
Company paid a facility fee of $185 at time of signing the Agreement. The
Agreement prohibits the Company from declaring any cash dividends on its common
stock. The Company may elect interest rates ranging from various LIBOR periods
plus a 2.125% margin, to the bank's reference rate. The average interest rate
paid under the Agreement for 1999 averaged 7.7%.
Availability under the facility is related to a percentage of the Company's
net outstanding accounts receivable and inventory balances, as defined, less
certain ineligible amounts, as defined in the Agreement. Overall borrowings
under the Agreement are limited to the lessor of the total allowable collateral
base or $25,000.
The facility is secured by the assets of the Company. Prior to November 1,
1999, the John N. Kapoor Trust, dated September 20, 1989, ("the Trust"), had
pledged an irrevocable letter of credit ("the LOC") totaling $7,000 in favor of
Bank America Business Credit to support additional borrowings that exceeded the
allowable collateral base as defined in the Agreement. The LOC was issued on
February 5, 1999, was reduced by $2,500 twice in the subsequent four months and
eliminated in total effective November 1, 1999. In exchange for the LOC, the
Company paid administrative fees to the Trust of $94 prior to its elimination.
The effective borrowing rate of interest under the prior facility as of
December 31, 1998 averaged 9.6%, as a result of non-compliance with the interest
coverage covenant. The interest rate paid by the Company on its outstanding
liability was 2% above the bank's reference rate plus an additional 0.25%. The
Company retired its existing amount due in its entirety and terminated this
facility on February 5, 1999. As part of the termination of this facility, the
Company wrote off the $185 of remaining deferred financing costs.
The Company leases certain medical equipment under long-term lease
agreements. Most of these agreements have a term of 36 months and are classified
as capital leases. The net book value of the medical equipment under capital
leases were $172 and $298 for 1999 and 1998, respectively.
33
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(5) PROVISION FOR INCOME TAXES
The income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
1999:
Federal..................................................... $3,286 $ (467) $ 2,819
State....................................................... 363 (53) 310
------ ------- -------
$3,649 $ (520) $ 3,129
====== ======= =======
1998:
Federal..................................................... $ 493 $ 233 $ 726
State....................................................... 82 34 116
------ ------- -------
$ 575 $ 267 $ 842
====== ======= =======
1997:
Federal..................................................... $ -- $(1,464) $(1,464)
State....................................................... 482 (258) 224
------ ------- -------
$ 482 $(1,722) $(1,240)
====== ======= =======
</TABLE>
A reconciliation between the income tax expense (benefit) recognized in the
Company's Consolidated Statement of Operations and the income tax expense
(benefit) computed by applying the U.S. Federal corporate income tax rate of
35%, 34% and 35% for 1999, 1998 and 1997, respectively, to earnings (loss)
before income taxes follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)................... $2,715 $ 51 $(1,168)
Increase (decrease) in income taxes resulting from:
Amortization of goodwill.................................. 55 55 56
State income taxes, net of federal income tax benefit..... 310 8 (143)
Settlement of 1992-1995 IRS audit and adjustments......... -- 739 --
Other, net................................................ 49 (11) 15
------ ---- -------
Total provision (benefit)................................... $3,129 $842 $(1,240)
====== ==== =======
</TABLE>
34
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(5) PROVISION FOR INCOME TAXES (CONTINUED)
Deferred income tax assets and (liabilities) at December 31, 1999 and 1998
include:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................ $1,661 $ -- 1,395 $ --
Allowance for notes receivable......................... 140 -- 11 --
Accrued expenses....................................... 118 -- 42 --
Severance accrual...................................... -- -- 103 --
Accrued wages and benefits............................. 489 -- 275 --
Insurance claims payable............................... 177 32
Accrued legal fees..................................... 332 -- -- --
Reserve for discontinued operations.................... 7 -- 115 --
Capital loss carry-forward............................. -- 575 -- 575
Net operating loss carry-forward....................... -- -- -- 718
Other, net............................................. (35) -- 71 --
------ ----- ------ ------
Total deferred tax assets.............................. 2,889 575 2,044 1,293
Valuation allowance.................................... -- (575) -- (575)
------ ----- ------ ------
Net deferred tax asset................................. 2,889 -- 2,044 718
Deferred tax liabilities:
Tax over book depreciation............................. -- (63) -- (172)
Internally developed software.......................... -- 80 -- (434)
Intangible assets...................................... (434)
Tax accounting change.................................. -- -- (81) --
Other, net............................................. -- (297) -- (103)
------ ----- ------ ------
Total deferred tax liabilities......................... -- (714) (81) (709)
------ ----- ------ ------
Net deferred income tax asset/(liability).............. $2,889 $(714) $1,963 $ 9
====== ===== ====== ======
</TABLE>
The Company has a capital loss carry-forward of $1,475, which expires in
2001.The Company has a valuation allowance of $575 for 1999 and 1998, related to
the capital loss carry-forward. In 1998, the Company incurred additional
expenses for taxes due to the settlement of an IRS audit for prior years and the
corresponding adjustment to deferred taxes.
The Company believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the net deferred
tax asset.
35
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(6) STOCK INCENTIVE PLAN
The Company's Amended and Restated Incentive Plan (1997) was originally
adopted by the Board and approved by the shareholders on September 11, 1991 and
amended on February 21, 1997 (the "Incentive Plan"). The Incentive Plan provides
for the award of cash, stock, and stock unit bonuses, and the grant of stock
options and stock appreciation rights ("SARs"), to officers and employees of the
Company and its subsidiaries and other persons who provide services to the
Company on a regular basis. On February 21, 1997, the Company's Board approved
an increase in the amount of shares reserved for the Incentive Plan to 2,000,000
shares of Common Stock. All options under the Incentive Plan must be exercised
within ten years after the grant date. As of December 31, 1999, no cash, stock,
stock unit bonuses or SARs have been granted pursuant to the Incentive Plan.
The following schedule details the changes in options granted under the
Incentive Plan for the three years ending December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------- --------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 1,424,840 $1.95 977,715 $4.16 965,447 $3.58
Granted.......................... 101,500 3.24 928,300 1.63 527,250 5.34
Exercised........................ (1,500) 0.75 (18,250) 3.28 (160,748) 2.54
Terminated....................... (262,564) 3.53 (462,925) 3.95 (354,234) 5.11
--------- --------- --------
Outstanding at end of year....... 1,262,276 1.73 1,424,840 1.95 977,715 4.16
--------- --------- --------
Options exercisable at
year-end....................... 510,746 435,123 354,514
--------- --------- --------
Weighted average fair value of
options granted during the
year........................... $ 3.24 $ 0.89(1) $ 2.53
</TABLE>
- ------------------------
(1) Includes an aggregate of 262,500 shares of options re-priced in October 1998
from exercise prices ranging from $3.375 to $6.00, to an exercise price of
$0.75.
36
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes information about the Incentive Plan and
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED-AVG.
RANGE OF NUMBER REMAINING NUMBER
EXERCISE OUTSTANDING CONTRACTUAL WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
PRICES AT 12/31/99 LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
- --------------------- ----------- ------------- -------------- ----------- --------------
<C> <C> <S> <C> <C> <C>
0.7$5 to $1.00.... 828,437 8.5 years $0.76 265,647 $0.76
2.0$0 to $3.47.... 186,639 6.3 years $2.95 60,950 $2.59
3.7$5 to $4.38.... 242,400 6.1 years $4.02 181,150 $4.01
5.0$0 to $7.50.... 4,800 7.0 years $5.60 2,999 $5.50
--------- -------
0.7$5 to $7.50.... 1,262,276 510,746
========= =======
</TABLE>
The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans.
Had compensation cost for the Company's stock-based compensations plans been
determined based on FASB Statement No. 123, the Company's net income (loss) and
income (loss) per common share in 1999, 1998 and 1997 on a pro-forma basis would
have been:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss):
as reported............................................... $4,627 $ (691) $(2,097)
pro forma................................................. $4,533 $ (731) $(2,520)
Net income (loss) per common share--basic:
as reported............................................... $ 0.40 $(0.06) $ (0.19)
pro forma................................................. $ 0.39 $(0.07) $ (0.24)
Net income (loss) per common share--diluted:
as reported............................................... $ 0.39 $(0.06) $ (0.19)
pro forma................................................. $ 0.38 $(0.07) $ (0.24)
</TABLE>
The fair value of options granted under the Company's stock option plan
during 1999, 1998 and 1997 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, expected volatility of 74% for 1999, 65% for 1998 and 45% for 1997, risk
free interest rate of 5.00% for 1999, 4.65% for 1998 and 5.75% for 1997, and
expected lives of 5 years for each year.
(7) EMPLOYEE BENEFIT PROGRAMS
(a) 401(K) PLAN
The Company has a defined contribution plan under which the Company may make
matching contributions based on employee contributions. The match, if any, is
determined at discretion by the Board of Directors of the Company. The plan is
intended to qualify as a deferred compensation plan under Section 401(k) of the
Internal Revenue Code of 1986. Contributions are invested at the direction of
the employee into one or more funds. All employees who have attained the age of
20 1/2 with one year's service
37
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) EMPLOYEE BENEFIT PROGRAMS (CONTINUED)
are eligible for participation in the plan. The amount of expense recognized in
1999, 1998, and 1997 related to this plan totaled $322, $304 and $176,
respectively.
(b) EMPLOYEE STOCK PURCHASE PLAN
The 1996 Employee Stock Purchase Plan, (ESPP) which has an expiration date
of December 31, 2000, permits eligible employees, per the ESPP, the ability to
acquire shares of the Company's stock through payroll deductions, up to a
maximum of 15% of eligible wages. Employees can elect to enter the ESPP once a
year, in December of the prior year for participation in the next year.
Employees can stop their participation at any time during the year, but cannot
re-enroll until the next year. In addition, enrolled employees can increase or
decrease their participation percentage in May, effective July 1 of that year.
The price paid for the shares issued under the ESPP is at a 15% discount
from the lower of the average of the asks and bids prices, as listed on the
NASDAQ, for the Company's shares on the first and the last business day of each
year. The shares are issued in January of the following year from un-issued
shares. For the 1999 plan year, 123,925 shares were issued in January of 2000.
108,580 shares were issued in January of 1999 for the 1998 plan year.
8) ASSET WRITE-OFFS AND OTHER CHARGES
In the fourth quarter of 1997, the Company performed an evaluation of its
operations, instituted a cost reduction program and disposed of certain
under-performing assets. In conjunction with these steps, the Company recorded
$3,902 in asset write-offs and other charges. The charge consists of $1,395 of
cash charges, of which payments of $759 were made in 1997 and $636 were made in
1998.
(9) COMMITMENTS AND CONTINGENCIES
The Company may be required, upon death or termination of employment, to
purchase stock of certain minority shareholders of subsidiaries.
Certain of the Company's purchase agreements for acquisitions made in 1997
and 1996, obligate the Company, upon the acquired businesses meeting of
determined milestones, the attainment of certain financial results or
contractually, to pay additional consideration to former owners representing
additional purchase price for these acquisitions. The contingency period for
these payments is through December 31, 2001. Amounts to be paid out under these
agreements, of which certain amounts will be paid out in Common Stock of the
Company, will be recorded as additional goodwill in the year that the amounts
become certain. 204,563 shares and 183,568 shares of the Company's Common Stock
were issued under these agreements in 1999 and 1998, respectively.
Certain management employees of the Company have employment agreements that
provide for the payment of salary and benefits through a specific time frame.
The agreements can only be terminated early for cause, as defined in the
agreements. These agreements are not renewable and the Company currently has no
plans in extending the agreements currently in place.
The Company is subject to claims and legal actions that may arise in the
ordinary course of business. However, the Company maintains insurance to protect
against such claims or legal actions. The Company is not aware of any litigation
either pending or filed that might have a potential impact on the Company's
38
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
financial position and statement of operations. The Company leases office space
under leases that are classified as operating leases. Operating lease expense
for 1999, 1998 and 1997 was $2,280, $2,980, and $3,286, respectively. The future
minimum lease payments for these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000...................................................... $2,135
2001...................................................... 1,681
2002...................................................... 1,040
2003...................................................... 460
2004 and beyond........................................... 179
------
$5,495
======
</TABLE>
(10) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest and taxes paid (refund):
Interest.................................................... $ 996 $3,125 $1,568
====== ====== ======
Income taxes paid (refund).................................. 2,422 (876) 2,085
====== ====== ======
Non-cash investing and financing activities:
Stock issued for franchise acquisitions..................... 729 88 1,260
====== ====== ======
Additions to obligation under capital leases................ $ 0 $ 23 $ 465
====== ====== ======
</TABLE>
39
<PAGE>
OPTION CARE, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<TABLE>
<CAPTION>
BALANCE BALANCE
BEGINNING (A) CHARGED (B) END
YEAR ENDED OF PERIOD ACQUISITIONS TO EXPENSE DEDUCTIONS OF PERIOD
- ---------- --------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1997......................... $1,738 $1,049 $5,715 $(4,749) $3,753
December 31, 1998......................... 3,753 -- 4,936 (5,113) 3,576
December 31, 1999......................... $3,576 -- $2,970 $(2,433) $4,113
</TABLE>
ALLOWANCE FOR UNCOLLECTIBLE NOTES RECEIVABLE--CURRENT AND LONG TERM:
<TABLE>
<CAPTION>
BALANCE BALANCE
BEGINNING (A) CHARGED (B) END
YEAR ENDED OF PERIOD ACQUISITIONS TO EXPENSE DEDUCTIONS OF PERIOD
- ---------- --------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1997......................... $116 -- $ 35 -- $151
December 31, 1998......................... 151 -- -- (122) 29
December 31, 1999......................... $ 29 -- $329 $ -- $358
</TABLE>
- ------------------------
(A) Represents balances related to companies acquired during the year.
(B) Represents accounts written off.
40
<PAGE>
(a)(3)Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant, together
with Certificate of Amendment thereto filed February 18,
1992. Filed as Exhibit 3(a) to the Company's Registration
Statement (No. 33-45836) dated April 15, 1992 and
incorporated by reference herein.
3.2 Certificate of Amendment to Certificate of Incorporation of
the Registrant filed March 25, 1992. Filed as Exhibit 3(c)
to the Company's Registration Statement (No. 33-45836) dated
April 15, 1992 and incorporated by reference herein.
3.3 Restated By-laws of the Registrant dated June 1, 1994. Filed
as Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the year ending December 31, 1994 and incorporated by
reference herein.
10.1 Stock Purchase Agreement dated February 18, 1992, among the
Registrant, OCE and the stockholders of Young's I.V.
Therapy, Inc. Filed as Exhibit 2(f) to the Company's
Registration Statement (No. 33-45836) dated April 15, 1992
and incorporated by reference herein.
10.2 1991 Stock Incentive Plan of the Registrant and related
forms of Incentive and Nonqualified Stock Option Agreements.
Filed as Exhibit 10(a) to the Company's Registration
Statement (No. 33-45836) dated April 15, 1992 and
incorporated by reference herein. *
10.2 (a) Amendment to the 1991 Stock Incentive Plan of the Registrant
and related forms of Incentive and Nonqualified Stock Option
Agreements, dated February 21, 1995. Filed as Exhibit
10.6(a) to the Company's Annual Report on Form 10-K for the
year ending December 31, 1994 and incorporated by reference
herein. *
10.2 (b) Amendment to the 1991 Stock Incentive Plan of the
Registrant, dated May 22, 1997. Filed as Exhibit 10.2(b) to
the Company's Annual Report on Form 10-K for the year ending
December 31, 1997 and incorporated by reference herein *
10.3 Option Care, Inc. 401(k) Profit Sharing Plan. Filed as
Exhibit 10(b) to the Company's Registration Statement (No.
33-45836) dated April 15, 1992 and incorporated by reference
herein. *
10.3 (a) Amendment to the 1992 401(k) Profit Sharing Plan of the
Registrant dated January 1, 1996. Filed as Exhibit 10.3(a)
to the Company's Annual Report on Form 10-K for the year
ending December 31, 1997 and incorporated by reference
herein. *
10.4 Consulting Agreement dated as of September 27, 1990 between
EJ Financial Enterprises and Michael Prime. Filed as Exhibit
10(h) to the Company's Registration Statement (No. 33-45836)
dated April 15, 1992 and incorporated by reference herein. *
10.5 Form of Franchise Agreement. Filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year ending
December 31, 1996 and incorporated by reference herein.
10.6 Lease dated as of October 23, 1996 between the Registrant
and LaSalle National Trust, N.A., as Trustee. Filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-K for
the year ending December 31, 1996 and incorporated by
reference herein.
10.7 Consulting Agreement between the Registrant and EJ Financial
Enterprises, Inc. Filed as Exhibit 10(o) to the Company's
Registration Statement (No. 33-45836) dated April 15, 1992
and incorporated by reference herein.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
10.8 Credit Agreement with ancillary documentation dated December
23, 1996, among Registrant, Option Care Enterprises, Inc.
("OCE"), Option Care, Inc. (California), and Option Care
Capital Services and PNC Bank as agent and lender and Harris
Bank and The Northern Trust Company as lenders re:
$30,000,000 credit agreement. Filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ending
December 31, 1996 and incorporated by reference herein.
10.8 (a) Amendment 1 to Credit Agreement dated February 5, 1997,
among Registrant, Option Care Enterprises, Inc. ("OCE"),
Option Care, Inc. (California), and PNC Bank as agent and
lender and Harris Bank and The Northern Trust Company as
lenders. Filed as Exhibit 10.8(a) to the Company's Annual
Report on Form 10-K for the year ending December 31, 1997
and incorporated by reference herein.
10.8 (b) Amendment 5 to Credit Agreement dated March 25, among
Registrant, Option Care Enterprises, Inc. ("OCE"), Option
Care, Inc. (California), and PNC Bank as agent and lender
and Harris Bank, The Northern Trust Company and The First
National Bank of Chicago as lenders re: an extension to the
original revolving credit agreement to January 2000. Filed
as Exhibit 10.8(b) to the Company's Annual Report on Form
10-K for the year ending December 31, 1997 and incorporated
by reference herein.
10.9 Stock Sale Agreement, Franchise Agreement and Addendum to
Franchise Agreement dated December 31, 1996 among the
Registrant and J. Harris Morgan, Jr. Filed as Exhibit 10.9
to the Company's Annual Report on form 10-K for the year
ending December 31, 1996 and incorporated by reference
herein.
10.10 Promissory Note between Convention Center Drug, Inc. and
Option Care, Inc., dated November 15, 1996. Filed as Exhibit
10.10 to the Company's Annual Report on Form 10-K for the
year ending December 31, 1996 and incorporated by reference
herein.
10.11 Security Agreement between Convention Center Drug, Inc. and
Option Care, Inc., dated November 15, 1996. Filed as Exhibit
10.11 to the Company's Annual Report on Form 10-K for the
year ending December 31, 1996 and incorporated by reference
herein.
10.12 Promissory Notes between Home I.V., Inc. and Option Care,
Inc., dated March 17, 1995. Filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ending
December 31, 1995 and incorporated by reference herein.
10.13 Promissory Note between Home Pharmacy Inc. and Option Care,
Inc., dated February 1, 1997. Filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ending
December 31, 1997 and incorporated by reference herein.
10.14 Management Agreement between Pinecrest Healthcare
Consultants, Inc., and Option Care, Inc. dated April, 1997.
Filed as Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ending December 31, 1997 and
incorporated by reference herein. *
10.15 Amended Option Care, Inc. 1996 Employee Stock Purchase Plan,
dated January 1, 1996. Filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ending
December 31, 1995 and incorporated by reference herein. *
10.16 Renewal, dated May 2, 1997, of the Executive Severance
Agreement between Erick E. Hanson and Option Care, Inc.,
dated June 28, 1996 incorporated by reference herein. *
10.17 Executive Severance Agreement between James A. Hodges, Jr.
and Option Care, Inc., dated December 19, 1997. Filed as
Exhibit 10.17 to the Company's Annual Report for the year
ending December 31, 1997 and incorporated by reference
herein.*
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
10.18 Executive Severance Agreement between Cathy Bellehumeur and
Option Care, Inc., dated November 12, 1997. Filed as Exhibit
10.18 to the Company's Annual Report for the year ending
December 31, 1997 and incorporated by reference herein.*
10.19 Promissory Note between Felice, Inc., and Option Care, Inc.,
dated March 11, 1997. Filed as Exhibit 10.19 to the
Company's Annual Report for year ending December 31, 1997
and incorporated by reference herein.*
10.20 Promissory Note between C.R. I.V. Service, Inc., and Option
Care, Inc., dated April 24, 1997. Filed as Exhibit 10.20 to
the Company's Annual Report for year ending December 31,
1997 and incorporated by reference herein. *
10.21 Promissory Note between Eugene and Susan Lutz, and Option
Care, Inc., dated April 24, 1997. Filed as Exhibit 10.20 to
the Company's Annual Report for year ending December 31,
1997 and incorporated by reference herein. *
10.22 Promissory Note between East Coast Optioncare, Inc., and
Option Care, Inc., dated November 1, 1997. Filed as Exhibit
10.21 to the Company's Annual Report for year ending
December 31, 1997 and incorporated by reference herein.*
10.23 Promissory Note between Brooks Home I.V., Inc., and Option
Care, Inc., dated December 8, 1997. Filed as Exhibit 10.22
to the Company's Annual Report for year ending December 31,
1997 and incorporated by reference herein.*
10.24 Facility Provider Agreement between Foundation Health
Corporation Affiliate(s) and Option Care, Inc. dated June 1,
1997. Filed as Exhibit 10.24 to the Company's Annual Report
for year ending December 31, 1997 and incorporated by
reference herein.
10.25 Amendment to the Facility Provider Agreement between
Foundation Health Corporation Affiliate(s) and Option Care,
Inc. dated March 23, 1998. Filed as Exhibit 10.25 to the
Company's Annual Report for year ending December 31, 1997
and incorporated by reference herein.
10.26 Loan and Security Agreement with ancillary documentation
dated February 5, 1999, among Registrant, Option Care
Enterprises, Inc. ("OCE'), Option Care, Inc. (California)
and BankAmerica Business Credit, Inc. as lender. Filed as
Exhibit 10.26 to the Company's Annual Report for year ended
December 31, 1998 and incorporated by reference herein.
10.27 Employment Agreement between Michael A. Rusnak and Option
Care, Inc., dated October 1, 1998. Filed as Exhibit 10.27 to
the Company's Annual Report for year ended December 31, 1998
and incorporated by reference herein.*
10.28 Reimbursement and Security Agreement dated February 10,
1999, between Option Care, Inc. and the John N. Kapoor Trust
dated September 20, 1989. Filed as Exhibit 10.28 to the
Company's Annual Report for year ended December 31, 1998 and
incorporated by reference herein.
10.29 Letter Agreement dated January 15, 1999, among Registrant,
Option Care Enterprises, Inc. ("OCE"), Option Care, Inc.
(California), and PNC Bank as agent and lender and Harris
Bank, the Northern Trust Company and The First National Bank
of Chicago as lenders re: Forbearance Agreement. Filed as
Exhibit 10.29 to the Company's Annual Report for year ended
December 31, 1998 and incorporated by reference herein.
10.30 Amendment No. 1 to the Consulting Agreement By and Between
EJ Financial Enterprises, Inc. and Option Care, Inc., dated
October 1, 1999.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
10.31 Termination Letter pertaining to the Reimbursement and
Security Agreement dated February 10, 1999, between Option
Care, Inc. and the John N. Kapoor Trust dated September 20,
1989.
16 Letter re Change in Certifying Accountant dated December 11,
1998 from KPMG, filed with Securities and Exchange
Commission as an amendment to Form 8-K filed by Company on
December 4, 1998 and incorporated by reference herein.
21 Subsidiaries of the Registrant. Filed as Exhibit 21 to the
Company's Annual Report for year ended December 31, 1998 and
incorporated by reference herein.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG LLP.
27 Financial Data Schedule
</TABLE>
- ------------------------
* Management contracts and compensatory plans and arrangements.
(d) Reports on Form 8-K.
Not applicable.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
OPTION CARE, INC.
By: /s/ MICHAEL A. RUSNAK
-----------------------------------------
Michael A. Rusnak
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Date: March 30, 2000
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MICHAEL A. RUSNAK
------------------------------------------- President, Chief Executive March 30, 2000
Michael A. Rusnak Officer and Director
Vice President and Chief
Financial Officer
/s/ MICHAEL A. SIRI (Principal Accounting
------------------------------------------- Officer and Principal March 30, 2000
Michael A. Siri Financial
Officer)
/s/ JAMES G. ANDRESS
------------------------------------------- Director March 30, 2000
James G. Andress
/s/ JAMES M. HUSSEY
------------------------------------------- Director March 30, 2000
James M. Hussey
/s/ JOHN N. KAPOOR
------------------------------------------- Chairman and Director March 30, 2000
John N. Kapoor
/s/ JEROME F. SHELDON
------------------------------------------- Director March 30, 2000
Jerome F. Sheldon
/s/ ROGER W. STONE
------------------------------------------- Director March 30, 2000
Roger W. Stone
</TABLE>
45
<PAGE>
Exhibit 10.30
AMENDMENT NO. 1
TO THE CONSULTING AGREEMENT
BY AND BETWEEN
E.J. FINANCIAL ENTERPRISES, INC.
AND
OPTION CARE, INC.
THIS AMENDMENT NO. 1, is made to that certain Consulting Agreement,
dated as of January 1, 1991 (the "Consulting Agreement"), by and between E.J.
Financial Enterprises, Inc., a Delaware corporation ("E.J. Financial"), and
Option Care, Inc., a Delaware corporation ("OCI").
WITNESSETH:
WHEREAS, E.J. Financial and OCI have previously entered into the
Consulting Agreement pursuant to which E.J. Financial has been providing
consulting services to OCI; and
WHEREAS, E.J. Financial and OCI desire to amend the compensation
provisions of the Consulting Agreement.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the Parties herein contained and contained in the
Consulting Agreement, and intending to be legally bound hereby, the Parties
hereto agree as follows:
1. Paragraph 4 "Term and Compensation" is hereby deleted in its entirety
and the following is substituted in its place:
Beginning as of October 1, 1999 and continuing each year thereafter
until this Consulting Agreement is terminated as provided in
Paragraph 6 hereof, E.J. Financial shall provide the Consulting
Services to OCI. In consideration for such Consulting Services,
and effective as of October 1, 1999, each year OCI shall pay to
E.J. Financial the Consulting Fee, payable in four equal
installments due in arrears on the last business day of March,
June, October, and December, respectively, of the year in question.
The Consulting Fee shall be in an amount equal to $175,000 per
year and shall remain at that level until changed by mutual
agreement of the Parties.
2. In all other respects, the Consulting Agreement is hereby ratified
and confirmed.
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
undersigned Parties have caused this Amendment No. 1 to the Consulting
Agreement to be duly executed as of the 1st day of October, 1999.
OPTION CARE, INC.
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
E.J. FINANCIAL ENTERPRISES, INC.
By:
----------------------------------
John N. Kapoor, President
<PAGE>
Exhibit 10.31
November 8, 1999
Option Care, Inc.
100 Corporate North, Suite 212
Bannockburn, Illinois 60015
Attn: Michael Siri
RE: LOAN AND SECURITY AGREEMENT DATED AS OF FEBRUARY 5, 1999 AMONG
BANK OF AMERICA, NATIONAL ASSOCIATION, SUCCESSOR-IN-INTEREST
TO BANKAMERICA BUSINESS CREDIT, INC., AS LENDER, OPTION CARE,
INC., INDIVIDUALLY AND AS BORROWER'S AGENT, AND OPTION CARE,
INC. AND EACH OF THE SUBSIDIARIES OF OPTION CARE, INC., AS
BORROWERS (AS THEREAFTER AMENDED, MODIFIED, RENEWED OR
RESTATED, THE "LOAN AGREEMENT")
Dear Mr. Siri:
In accordance with Section 7.5(c) of the Loan Agreement and Section 1.15(c) of
the Trust Subordination Agreement (as such term is defined in the Loan
Agreement) and as a result of the Borrowers' compliance with the provision
contained in Section 7.5(b)(i) of the Loan Agreement and Section 1.15(b) of the
Trust Subordination Agreement, Bank of America hereby consents to the
termination by the Borrowers' Agent of the Northern Letter of Credit.
Sincerely,
Paula K. Berry
Vice President
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-98256, 33-66592 and 333-66255) pertaining to the 1995 Employee
Stock Purchase Plan, 1991 Stock Incentive Plan and the Amended and Restated
Stock Incentive Plan (1997) of our report dated March 10, 2000, with respect to
the consolidated financial statements and schedule of Option Care, Inc. included
in its Annual Report on Form 10-K for the year ended December 31, 1999.
ERNST & YOUNG LLP
Chicago, Illinois
March 27, 2000
<PAGE>
Exhibit 23.2
CONSENT OF KPMG LLP
The Board of Directors
Option Care, Inc.:
We consent to incorporation by reference in the Registration Statements
Nos. 33-47436, 33-98256 and 333-66255 on Form S-8 of Option Care, Inc. of our
report dated March 26,1998, relating to the statements of operations,
stockholders' equity and cash flows of Option Care, Inc. and subsidiaries for
the year ended December 31, 1997, which report appears in this December 31, 1999
Annual Report on Form 10-K of Option Care, Inc.
Chicago, Illinois
March 27, 2000
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<NAME> OPTION CARE INC.
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