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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, 2000
COMMISSION FILE NO. 0-19878
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OPTION CARE, INC.
(Exact name of registrant as specified in its charter)
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)
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. / /
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 15, 2001 was approximately $49,156,000 (based on closing
sale price of $8.125 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 15, 2001 was approximately 12,299,862.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2001 Annual
Shareholders' Meeting are incorporated by reference into Items 10-13 in
Part III of this Report.
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OPTION CARE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
--------
PART I:
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Item 4(A). Executive Officers of Registrant............................ 11
PART II:
Item 5. Market for the Registrant's Common Equity and Related
Stockholders Matters........................................ 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 7(A). Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 21
PART III:
Item 10. Directors and Executive Officers of the Registrant.......... 21
Item 11. Executive Compensation...................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 21
Item 13. Certain Relationships and Related Transactions.............. 21
PART IV:
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 22
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 Option
Care with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
Option Care) 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, Option Care. These risks
and uncertainties include, but are not limited to, uncertainties affecting
businesses of Option Care 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 Option Care operates.
2
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Option Care, Inc. provides specialty pharmaceutical products and related
services, infusion therapy and other ancillary healthcare services through a
national network of 130 company-owned and franchise locations in 32 states.
Through our wholly-owned OptionMed-TM- subsidiary, we contract with managed care
organizations and physicians to become their specialty pharmacy provider,
dispensing and delivering specialized pharmaceuticals, assisting with clinical
compliance information and providing pharmacy consulting services. Through our
established national network of 130 Option Care locations, we contract with
managed care organizations, third party payors, hospitals, physicians and other
referral sources to provide pharmaceuticals and complex compounded solutions to
patients for intravenous delivery in the patients' homes or other non-hospital
settings. Many of our locations provide other ancillary healthcare services as
well, such as nursing, respiratory therapy and durable medical equipment. In
addition, our subsidiary, Management by Information, Inc., provides data
management products and support services to the infusion and home medical
equipment industry.
Our predecessor company was established in 1979 in Chico, California as a
venture between a hospital pharmacist, a retail pharmacist and a local hospital,
and began building a franchise network in 1984. Our company was incorporated in
Delaware on July 9, 1991. In 1992, we completed the initial public offering of
our common stock and became a public company. We are listed on the Nasdaq
National Market under the symbol "OPTN."
As of December 31, 2000, we have 130 Option Care locations operating in 32
states, of which 27 are company-owned and 103 are owned and operated by
franchisees. Our principal executive offices are located at 100 Corporate North,
Suite 212, Bannockburn, Illinois, 60015 and our telephone number is
(847) 615-1690.
COMPANY STRATEGY
Option Care plans to continue to investigate expanding, growing and
developing our 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-, through additional contracts
with managed care organizations and biotech pharmaceutical manufacturers, and
(iii) increasing the volume of current therapies and expanding coverage of new
therapies and services. To meet our objectives, additional financing sources may
be required. We can give no guarantees that such financing will be available or
available at an acceptable cost.
OVERVIEW OF OUR BUSINESS LINES
Option Care's business is divided into two main business segments: specialty
pharmacy and infusion and services. Our specialty pharmacy business consists of
providing specialty drug distribution and pharmacy consulting services to
managed care organizations, third-party payors, physician groups and other
providers. Our infusion and services business consists of providing a full range
of infusion therapies, care management, and other ancillary services through a
national network of company and franchise-owned Option Care locations.
We offer our portfolio of specialty pharmacy and infusion and related
healthcare services to a highly diversified customer base. We currently serve
specialty pharmacy clients through our distribution centers in Miami, Florida
and Ann Arbor, Michigan. Clients receiving infusion and other related healthcare
services
3
are served through our network of 130 offices in 32 states. The following table
shows the breakdown of company-owned versus franchise locations for Option Care
over the past three years:
2000 1999 1998
-------- -------- --------
Company-owned locations..................................... 27 23 24
Franchise locations......................................... 103 117 121
--- --- ---
Total....................................................... 130 140 145
=== === ===
Number of states with Option Care locations................. 32 34 35
SPECIALTY PHARMACY SERVICES
Through our company-owned offices in Miami, Florida and Ann Arbor, Michigan,
we contract with managed care organizations and physician groups to provide
biotech and injectable drugs for administration to patients in physicians'
offices and other alternative sites. We also market biotech and injectable drugs
and provide pharmacy consulting services directly to physicians, third-party
payors and other providers. In January 2000, we repositioned the specialty
pharmacy drug distribution business into a separate division doing business as
OptionMed-TM-.
INFUSION AND SERVICES
The infusion and services segment consists of the following: (i) providing
infusion and other healthcare services through our 27 company-owned locations,
(ii) managing our network of 103 franchise locations providing infusion
services, and (iii) providing data management systems to the infusion and home
medical equipment industry.
- INFUSION AND OTHER HEALTHCARE SERVICES
Home infusion services provide a safe and cost effective alternative to
hospital care. 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.
For the alternate site patient, Option Care locations compound, dispense and
administer pharmaceuticals, sell medical supplies, provide nursing services,
train patients and their caregivers, consult with attending physicians, and
process reimbursement claims. Some locations also sell and rent durable
medical equipment and provide a full menu of home health nursing and therapy
services.
We are committed to providing quality care. We believe that an important
measure of quality in the healthcare industry is accreditation by a
recognized accrediting body. As of December 31, 2000, a total of 117 or 90%
of the franchise and company-owned offices were accredited and a total of 15
or 12% received commendations. Since 1990, all new franchises have been
required to apply for accreditation within their first year of operation.
Our goal is for all Option Care infusion pharmacies to become accredited.
- FRANCHISE PROGRAM
As of December 31, 2000, Option Care had 103 franchise locations, which in
addition to our 27 company-owned locations, provide in-home or alternative
site infusion therapy and other related services. Any new franchise granted
by Option Care provides the franchise owner the authority to own and operate
an Option Care office within a granted territory for up to a 5-year term.
The initial fee for a start-up franchise is payable by the new franchise
owner upon execution of the franchise agreement.
4
The exact amount of the initial franchise fee is determined by Option Care
based on the population in the territory granted to the franchise owner. Our
existing franchise agreements generally provide for royalties on a sliding
scale ranging from 9% to 3% of gross cash receipts.
Each franchised office is required to maintain a licensed pharmacy equipped
to compound sterile solutions as prescribed by the patient's physician. Each
location operates under a confidential, proprietary system developed by
Option Care, which includes initial training as well as procedures for
quality assurance.
Key employees of each franchised office, including the director of pharmacy,
director of nursing, and general manager, must complete initial training
programs provided by Option Care. In addition to required initial training,
we may offer additional programs on selected topics to franchise owners and
their employees. Our initial training stresses the importance of responsive
service. In addition, we may make available to franchisees additional
programs for marketing and operating support services.
Our franchise agreements require, among other things, that franchise owners
utilize Option Care's policies on quality assurance, clinical services and
local marketing and obtain specified liability insurance protecting the
franchise owner against claims arising from the operation of the franchised
business.
- DATA MANAGEMENT SYSTEMS
Management by Information, Inc. (MBI) supplies data management products and
support services to the infusion and home medical equipment industry through
such products as MBI HomeCare 5.0, which was introduced in 1999. MBI
specializes in home infusion and home medical equipment software products
that are designed with the ability to integrate with other key information
systems to provide a seamless business solution to healthcare companies.
Financial information about our business segments is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 to the "Notes to Consolidated Financial Statements" in
this Annual Report on Form 10-K.
REIMBURSEMENT FOR SERVICES
Most of our patient care service revenue from company-owned offices is
derived from third-party payors, such as insurance companies, managed care
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 our
company-owned offices for the three-year period as indicated:
YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Private insurance and other private payors................. 84% 82% 75%
Medicare, Medicaid and other governmental programs......... 16% 18% 25%
--- --- ---
Total.................................................. 100% 100% 100%
=== === ===
5
SALES AND MARKETING
Generating patient referrals is vital to the success of Option Care. Our
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 that 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.
We have established a program called Optionet-Registered Trademark-, through
which we contract with certain regional and national third-party payors (e.g.,
insurance companies, managed care organizations and large self-insured
employers) so that participating Option Care locations may receive patient
referrals. 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 fee.
In addition, we have established a new sales program to pursue regional and
national managed care contracts and national specialty pharmacy distribution
agreements with biotech pharmaceutical manufacturers.
COMPETITION
The infusion services and specialty pharmacy businesses in which we operate
are each highly competitive. The core of our infusion and services segment, our
infusion business, participates in the $6 billion alternate-site infusion
market. Our company-owned and franchised pharmacy locations compete with other
national and regional infusion companies, hospital pharmacies, and independent
regional and local pharmacies. The alternate-site infusion market is highly
fragmented, with no single player having a dominant market share. Our specialty
pharmacy business, OptionMed, participates in the $20 billion pharmaceutical
market, of which $4 billion represents specialty pharmacy products. Although no
single player is dominant in the market, our OptionMed business competes on a
national level against several specialty pharmacy distribution companies,
certain of which possess greater capital resources and generate larger revenues
than Option Care.
SUPPLIERS
Option Care's company-owned and participating franchise locations purchase
pharmaceuticals and supplies from a preferred list of vendors specified by
Option Care. This allows us to obtain volume discount pricing. We may derive
revenue through administrative fees received from contracted manufacturers.
Neither Option Care 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 our
franchises and owned locations, we believe that alternate sources could be
located which would adequately meet our needs.
GOVERNMENT REGULATION
OVERVIEW.
The healthcare industry is required to comply with many laws and government
regulations at both the federal and state levels. Laws and regulations in the
healthcare industry are extremely complex and, in many instances, the industry
does not have the benefit of significant regulatory or judicial interpretation.
Moreover, our business is impacted not only by those laws and regulations that
are directly applicable to us, but also by certain laws and regulations that are
applicable to our managed care, hospital and other clients. If we fail to comply
with the laws and regulations directly applicable to our business, we could
suffer civil and/or criminal penalties and we could be excluded from contracting
with providers participating in Medicare, Medicaid and other federal and state
healthcare programs. If our franchisees fail to comply with the laws and
regulations applicable to their businesses, they could suffer civil and/or
criminal
6
penalties and/or be excluded from participating in Medicare, Medicaid and other
federal and state healthcare programs, which could, indirectly, have an adverse
impact on our business.
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
the Drug Enforcement Administration, and comply with record keeping and
inventory requirements for the dispensing of controlled substances. Although
Option Care provides its franchise offices guidance on 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.
PROFESSIONAL LICENSURE.
Many of the nurses, pharmacists and other healthcare professionals employed
by us are required to be individually licensed or certified under applicable
state law. We take steps to ensure that our employees possess all necessary
licenses and certifications, and we believe that our employees, including nurses
and therapists, comply with all applicable licensure laws.
PHARMACY LICENSING AND REGISTRATION.
State laws require that we be licensed as an in-state pharmacy or as an
out-of-state pharmacy to certain other states in which we ship prescription
drugs. We believe that we substantially comply with all state licensing laws
applicable to our business.
Laws enforced by the Drug Enforcement Administration, as well as some
similar state agencies, require our pharmacy locations to individually register
in order to handle controlled substances, including prescription drugs. A
separate registration is required at each principal place of business where the
applicant dispenses controlled substances. Federal and state laws also require
that we follow specific labeling and record-keeping requirements for controlled
substances. We maintain federal and state controlled substance registrations for
each of our facilities that require it, and follow procedures intended to comply
with all such record-keeping requirements.
PRESCRIPTION DRUG MARKETING ACT.
This federal law exempts many drugs and medical devices from federal
labeling and packaging requirements, as long as they are not adulterated or
misbranded, and were prescribed by a physician. To the extent that this law
applies to us, we believe that we comply with the documentation, record-keeping
and storage requirements.
FRAUD AND ABUSE.
Various federal laws prohibit the knowing and willful submission of false or
fraudulent claims, including claims to obtain payment under Medicare, Medicaid,
and other government healthcare programs. The federal anti-kickback statute also
prohibits individuals and entities from knowingly and willfully paying,
offering, receiving, or soliciting money or anything else of value in order to
induce the referral of patients or to induce a person to purchase, lease, order,
arrange for, or recommend services or goods covered by Medicare, Medicaid, or
other government healthcare programs. The anti-kickback statute is extremely
broad and potentially covers many standard business arrangements. Violations can
lead to significant criminal and civil penalties, including fines of up to
$25,000 per violation, civil monetary penalties of up to $50,000 per violation,
assessments of up to three times the amount of the prohibited remuneration,
imprisonment, and/or exclusion from participation in Medicare, Medicaid, and
other government healthcare programs. The Office of the Inspector General of the
U.S. Department of Health and Human Services has published regulations that
identify a limited number of specific business practices
7
that fall within safe harbors guaranteed not to violate the anti-kickback
statute. We attempt to safe harbor our business relationships. But while not all
of our business relationships meet all of the elements of the published safe
harbors, conformity with the safe harbors is not mandatory and failure to meet
all of the requirements of an applicable safe harbor does not by itself make
conduct illegal.
A number of states have in place statutes and regulations that prohibit the
same general types of conduct as those prohibited by the federal laws described
above. Some states' anti-fraud and anti-kickback laws apply only to goods and
services covered by Medicaid. Other states' anti-fraud and anti-kickback laws
apply to all healthcare goods and services, regardless of whether the source of
payment is governmental or private.
In recent years, federal and state government agencies have increased the
level of enforcement resources and activities targeted at the healthcare
industry. In addition, federal law allows individuals to bring lawsuits on
behalf of the government in what are known as QUI TAM or "Whistleblower"
actions, alleging false or fraudulent Medicare or Medicaid claims and certain
other violations of federal law. The use of these private enforcement actions
against healthcare providers and their business partners has increased
dramatically in the recent past, in part because the individual filing the
initial complaint is entitled to share in a portion of any settlement or
judgment.
We endeavor to conduct our operations in compliance with the applicable
fraud and abuse statutes and to stay informed as to evolving regulatory and
judicial interpretations of these broad and complex laws. Should we identify any
of our practices as being contrary to these laws, we will take appropriate
action to address the matter, including, when appropriate, making disclosure to
the proper authorities.
ANTI-REFERRAL LAWS.
The federal Stark law generally provides that, if a physician or a member of
a physician's immediate family has a financial relationship with a healthcare
entity, the physician may not make referrals to that entity for the furnishing
of designated health services covered under Medicare, Medicaid, or other
government healthcare programs, unless one of several specific exceptions
applies. For purposes of the Stark law, a financial relationship with a
healthcare entity includes an ownership or investment interest in that entity or
a compensation relationship with that entity. Designated health services include
physical and occupational therapy services, durable medical equipment, home
health services, and inpatient and outpatient hospital services. On January 4,
2001, the Health Care Financing Administration published the first phase of a
set of final regulations interpreting the Stark law. The effective date of these
regulations will be January 4, 2002.
The federal government will make no payment for designated health services
provided in violation of the Stark law. In addition, sanctions for violating the
Stark law include civil monetary penalties of up to $15,000 per prohibited
service provided and exclusion from any federal, state, or other government
healthcare programs. There are no criminal penalties for violation of the Stark
law.
A number of states have in place statutes and regulations that prohibit the
same general types of conduct as that prohibited by the federal Stark law
described above. Some states' Stark laws apply only to goods and services
covered by Medicaid. Other states' Stark laws apply to certain designated
healthcare goods and services, regardless of whether the source of payment is
government or private.
We exercise care in structuring our arrangements with physicians to comply
with relevant statutes. We believe our business arrangements with physicians
comply with the Stark law.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT.
HIPAA created new health care crimes, and granted authority to the Secretary
of the Department of Health and Human Services to impose certain civil
penalties. Particularly, the Secretary may now exclude from Medicare any
individual with a direct or indirect ownership interest in an entity convicted
of health
8
care fraud or excluded from the program. HIPAA encourages the reporting of
health care fraud by allowing reporting individuals to share in any recovery
made by the government. HIPAA also requires new programs to control fraud and
abuse, and new investigations, audits and inspections.
New crimes under HIPAA include:
- knowingly and willfully committing a federal health care offense relating
to a health care benefit program; and
- knowingly and willfully falsifying, concealing, or covering up a material
fact or making any materially false or fraudulent statements in connection
with claims and payment for health care services by a health care benefit
plan.
These provisions of HIPAA criminalized situations that previously were handled
civilly through repayments of overpayments, offsets, and fines. We believe that
our business arrangements and practices comply with HIPAA. However, a violation
could subject us to penalties, fines, or possible exclusion from Medicare or
Medicaid. Such sanctions could reduce our revenues or profits.
CONFIDENTIALITY.
Subtitle F of the Health Insurance Portability and Accountability Act of
1996 was enacted to improve the efficiency and effectiveness of the healthcare
system through the establishment of standards and requirements for the
electronic transmission of certain health information. To achieve that end, the
act requires the Secretary of the U.S. Department of Health and Human Services
to promulgate a set of interlocking regulations establishing standards and
protections for health information systems, including standards for the
following:
- the development of electronic transactions and code sets to be used in
those transactions;
- the development of unique health identifiers for individuals, employers,
health plans, and healthcare providers;
- the security of individual health information;
- the transmission and authentication of electronic signatures; and
- the privacy of individually identifiable health information.
Final rules setting forth standards for electronic transactions and code
sets were published on August 17, 2000 and for the privacy of individually
identifiable health information on December 28, 2000, both of which apply to
health plans, healthcare clearinghouses and healthcare providers who transmit
any health information in electronic form in connection with certain
administrative and billing transactions. Proposed rules that include standards
for unique health identifiers for employers and healthcare providers, as well as
standards related to the security of individual health information and the use
of electronic signatures have been published. Compliance with the final rules
will not be required until at least the fourth quarter of 2002.
We are currently evaluating the effect of the proposed and final rules
published to date and have developed a task force to address the standards set
forth in these rules and their effect on our business. Given the fact that not
all of the standards have been issued in final form, we cannot estimate at this
time the cost of compliance.
BALANCED BUDGET ACT.
Each state operates a Medicaid program funded in part by the Federal
government. The states may customize their programs within federal limitations.
Each state program has its own payment formula and recipient eligibility
criteria. In recent years, changes in Medicare and Medicaid programs have
resulted in
9
limitations on, and reduced levels of, payment and reimbursement for a
substantial portion of health care goods and services. For example, the federal
Balanced Budget Act of 1997 (even after the restoration of some funding in 1999)
will continue to cause significant reductions in spending levels for the
Medicare and Medicaid programs. In Spring of 2000, some state Medicaid agencies
reduced their reimbursement rates to correspond to the new AWP prices published
by First Data Bank.
FRANCHISE REGULATION.
Our franchising operations are subject to Federal Trade Commission (FTC)
regulation and state laws that regulate the offer and sale of franchises. We are
also subject to a number of state laws that regulate substantive aspects of the
relationship between franchisors and franchise owners.
The FTC's Trade Regulation Rule on Franchising requires us to furnish
prospective franchise owners with a Uniform Franchise Offering Circular
containing information prescribed by the 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 that
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 us from seeking
franchise owners in any given area and have not had a significant effect on our
operations.
We are not aware of any pending franchise legislation that in its view is
likely to significantly affect our operations. We believe that our operations
comply substantially with the FTC Rule and applicable state franchise laws.
SERVICE MARKS
We have registered with the federal government OPTION
CARE-Registered Trademark-, among others, as a service mark. We believe that
this service mark is becoming increasingly recognized by many referral sources
as representing a reliable, cost-effective source of pharmaceutical services. We
believe that the use of this service mark does not violate or otherwise infringe
on the rights of others.
EMPLOYEES
As of December 31, 2000, we employed 732 persons on a full-time basis and
451 persons on a part-time basis. Of our full-time employees, 79 were corporate
management and administrative personnel and the remaining 653 were employees of
company-owned locations, primarily in clinical, management and administrative
positions.
We consider employee relations to be good. None of our employees are covered
by a collective bargaining agreement.
INSURANCE
We currently maintain insurance for general and professional liability
claims in an aggregate amount that we believe to be sufficient given the nature
of our business. In addition, we maintain insurance for vicarious liability of
Option Care and for the acts and omissions of its franchises. We also require
each franchise to maintain general liability and professional liability
insurance on each of its professionals, covering both the franchise and Option
Care, at coverage levels that we believe to be sufficient. These policies
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 us 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 us, we
will be responsible for the excess.
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ITEM 2. PROPERTIES
Our executive offices, located at 100 Corporate North, Suite 212,
Bannockburn, Illinois, 60015, consist of approximately 18,845 square feet of
leased space.
At December 31, 2000, we had facilities located in Little Rock, AR, Bullhead
City, AZ, Chico, Corona, Hemet, Victorville and Vista, CA, Englewood and Grand
Junction, CO, Jacksonville, Miami and Tampa, FL, Ann Arbor and Coopersville, MI,
Columbia and Jefferson City, MO, Grand Island, Lincoln and Omaha, NE, Milford,
OH, Oklahoma City, OK, Bethlehem and Horsham, PA, Houston and Rockwall, TX,
Sterling, VA and Bellingham, Everett, Kennewick and Sedro Woolley, WA. All of
these offices are leased, with remaining terms ranging from one month to five
years. These locations consist of approximately 183,560 square feet in total.
The owned offices are in good condition, well maintained, and are adequate to
fulfill our operational needs for the foreseeable future.
All locations listed produce infusion and services segment revenues with the
exception of Corona, CA and Jacksonville, FL, which do not have current
operations. In addition, the specialty pharmacy segment revenues are generated
from our Miami, FL and Ann Arbor, MI locations.
ITEM 3. LEGAL PROCEEDINGS
Option Care is party to certain legal proceedings incidental to our
business. We do not believe that the outcome of such legal proceedings will have
a material adverse impact on our 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 by any other means during the fourth quarter of the
fiscal year ended December 31, 2000.
ITEM 4(A). EXECUTIVE OFFICERS
The names, ages and positions of the executive officers of Option Care are
set forth below. Executive officers of Option Care serve at the discretion of
the Board of Directors.
NAME AGE POSITION
---- -------- ------------------------------------------
Dr. John N. Kapoor........................ 57 Chairman of the Board and Chief Executive
Officer
Rajat Rai................................. 34 President, Chief Operating Officer
Cathy Bellehumeur......................... 50 Senior Vice President, Secretary,
Corporate Compliance Officer and General
Counsel
Carla M. Pondel........................... 36 Chief Financial Officer
All executive officers are elected annually and serve for a one-year term.
There are no family relationships between any of Option Care'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 Option Care's Chairman of the Board and
Chief Executive Officer. He has been Chairman of the Board of Directors since
October 1990 and has served as Chief Executive Officer since June 2000.
Previously, he served as 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
11
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 First Horizon Pharmaceutical
Corporation and the Chairman of the Board and Director for each of Akorn, Inc.,
NeoPharm, Inc. and Introgen Therapeutics, 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. Rajat Rai has been President since June 2000 and 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 Option Care
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 Option Care, he received his M.B.A. in Finance from Wayne State
University and also holds a B.S. in Mechanical Engineering from Regional
Engineering College in Warangal, India.
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
Option Care, Ms. Bellehumeur was an attorney in private practice with Godfrey &
Cahn, S.C., Milwaukee, Wisconsin 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.
Ms. Carla M. Pondel has been Chief Financial Officer since October 2000.
Prior to joining Option Care, she was Treasurer of PathoGenesis Corporation and
held various finance and accounting positions of increasing responsibility with
Baxter International Inc. and a spin-off company, Caremark International Inc.
Ms. Pondel has a B.S. in Accountancy from the University of Illinois at
Champaign-Urbana, a M.B.A. in Finance and Marketing from the J. L. Kellogg
Graduate School of Management at Northwestern University and is a Certified
Public Accountant.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Option Care is traded on the Nasdaq National Market under the symbol "OPTN".
The following table shows the high and low sales prices for our Common Stock for
the periods indicated.
CALENDAR QUARTER HIGH LOW
---------------- -------- --------
2000
First Quarter............................................... $8.75 $2.75
Second Quarter.............................................. $8.06 $4.50
Third Quarter............................................... $7.38 $4.94
Fourth Quarter.............................................. $7.75 $5.50
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
As of March 15, 2001, there were approximately 249 holders of record of
Option Care's Common Stock. The closing price of Option Care's Common Stock on
March 15, 2001 was $8.125 per share, as reported by the Nasdaq National Market.
Option Care did not pay cash dividends in 2000 or 1999. The payment of
dividends is restricted under our existing credit facility. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 5 to Option Care's Consolidated Financial Statements.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected consolidated financial data for
each of the five years in the period ended December 31, 2000. The selected
consolidated financial data reflects our acquisitions, all of which were
accounted for using the purchase method of accounting, except for the
September 19, 1996 acquisition of Addison Home Care, Inc., subsequently renamed
Option Care of Oklahoma, Inc., which was treated as a pooling of interest. This
summary should be read in conjunction with our Consolidated Financial Statements
and Notes thereto, contained elsewhere in this Annual Report on Form 10-K.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue:
Infusion & services..................... $102,231 $ 90,522 $ 93,770 $ 93,323 $ 71,093
Specialty pharmacy...................... 39,043 29,927 21,170 7,170 --
-------- -------- -------- -------- --------
Total revenue......................... 141,274 120,449 114,940 100,493 71,093
-------- -------- -------- -------- --------
Cost of revenue:
Cost of goods sold...................... 68,197 53,864 51,366 36,875 22,160
Cost of services provided............... 19,588 16,890 17,743 20,634 12,919
-------- -------- -------- -------- --------
Total cost of revenue................. 87,785 70,754 69,109 57,509 35,079
-------- -------- -------- -------- --------
Gross profit.............................. 53,489 49,695 45,831 42,984 36,014
Operating expenses:
Selling, general and administrative..... 37,444 36,888 37,853 34,623 26,795
Provision for doubtful accounts......... 2,297 2,970 4,936 5,750 1,861
Amortization of goodwill................ 674 553 504 386 960
Asset write-offs and other charges...... -- -- -- 3,902 24,164
-------- -------- -------- -------- --------
Total operating expenses............ 40,415 40,411 43,293 44,661 53,780
-------- -------- -------- -------- --------
Operating income (loss)................... 13,074 9,284 2,538 (1,677) (17,766)
Other expense, net........................ (1,154) (1,528) (2,387) (1,660) (192)
-------- -------- -------- -------- --------
Income (loss) before income taxes......... 11,920 7,756 151 (3,337) (17,958)
Provision (benefit) for income taxes...... 4,465 3,129 842 (1,240) 2,298
-------- -------- -------- -------- --------
Net income (loss)......................... $ 7,455 $ 4,627 $ (691) $ (2,097) $(20,256)
======== ======== ======== ======== ========
Net income (loss) per common share:
Basic................................... $ 0.61 $ 0.40 $ (0.06) $ (0.19) $ (1.93)
======== ======== ======== ======== ========
Diluted................................. $ 0.60 $ 0.39 $ (0.06) $ (0.19) $ (1.93)
======== ======== ======== ======== ========
Shares used in computing net income (loss)
per common share:
Basic................................... 12,135 11,483 11,071 10,879 10,494
======== ======== ======== ======== ========
Diluted................................. 12,488 11,926 11,071 10,879 10,494
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
Trade accounts receivable, net................. $28,845 $22,697 $23,544 $34,138 $20,558
Working capital................................ 20,994 11,676 19,796 25,901 21,458
Intangible assets, net......................... 27,025 22,067 20,060 19,895 9,832
Total assets................................... 66,825 57,634 59,392 68,639 44,041
Total long-term debt........................... 12,784 8,590 22,358 29,115 12,461
Stockholders' equity........................... 38,668 29,306 23,739 23,402 23,540
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Option Care provides specialty pharmaceutical products and related services,
infusion therapy and other ancillary healthcare services through a national
network of 130 company-owned and franchise offices in 32 states. We derive our
revenue from two product line segments: specialty pharmacy and infusion and
services. Our specialty pharmacy business consists of providing specialty drug
distribution and pharmacy consulting services to managed care organizations,
third-party payors, physician groups and other providers. Our infusion and
services business consists of providing a full range of infusion therapies, care
management, medical equipment, data management, and other ancillary services
through a national network of company-owned and franchise-owned Option Care
locations.
Option Care's revenues are derived from two distinct segments: (i) infusion
and services, and (ii) specialty pharmacy. The infusion and services segment
primarily generates revenues by providing infusion and other healthcare
services, through royalties due from Option Care franchises, and from sales and
support of the software products created by our wholly-owned subsidiary,
Management by Information, Inc. The specialty pharmacy segment generates revenue
through dispensing and delivering biotech and injectable pharmaceuticals to
patients and physicians in a variety of settings. Summarized information about
our revenues in each segment is provided below.
% OF % OF % OF
2000 TOTAL 1999 TOTAL 1998 TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Revenue:
Infusion and services:
Infusion therapy & other healthcare
services........................... $ 90,523 64.1% $ 78,686 65.3% $ 74,949 65.2%
Royalty fees......................... 8,795 6.2% 8,702 7.2% 8,700 7.6%
Product sales & other................ 2,913 2.1% 3,134 2.6% 10,121 8.8%
Total infusion and services............ 102,231 72.4% 90,522 75.1% 93,770 81.6%
Specialty pharmacy..................... 39,043 27.6% 29,927 24.9% 21,170 18.4%
-------- ----- -------- ----- -------- -----
Total revenue............................ $141,274 100.0% $120,449 100.0% $114,940 100.0%
The majority of our revenues are generated from managed care contracts and
other agreements with commercial payors. However, approximately 16% of our 2000
revenues were derived from government programs, such as Medicare and Medicaid.
As a provider of specialty pharmacy and other healthcare services, our revenues
and growth prospects are affected by trends and developments in governmental
healthcare spending. Material changes in the rates or methods of government
reimbursements to us for products and services could affect our revenues and
overall future financial performance.
Our gross profit is largely controlled by our ability to negotiate
profitable managed care contracts, and by our ability to leverage our size to
purchase pharmaceutical products at comparatively low prices. However, recent
government investigations into how the average wholesale price ("AWP") for
certain pharmaceuticals are determined could result in reduced pricing and
margins on certain drugs that we currently supply. Various federal and state
governmental agencies have been investigating whether the AWP of many drugs is
an appropriate or accurate measure of market prices from which governmental
payors determine how much they reimburse for the drug. Many governmental payors
pay us for some drugs based on that drug's AWP, or at a percentage off AWP. In
addition, we have also contracted with a number of private payors to sell at AWP
or at a percentage discount off AWP.
15
AWP for most drugs is compiled and published by private companies. First
DataBank, Inc. is one of these companies. It has been reported that there are
currently several lawsuits pending against manufacturers of certain drugs. These
government investigations and lawsuits involve allegations that manufacturers
have misrepresented the actual selling price of certain drugs to First DataBank.
First DataBank has announced that it will base AWP on market prices certified by
the manufacturer. First DataBank has published a Market Price Survey that
reduces the AWP significantly for a number of the products Option Care currently
supplies to patients. We cannot predict the eventual results of these
investigations, nor the changes made in AWP by First DataBank.
If a reduced set of average wholesale prices became the standard by which we
are reimbursed by government payors or private payors, this could have a
material adverse effect on our business, financial condition, and results of
operations, including reducing the pricing and margins on certain of our
products. In addition, there are currently various proposals under development
to enact healthcare reform on national, state and local levels. It is not
possible at this time to predict the cash flow impact, if any, which any such
changes may have on Option Care or any other providers of home healthcare
services.
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
REVENUE--
Our net revenues increased by 17.3% from $120.5 million in 1999 to $141.3
million in 2000. The $20.8 million of revenue growth during 2000 was primarily
in infusion therapy and specialty pharmacy. Approximately $11.8 million, or
15.0% of such increase was attributable to infusion therapy and other healthcare
services revenue, of which approximately $3.7 million was due to business
acquisitions completed at various dates in 2000 in the cities of Bellingham, WA,
Sterling, VA and Hemet, CA. The remaining $8.1 million increase during 2000 was
due to same store sales growth over 1999. Specialty pharmacy revenues increased
30.5%, or $9.1 million, primarily due to new managed care contracts, improved
marketing of existing products and services and distribution of new products.
Royalty revenues increased by 1.1% due to same store growth within our franchise
network.
GROSS PROFIT--
Option Care's 2000 gross profit of $53.5 million represented an increase of
$3.8 million, or 7.6%, over 1999. This increase can be directly attributed to
the $20.8 million year-to-year increase in net revenues. However, the overall
gross profit percentage decreased from 41.3% in 1999 to 37.9% in 2000. This
decrease is due to the stronger growth of the specialty pharmacy segment
relative to the infusion and services segment. The specialty pharmacy segment
markets higher cost, lower margin injectables and other pharmaceutical products,
and therefore generates a lower gross profit percentage than our infusion and
services segment. The specialty pharmacy segment gross profit percentage in 2000
was 13.7%, as compared to a gross profit percentage of 47.1% for infusion and
services. The faster 2000 growth rate of the specialty pharmacy segment over the
infusion and services segment accounts for Option Care's overall decline in
gross profit percentage. The 1999 specialty pharmacy segment gross profit
percentage was 15.5%, while the infusion and services segment gross profit
percentage was 49.8%. For both segments, the year-to-year decrease was due to an
increase in higher cost, lower margin pharmaceutical product sales.
OPERATING EXPENSES--
Total 2000 operating expenses of $40.4 million were virtually equal to 1999
operating expenses of $40.4 million. This fact, combined with our $20.8 million
increase in revenues, resulted in operating expenses declining to 28.6% of
revenue in 2000 compared to 33.6% in 1999. There are several reasons for this
decline in percentage. The increase in revenues in 2000 over 1999 came primarily
from within our existing operations and facilities. Therefore, we incurred no
direct increase in overhead expenses resulting
16
from the increase in revenues. Also, while administrative wages and related
costs increased by $2.1 million, this increase was offset by reductions in other
general and administrative expenses. Our provision for doubtful accounts
decreased by $0.7 million, from 2.5% of revenues in 1999 to 1.6% in 2000.
Goodwill amortization expense increased by $121 thousand due to additional
goodwill resulting from our 2000 acquisitions and additional payments on our
1996 and 1997 acquisitions.
INTEREST EXPENSE--
Interest expense in 2000 was $1.0 million, which was equal to the
$1.0 million in 1999. In 2000, positive operating cash flows of $7.8 million
from continuing operations were offset by payments for acquisitions of
$7.6 million, which consists of $4.2 million for new businesses and
$3.4 million for additional payments on 1996 and 1997 acquisitions. This
resulted in a similar average credit line borrowing balance between the two
years, and thus similar interest expense.
INCOME TAXES--
Income taxes were provided for at a 37.5% rate in 2000 compared to 40.3% in
1999. The reduction in the income tax rate in 2000 versus 1999 was due to a
re-evaluation of our overall state tax liabilities, as well as from the
favorable resolution of various tax matters previously reserved for as potential
liabilities.
EARNINGS PER SHARE--
As a result of the foregoing, Option Care recorded net income of
$7.5 million in 2000, which represents an increase of $2.8 million over 1999.
Net income equaled 5.3% of revenues in 2000 compared to 3.8% of revenues in
1999. As a result of the increase in net income, earnings per diluted share
increased to $0.60 in 2000 versus $0.39 in 1999. The increase in earnings per
share that resulted from our increase in net income was offset by a 4.7%
increase in diluted shares outstanding. This increase was mostly due to the
issuance of new shares of stock for three purposes: (i) payment of stock
earnouts under the terms of 1996 and 1997 acquisitions agreements;
(ii) exercise of non-qualified stock options by employees and former employees;
and (iii) issuance of shares to employees who participated in our 1999 Employee
Stock Purchase Plan.
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. Revenues from our specialty pharmacy
segment increased $8.8 million, or 41.2%, due to an increased focus on marketing
and growing this segment. Revenues from our infusion and services segment
declined by $3.2 million, or 3.5%, due primarily to our decision, made in the
second and third quarters of 1998, to terminate participation under contracts to
perform network management services. Within the infusion and services segment,
revenues from infusion therapy and other healthcare services increased
$3.8 million, or 5.1% due to same-store growth realized by our owned offices.
Royalty revenues remained virtually unchanged, as same store growth within our
franchise network compensated for a slight reduction in the total number of
franchise locations in 1999 versus 1998. Product sales and other revenue of
$3.1 million in 1999 consisted mainly of sales of software made through our
wholly owned subsidiary, Management by Information, Inc. Excluding the revenue
recognized during 1998 under the terminated network management contracts,
product sales and other revenue in 1999 increased by $0.6 million as Management
by Information (MBI) successfully rolled out its MBI HomeCare 5.0 software
during 1999.
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. Our gross profit
margin for 1999 increased to 41.3% compared to 39.9% in 1998 due primarily to a
4.7% increase in the gross profit of the specialty pharmacy segment, from 10.8%
in
17
1998 to 15.5% in 1999. Improved managed care contract pricing and reduced cost
of pharmaceuticals due to volume discounts were the reasons for this
improvement. Our infusion and services segment experienced a 3.4% improvement in
gross profit margin in 1999 over 1998. This was mostly due to termination of our
participation under network management service contracts in the second and third
quarters of 1998. The revenues generated in 1998 under these contracts provided
little or no gross margin on over $6 million of network management revenue.
During the first quarter of 1999, we changed our 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. We 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
increased 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 our use of cash on hand to reduce debt upon
signing the new credit facility in the first quarter of 1999. In the third
quarter of 1998, we had discontinued our policy of using excess cash flow to pay
down on our revolving credit facility. Once the new credit facility was in
place, we re-instituted this policy and used cash on hand to retire debt. In
addition, in 1999 we used our operating cash flow of $7.7 million, generated by
strong cash collections of outstanding accounts receivable and improved
management of accounts payable, to minimize outstanding amounts under our
revolving credit facility.
INCOME TAXES--
Income taxes were provided for at a 40.3% rate reflecting our profitability
during 1999. Comparisons to prior year are not meaningful because we settled
outstanding audits and recognized additional tax expense in 1998.
EARNINGS PER SHARE--
As a result of the forgoing, for the full year of 1999, we 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 our stock at December 31, 1999 compared to
December 31, 1998 and to the issuance of shares under certain 1996 and 1997
acquisition agreements.
18
LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS--
As of December 31, 2000 and 1999, Option Care had no cash and cash
equivalents. Under the terms of our revolving debt facility, we have the ability
to borrow or pay down our existing debt on a daily basis as dictated by our
operational cash flows. This allows us to maintain a zero cash position, thereby
minimizing our outstanding debt balance and interest expense.
NET CASH FLOWS--
Net cash flow provided by operations for 2000 was $7.8 million, a small
increase from the $7.7 million of cash flow provided by operations in 1999.
While net income increased by $2.8 million in 2000 versus 1999, accounts
receivable increased by $6.4 million, or 27%, due to the fact that 4th quarter
2000 revenues of $40.1 million exceeded 4th quarter 1999 revenues of
$31.7 million by this same 27%. This increase in accounts receivable was
partially offset by a $1.4 million decrease in inventory. December 31, 1999
inventories had been increased as a precautionary measure related to Year 2000
planning, and also to obtain favorable price reductions based on volume
purchases of certain products. No such temporary inventory increases existed as
of December 31, 2000, therefore resulting in a decrease in inventory value
compared to the prior year. Changes in other assets and liabilities accounted
for the remainder of the year-to-year change in operating cash flows.
Net cash flow used in investing activities for 2000 was $9.2 million
compared to $1.8 million in 1999. The $7.4 million increase was primarily due to
$4.2 million in cash payments for 2000 acquisitions. Another $3.4 million
related to payment of additional obligations under our 1996 and 1997 acquisition
agreements compared to $1.2 million paid in 1999. The remaining increase in cash
flow used in investing activities consisted of a $0.3 million increase in
capital expenditures and $0.8 million in additions to other assets, which
included loan origination fees paid for securing our $15 million term loan, as
well as expenditures for development of our OptionMed-TM- web site.
Net cash flow provided by financing activities was $1.5 million in 2000
versus net cash flow used by financing activities of $9.6 million in 1999,
resulting in an $11.1 million variance. Repayments of debt under our revolving
credit facility in 1999 due to strong operating cash flows was the reason for
the $9.6 million cash flow usage in that year. Payments for our 2000
acquisitions and for obligations related to our 1996 and 1997 acquisitions
exceeded our 2000 net operating cash flow. Therefore, the total outstanding
obligations under our credit facility increased, resulting in $1.5 million being
provided by financing activities.
DEBT FACILITY--
On February 5, 1999, Option Care entered into a $25 million Loan and
Security Agreement with Banc of America Commercial Finance Corporation. This
agreement provided for borrowing up to $25 million on revolving loans. On
June 30, 2000, the agreement was amended and restated to increase the total
facility to $40 million, consisting of $25 million available on revolving loans,
plus $15 million available under term loans. The purpose of the amendment was to
allow Option Care the available capital to acquire selected franchises and
outside healthcare companies upon approval by the lenders and by our Board of
Directors. Under the revised agreement, we may enter into term loans from
June 30, 2000 through June 30, 2001. Repayments under these term loans will be
made on a four year amortization schedule, with the first payment due July 1,
2001, except that the entire $40 million facility is due to expire in
February 2002. We would be subject to early termination fees if the loan were
terminated prior to its natural expiration.
The amended and restated agreement requires Option Care to meet certain
financial covenants including, but not limited to: fixed charge coverage ratio;
debt ratio; debt to operating cash flow ratio; and limitations on annual capital
expenditures. Under this agreement, Option Care is prohibited from
19
declaring any cash dividend on its common stock. We paid a facility fee of
$0.2 million when the original agreement was signed in 1999, and paid an
additional $0.2 million upon signing the amended and restated agreement on
June 30, 2000. Under the facility agreement, Option Care may elect interest
rates on the revolving loan ranging from LIBOR plus 2.125%, to the bank's
reference rate. Interest on the term loan ranges from LIBOR plus 3.200%, to the
bank's reference rate plus 1%.
Availability under the overall facility is related to percentages of our
outstanding accounts receivable and inventory balances, less certain ineligible
amounts, as defined within the amended and restated loan and security agreement.
The facility is secured by all of the issued and outstanding Common Stock of
each of Option Care's subsidiaries. Overall borrowings allowable under the
revolving loan portion of the agreement are limited to the lesser of
$25 million or the total allowable collateral base.
We believe that cash flow from operations and amounts available under the
existing credit facility will be sufficient to meet the cash needs of the
business for the immediate future, including cash repayments due in 2001 under
existing term loans. In the event that additional capital is required,
management cannot assure that such capital can be obtained on terms acceptable
to us.
There are currently various proposals under development to enact healthcare
reform on national, state and local levels. At this time, we cannot predict the
cash flow impact, if any, which any such changes may have on providers of home
healthcare services and on our franchise and company-owned Option Care offices.
GOODWILL AND OTHER INTANGIBLE ASSETS--
Net goodwill and other intangible assets increased $4.9 million, to
$27.0 million as of December 31, 2000, compared to $22.1 million as of
December 31, 1999. The majority of this increase was due to two factors:
(i) goodwill and other intangible assets of $2.7 million resulting from our 2000
acquisition of businesses in Bellingham, WA, Hemet, CA, Rockwall, TX, and
Sterling, VA; and (ii) additional goodwill of $3.0 million resulting from
payments of additional consideration to former owners of businesses we acquired
in 1996 and 1997, per the applicable purchase agreements. Intangible assets
represent 40.4% of Option Care's total assets as of December 31, 2000 compared
to 38.3% as of December 31, 1999. This increase was the result of the 2000
acquisitions referenced above. As a percentage of total stockholders' equity,
intangible assets declined from 75.3% as of December 31, 1999 to 69.9% as of
December 31, 2000. This change was primarily due to Option Care's strong 2000
net income of $7.5 million, as well as the issuance of $1.9 million of new
common stock, both of which increased total stockholders' equity.
20
QUARTERLY INFORMATION
Below is a summary of unaudited consolidated quarterly financial information
for the years ended December 31, 2000 and 1999. Certain amounts from 1999 have
been reclassified from previously published amounts.
QUARTER
(ALL NUMBERS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
2000: FIRST SECOND THIRD FOURTH
----- -------- -------- -------- --------
Revenue................................................. $32,771 $33,150 $35,265 $40,088
Gross profit............................................ 13,058 12,896 13,645 13,890
Income before income taxes.............................. 2,596 2,749 3,259 3,316
Net income.............................................. 1,610 1,722 2,001 2,122
Basic earnings per share................................ $ 0.14 $ 0.14 $ 0.17 $ 0.17
------- ------- ------- -------
Diluted earnings per share.............................. $ 0.13 $ 0.14 $ 0.16 $ 0.17
------- ------- ------- -------
1999: FIRST SECOND THIRD FOURTH
----- -------- -------- -------- --------
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
------- ------- ------- -------
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Financial Statement Schedule in
Part IV, Item 14(a)(1) and (2) of this Annual Report on Form 10-K are
incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 for its 2001 Annual Shareholders' Meeting 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
2001 Proxy Statement is incorporated herein by reference.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) The Consolidated Financial Statements of Option Care and its
subsidiaries and independent auditors' reports thereon are included on pages 23
through 42 of this Annual Report on Form 10-K:
PAGE
--------
Independent Auditors' Report--Ernst & Young LLP............. 23
Consolidated Balance Sheets--December 31, 2000 and 1999..... 24
Consolidated Statements of Operations--Years Ended December
31, 2000, 1999, and 1998.................................. 25
Consolidated Statements of Stockholders' Equity--Years Ended
December 31, 2000, 1999, and 1998......................... 26
Consolidated Statements of Cash Flows--Years Ended December
31, 2000, 1999, and 1998.................................. 27
Notes to Consolidated Financial Statements.................. 28
(2) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts.............. 42
All other Schedules are omitted because the required information is not
applicable or information is presented in the Consolidated Financial Statements
or related notes.
(3) See Exhibit Index
(b) Reports on Form 8-K
On October 26, 2000, we filed a Form 8-K concerning the resignation of
Michael A. Siri as Senior Vice President and Chief Financial Officer and the
appointment of Carla M. Pondel as Chief Financial Officer.
22
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, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These financial statements and schedule are the responsibility of Option Care'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, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000 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 presents fairly in all material respects,
the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 23, 2001
23
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ --
Trade accounts receivable, less allowance of $5,092 and
$4,113, respectively.................................... 28,845 22,697
Current portion of notes receivable, less allowance of $79
and $119, respectively.................................. 91 112
Inventory, net............................................ 2,320 3,608
Deferred income tax benefit............................... 3,308 2,889
Prepaid expenses.......................................... 631 795
Other current assets...................................... 178 342
------- --------
Total current assets.................................... 35,373 30,443
Notes receivable, less allowance of $226 and $239,
respectively............................................ -- 121
Equipment and other fixed assets, net..................... 4,182 4,808
Goodwill, net............................................. 25,859 21,395
Other intangible assets, net.............................. 1,166 672
Other long-term assets.................................... 245 195
------- --------
Total assets............................................ $66,825 $ 57,634
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 770 $ 3,964
Current portion of long-term debt......................... 833 142
Trade accounts payable.................................... 5,854 5,747
Income tax payable........................................ 500 623
Accrued wages and related employee benefits............... 4,033 3,595
Deferred purchase price liability......................... 216 1,210
Accrued expenses.......................................... 2,173 3,486
------- --------
Total current liabilities............................... 14,379 18,767
Long-term debt, less current portion...................... 11,951 8,448
Long-term deferred income tax liability................... 933 714
Minority interest......................................... 404 163
Other long-term liabilities............................... 490 236
------- --------
Total liabilities....................................... 28,157 28,328
------- --------
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares
authorized, 12,134,961 and 11,492,853 shares issued and
outstanding, respectively............................... 121 115
Common stock to be issued, 124,901 and 234,701 shares,
respectively............................................ 352 740
Additional paid-in capital................................ 46,984 44,695
Accumulated deficit....................................... (8,789) (16,244)
------- --------
Total stockholders' equity.............................. 38,668 29,306
------- --------
Total liabilities and stockholders' equity.............. $66,825 $ 57,634
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
24
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
-------- -------- --------
Revenue:
Infusion and services:
Infusion therapy and other healthcare services.......... $ 90,523 $ 78,686 $ 74,949
Royalty fees............................................ 8,795 8,702 8,700
Product sales and other................................. 2,913 3,134 10,121
Specialty pharmacy........................................ 39,043 29,927 21,170
-------- -------- --------
Total revenue........................................... 141,274 120,449 114,940
Cost of revenue:
Cost of goods sold........................................ 68,197 53,864 51,366
Cost of services provided................................. 19,588 16,890 17,743
-------- -------- --------
Total cost of revenue................................... 87,785 70,754 69,109
-------- -------- --------
Gross profit................................................ 53,489 49,695 45,831
Operating expenses:
Selling, general and administrative expense............... 37,444 36,888 37,853
Provision for doubtful accounts........................... 2,297 2,970 4,936
Amortization of goodwill.................................. 674 553 504
-------- -------- --------
Total operating expenses................................ 40,415 40,411 43,293
-------- -------- --------
Operating income............................................ 13,074 9,284 2,538
Other income (expense), net:
Interest expense.......................................... (1,027) (1,004) (2,392)
Other, net................................................ (127) (524) 5
-------- -------- --------
Total other expense, net.................................... (1,154) (1,528) (2,387)
-------- -------- --------
Income before income taxes.................................. 11,920 7,756 151
Provision for income taxes.................................. 4,465 3,129 842
-------- -------- --------
Net income (loss)......................................... $ 7,455 $ 4,627 $ (691)
======== ======== ========
Net income (loss) per common share:
Basic..................................................... $ 0.61 $ 0.40 $ (0.06)
======== ======== ========
Diluted................................................... $ 0.60 $ 0.39 $ (0.06)
======== ======== ========
Shares used in computing net income (loss) per common share:
Basic..................................................... 12,135 11,483 11,071
======== ======== ========
Diluted................................................... 12,488 11,926 11,071
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
25
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
COMMON
COMMON STOCK STOCK TO ADDITIONAL
------------------- BE PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNTS ISSUED CAPITAL DEFICIT EQUITY
-------- -------- -------- ---------- ----------- -------------
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
------ ---- ------ ------- -------- -------
Net income............................... -- -- -- -- 7,455 7,455
Common stock to be issued, net........... -- -- (388) -- -- (388)
Issuance of common stock................. 642 6 -- 1,878 -- 1,884
Income tax benefit from exercise of stock
options................................ -- -- -- 411 -- 411
------ ---- ------ ------- -------- -------
December 31, 2000........................ 12,135 $121 $ 352 $46,984 $ (8,789) $38,668
====== ==== ====== ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
26
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss)......................................... $7,455 $ 4,627 $ (691)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization........................... 3,037 2,768 3,473
Provision for doubtful accounts......................... 2,297 2,970 4,936
Deferred income taxes................................... (200) (520) 267
Other..................................................... 411 -- --
Changes in assets and liabilities, net of effects from
acquisitions:
Trade accounts and notes receivable..................... (6,354) (1,948) 5,985
Inventory............................................... 1,421 (1,511) 192
Prepaid expenses and other current assets............... 331 (297) 2,090
Trade accounts payable.................................. (128) (746) (1,713)
Accrued wages and related benefits...................... 432 930 (169)
Income tax payable...................................... (123) 1,072 --
Accrued expenses and other liabilities.................. (813) 338 (1,453)
------ ------- ------
Net cash provided by operating activities............. 7,766 7,683 12,917
------ ------- ------
Cash flows from investing activities:
Purchases of equipment and other, net..................... (961) (667) (2,120)
Other assets, net......................................... (697) 119 --
Payments for acquisitions, net of stock to be issued...... (7,559) (1,204) (1,258)
------ ------- ------
Net cash used in investing activities................. (9,217) (1,752) (3,378)
------ ------- ------
Cash flows from financing activities:
Cash overdraft............................................ (3,194) 3,964 (145)
Net borrowings (payments) under credit agreements......... 4,292 (13,483) (6,400)
Payments on capital leases................................ (160) (226) (142)
Payments of notes payable................................. -- (59) (215)
Issuance of common stock.................................. 513 208 1,028
------ ------- ------
Net cash provided by (used in) financing activities... 1,451 (9,596) (5,874)
------ ------- ------
Net (decrease) increase in cash and cash equivalents........ -- (3,665) 3,665
Cash and cash equivalents, beginning of year................ -- 3,665 --
------ ------- ------
Cash and cash equivalents, end of year...................... $ -- $ -- $3,665
====== ======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
27
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. provides specialty pharmaceutical products and related
services, infusion therapy and other ancillary healthcare services through a
national network of company-owned and franchise locations. Through our
wholly-owned OptionMed-TM- subsidiary, we contract with managed care
organizations and physicians to become their specialty pharmacy, dispensing and
delivering specialized pharmaceuticals, assisting with clinical compliance
information and providing pharmacy consulting services. Through our established
national network of 130 Option Care locations, we contract with managed care
organizations, third party payors, hospitals, physicians and other referral
sources to provide pharmaceuticals and complex compounded solutions to patients
for intravenous delivery in the patients' homes or other non-hospital settings.
Many of our locations provide other ancillary healthcare services as well, such
as nursing, respiratory therapy and durable medical equipment. In addition, we
operate Management by Information, Inc., a supplier of data management products
and support services to the infusion and home medical equipment industry.
As of December 31, 2000, we have 130 Option Care locations operating in 32
states. Existing offices include 103 offices owned and operated by franchise
owners and 27 offices owned and operated by Option Care.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Option Care 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
Option Care 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 Option Care's financial instruments approximates their
carrying value.
(f) INVENTORY
Inventory, which consists primarily of pharmaceuticals and medical supplies,
is stated at cost, which approximates market, and is accounted for on the
first-in, first-out (FIFO) basis.
28
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)
(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 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 20 to 40 years.
Gross goodwill as of December 31, 2000 was $28.6 million, less accumulated
amortization of $2.7 million, while gross goodwill as of December 31, 1999 was
$23.4 million, less accumulated amortization of $2.0 million.
Certain intangible assets, arising from certain of Option Care's 1996, 1997,
and 2000 acquisitions, are being amortized on a straight-line basis over the
estimated useful life of each asset, ranging from 3 to 5 years. Loan origination
fees, software development costs and web site development costs, totaling a
combined $1.1 million, are also being amortized over useful lives of 3 to
5 years. The gross value of other intangible assets as of December 31, 2000 was
$2.8 million, less accumulated amortization of $1.6 million, compared to a gross
value of $1.8 million, less accumulated amortization of $1.1 million, as of
December 31, 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. No such impairment was noted as of December 31, 2000.
(h) INCOME TAXES
Option Care 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 as well as net operating loss and
capital loss 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
As of December 31, 2000, common stock to be issued consists solely of the
total amount withheld from employees for the purchase of shares under the
Employee Stock Purchase Plan. As of December 31, 1999, in addition to Employee
Stock Purchase Plan withholdings, common stock to be issued also included the
dollar value of anticipated payments of stock to former owners for amounts due
under several of our 1996 and 1997 purchase agreements. These amounts
represented additional purchase price for these acquisitions. During 2000, all
such payments of stock were made, and there are no additional amounts payable in
stock as of December 31, 2000.
29
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)
(j) REVENUE RECOGNITION
(i) Infusion therapy & other home health revenue is reported at the
estimated net 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 2000 and 1999, approximately 16% and 18%, respectively, of infusion
therapy & other home health revenue and patient accounts receivable was
reimbursable through governmental programs, such as Medicare and Medicaid.
Governmental programs pay for services based on fee schedules and rates that are
determined by the related governmental agency. Option Care's concentration of
credit risk relating to trade account receivables is limited due to our
diversity of patients and payors.
Laws and regulations governing government programs are complex and subject
to interpretation. As a result, there is at least a reasonable possibility that
recorded estimates may change. Option Care 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 based on the gross cash receipts reported by our
franchises for the applicable year. 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 3% depending on the levels of such
receipts and other certain factors. Initial franchise fees are recognized when
franchise training and substantially all other initial services have been
provided.
(iii) Product sales and other revenues consist primarily of monthly support
fees, software sales, and training fees billed by Management by Information, our
wholly-owned subsidiary, to a variety of clients, primarily hospital-based or
free-standing home infusion providers. Revenues are recognized in the period in
which the sales occur or the services are provided.
(iv) Specialty pharmacy revenue is reported at the estimated net realized
amounts from third-party payors and others for the pharmaceutical products
provided to physicians, patients, and pharmacies. Most specialty pharmacy
revenues and accounts receivable are reimbursed based upon predetermined fee
schedules.
(k) COST OF REVENUE
Cost of revenue consists of two components--cost of goods, and cost of
services provided. Cost of goods consists of the actual cost of pharmaceuticals
and other medical supplies provided. Cost of services provided consists of all
other costs directly related to the production of revenues, such as shipping and
handling, pharmacy and nursing wages and other related costs.
30
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, 2000, 1999 and 1998 is as follows: (in thousands, except for per
share amounts)
FOR THE YEAR ENDED DECEMBER 31,
2000
-------------------------------------
INCOME SHARES PER SHARE
-------- -------- ---------
Basic earnings per share.................................... $7,455 12,135 $0.61
Effect of dilutive securities............................... -- 353 (0.01)
------ ------ -----
Diluted earnings per share.................................. $7,455 12,488 $0.60
------ ------ -----
FOR THE YEAR ENDED DECEMBER 31,
1999
-------------------------------------
INCOME SHARES PER SHARE
-------- -------- ---------
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
------ ------ -----
FOR THE YEAR ENDED DECEMBER 31,
1998
-------------------------------------
INCOME SHARES PER SHARE
-------- -------- ---------
Basic loss per share........................................ $ (691) 11,071 $(0.06)
Effect of dilutive securities............................... -- -- --
------ ------ ------
Diluted loss per share...................................... $ (691) 11,071 $(0.06)
------ ------ ------
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 as the impact would have been anti-dilutive.
(m) COMPREHENSIVE INCOME
Option Care has no significant components of comprehensive income.
(2) SEGMENT REPORTING
In 2000, Option Care realigned its internal management reporting into two
distinct business segments: (i) infusion and services, and (ii) specialty
pharmacy. Infusion and services segment revenues consist primarily of home
infusion and other home health care services revenue, royalties earned under our
franchise agreements, and software sales, support fees, and training charges.
Specialty pharmacy segment revenues are derived from the preparation and
delivery of injectible and other specialty pharmaceutical products to patients
and physicians under managed care contracts. The most significant assets
directly allocable to the specialty pharmacy segment consist of inventories and
accounts receivable. Prior to 2000, Option Care operated as one business
segment.
31
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) SEGMENT REPORTING (CONTINUED)
Condensed segmental Statements of Operations for the years 2000, 1999, and
1998 are presented below. Inter-segment sales are eliminated in consolidation.
YEAR ENDED DECEMBER 31, 2000
% OF % OF % OF
INFUSION & TOTAL NET SPECIALTY TOTAL NET TOTAL NET
SERVICES SALES PHARMACY SALES TOTAL SALES
---------- --------- --------- --------- -------- ---------
Net sales to external customers..... $102,231 $47,047 $149,278
Inter-segment net sales............. -- (8,004) (8,004)
-------- ------- --------
Total net sales................... 102,231 100.0% 39,043 100.0% 141,274 100.0%
Total direct costs.................. 54,076 52.9% 33,709 86.3% 87,785 62.1%
Gross profit........................ 48,155 47.1% 5,334 13.7% 53,489 37.9%
Total assets........................ $ 61,662 $ 5,163 $ 66,825
YEAR ENDED DECEMBER 31, 1999
% OF % OF
INFUSION & TOTAL NET SPECIALTY TOTAL NET % OF TOTAL
SERVICES SALES PHARMACY SALES TOTAL NET SALES
---------- --------- --------- --------- -------- ----------
Net sales to external customers.... $90,522 $32,530 $123,052
Inter-segment net sales............ -- (2,603) (2,603)
------- ------- --------
Total net sales.................. 90,522 100.0% 29,927 100.0% 120,449 100.0%
Total direct costs................. 45,464 50.2% 25,290 84.5% 70,754 58.7%
Gross profit....................... 45,058 49.8% 4,637 15.5% 49,695 41.3%
Total assets....................... $52,247 $ 5,387 $ 57,634
YEAR ENDED DECEMBER 31, 1998
% OF % OF
INFUSION & TOTAL NET SPECIALTY TOTAL NET % OF TOTAL
SERVICES SALES PHARMACY SALES TOTAL NET SALES
---------- --------- --------- --------- -------- ----------
Net sales to external customers.... $93,770 $21,674 $115,444
Inter-segment net sales............ -- (504) (504)
------- ------- --------
Total net sales.................. 93,770 100.0% 21,170 100.0% 114,940 100.0%
Total direct costs................. 50,221 53.6% 18,888 89.2% 69,109 60.1%
Gross profit....................... 43,549 46.4% 2,282 10.8% 45,831 39.9%
Total assets....................... $56,906 $ 2,486 $ 59,392
(3) BUSINESS COMBINATIONS
Option Care completed four acquisitions in 2000. In the second quarter, we
acquired the business of a hospital-based home health agency in northwest
Washington. In the third quarter, Option Care completed
32
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) BUSINESS COMBINATIONS (CONTINUED)
a stock acquisition of our Sterling, VA (Washington D.C. area) franchise, and
acquired the assets of our Hemet (west of Los Angeles), CA franchise. Finally,
in the fourth quarter, we purchased the assets of our Rockwall (Dallas), TX
franchise. The aggregate purchase price for these acquisitions was
$4.6 million, of which $4.2 million was paid in cash, and $0.4 million is
payable in future cash consideration. Also, an estimated $1.3 million additional
consideration will be payable in cash in 2001 if certain financial targets are
reached. The purchase method of accounting was used for all acquisitions, and
$2.1 million in goodwill was recorded. The accompanying consolidated financial
statements include the results of operations of all acquired businesses from the
date of acquisition.
At various dates during 1996 and 1997, Option Care purchased the assets and
ongoing operations of several of our franchises. Option Care recorded an
additional $3.0 million and $2.9 million goodwill, in 2000 and 1999,
respectively, from payments made under certain of these acquisition agreements
due to the meeting of certain financial milestones.
The unaudited pro-forma results of operations, affected by the 2000
acquisitions as if they had occurred as of January 1, 1998, were as follows:
2000 1999 1998
-------- -------- --------
Net revenue................................... $149,961 $129,760 $122,615
Net income (loss)............................. 7,904 4,959 (658)
Net income (loss) per diluted share........... $ 0.63 $ 0.42 $ (0.06)
(4) EQUIPMENT AND OTHER FIXED ASSETS
Equipment and other fixed assets consists of:
2000 1999
-------- --------
Equipment................................................. $11,006 $12,833
Capitalized computer software............................. 613 613
Leasehold improvements.................................... 1,134 1,162
------- -------
Equipment and other fixed assets.......................... 12,753 14,608
Less accumulated depreciation and amortization............ 8,571 9,800
------- -------
Equipment and other fixed assets, net..................... $ 4,182 $ 4,808
======= =======
Fixed asset purchases and 2000 business acquisitions resulted in equipment
additions of $1.7 million. Capitalized computer software is being amortized over
a three-year period, which is the estimated life of the product. Amortization
expense for capitalized software was $204 in both 2000 and 1999.
33
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(5) LONG-TERM DEBT
Long-term debt consists of:
2000 1999
-------- --------
Revolving credit facility, due February, 2002.............. $ 9,609 $8,317
Term loans, due February 2002.............................. 3,000 --
Notes payable, secured by various assets, with maturities
through 2005 at interest rates ranging from 8% to 10%.... 117 151
Capital lease obligations.................................. 58 122
------- ------
12,784 8,590
Less current portion....................................... 833 142
------- ------
Long-term debt............................................. $11,951 $8,448
======= ======
Maturities of credit facility (revolving loans & term loans), notes payable
and capital lease obligations are:
CAPITAL
YEAR ENDING CREDIT NOTES LEASE
DECEMBER 31, FACILITY PAYABLE OBLIGATIONS
------------ -------- -------- -----------
2001............................................. $ 750 $ 28 $48
2002............................................. 11,859 28 12
2003............................................. -- 25 2
2004............................................. -- 26 --
2005 and beyond.................................. -- 10 --
------- ---- ---
$12,609 $117 62
======= ====
Less amounts representing interest............... 4
---
Present value of net minimum lease payments...... $58
===
On February 5, 1999, Option Care entered into a $25 million Loan and
Security Agreement with Banc of America Commercial Finance Corporation. This
agreement provided for borrowing up to $25 million on revolving loans. On
June 30, 2000, the agreement was amended and restated to increase the total
facility to $40 million, consisting of $25 million available on revolving loans,
plus $15 million available under term loans. The purpose of the amendment was to
allow Option Care the available capital to acquire selected franchises and other
healthcare companies upon approval by the lenders and by our Board of Directors.
Under the revised agreement, Option Care may enter into term loans from
June 30, 2000 through June 30, 2001. Repayments under these term loans will be
made on a four year amortization schedule, with the first payment due July 1,
2001, except that the entire $40 million facility is due to expire in
February 2002. Option Care would be subject to early termination fees if the
loan were terminated prior to its natural expiration.
The amended and restated agreement requires Option Care to meet certain
financial covenants including, but not limited to: fixed charge coverage ratio;
debt ratio; debt to operating cash flow ratio; and limitations on annual capital
expenditures. Under this agreement, Option Care is prohibited from declaring any
cash dividend on its common stock. Option Care paid a facility fee of
$0.2 million when the
34
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
original agreement was signed in 1999, and paid an additional $0.2 million upon
signing the amended and restated agreement on June 30, 2000. Upon signing the
original facility agreement in February 1999, Option Care wrote off $185 of
deferred financing costs related to the previous facility.
Under the current facility agreement, Option Care may elect interest rates
on the revolving loan ranging from LIBOR plus 2.125%, to the bank's reference
rate. Interest on the term loan ranges from LIBOR plus 3.200%, to the bank's
reference rate plus 1%. The average interest rate paid under the Agreement for
2000 was 9.2%, compared to an average rate of 7.7% paid in 1999.
Availability under the revolving loan portion of the facility is related to
percentages of our outstanding accounts receivable and inventory balances, less
certain ineligible amounts, as defined within the amended and restated loan and
security agreement. Overall borrowings allowable under the revolving loan
portion are limited to the lesser of $25 million or the total allowable
collateral base. The revolving loan portion is secured by Option Care's assets,
as well as by all of the issued and outstanding Common Stock of each of Option
Care's subsidiaries. Availability under the term loan portion of the facility is
limited to $15 million, and is subject to approval by the lender. The term loan
portion of our total facility is unsecured. 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, Option
Care paid administrative fees to the Trust of $94 prior to its elimination.
Option Care leases certain computer equipment and 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 values of the computer
equipment and medical equipment under capital leases were $58 and $172 for 2000
and 1999, respectively.
35
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(6) PROVISION FOR INCOME TAXES
The income tax provision (benefit) consisted of the following:
CURRENT DEFERRED TOTAL
-------- -------- --------
2000:
Federal............................................ $4,296 $(184) $4,112
State.............................................. 369 (16) 353
------ ----- ------
$4,665 $(200) $4,465
====== ===== ======
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
====== ===== ======
A reconciliation between the income tax expense recognized in Option Care's
Consolidated Statement of Operations and the income tax expense computed by
applying the U.S. Federal corporate income tax rate of 35%, 35% and 34% for
2000, 1999, and 1998, respectively, to earnings (loss) before income taxes
follows:
2000 1999 1998
-------- -------- --------
Computed "expected" tax expense............................. $4,172 $2,715 $ 51
Increase (decrease) in income taxes resulting from:
Amortization of goodwill.................................. 54 55 55
State income taxes, net of federal income tax benefit..... 349 310 8
Settlement of 1992-1995 IRS audit and adjustments......... -- -- 739
Other, net................................................ (110) 49 (11)
------ ------ ----
Total provision............................................. $4,465 $3,129 $842
====== ====== ====
36
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(6) PROVISION FOR INCOME TAXES (CONTINUED)
Deferred income tax assets and (liabilities) at December 31, 2000 and 1999
include:
2000 1999
--------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT
-------- ---------- -------- ----------
Deferred tax assets:
Allowance for doubtful accounts........................ $2,032 $ -- $1,661 $ --
Allowance for notes receivable......................... 120 -- 140 --
Accrued expenses....................................... 200 -- 118 --
Severance accrual...................................... 107 -- -- --
Accrued wages and benefits............................. 250 -- 489 --
Insurance claims payable............................... 155 -- 177 --
Accrued legal fees..................................... 272 -- 332 --
Reserve for discontinued operations.................... -- -- 7 --
Capital loss carry-forward............................. -- -- -- 575
Other, net............................................. 172 -- (35) --
------ ----- ------ -----
Total deferred tax assets.............................. 3,308 -- 2,889 575
Valuation allowance.................................... -- -- -- (575)
------ ----- ------ -----
Net deferred tax asset................................. 3,308 -- 2,889 --
Deferred tax liabilities:
Tax over book depreciation............................. -- 120 -- (63)
Internally developed software.......................... -- (85) -- 80
Intangible assets...................................... -- (623) -- (434)
Other, net............................................. -- (345) -- (297)
------ ----- ------ -----
Total deferred tax liabilities......................... -- (933) -- (714)
------ ----- ------ -----
Net deferred income tax asset (liability).............. $3,308 $(933) $2,889 $(714)
====== ===== ====== =====
The valuation allowance was reduced by $575 during the year ended
December 31, 2000 as a result of the reduction of the non-current deferred tax
asset.
Option Care 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.
(7) STOCK INCENTIVE PLAN
Option Care'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 and again on May 12, 2000 (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 Option Care and its subsidiaries and other persons
who provide services to Option Care on a regular basis. On February 21, 1997,
Option Care's Board of Directors and shareholders approved an increase in the
amount of shares reserved for the Incentive Plan to 2,000,000 shares of Common
Stock. On May 12, 2000, the amount of shares was further increased to 2,500,000.
All options under the Incentive
37
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) STOCK INCENTIVE PLAN (CONTINUED)
Plan must be exercised within ten years after the grant date. As of
December 31, 2000, 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, 2000:
2000 1999 1998
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- --------- --------- --------- --------- ---------
Outstanding at beginning of year........ 1,262,276 $1.73 1,424,840 $1.95 977,715 $4.16
Granted................................. 566,250 6.22 101,500 3.24 928,300 1.63
Exercised............................... (212,937) 0.81 (1,500) 0.75 (18,250) 3.28
Terminated.............................. (301,336) 2.39 (262,564) 3.53 (462,925) 3.95
--------- --------- ---------
Outstanding at end of year.............. 1,314,253 3.63 1,262,276 1.73 1,424,840 1.95
--------- --------- ---------
Options exercisable at year-end......... 540,651 510,746 435,123
--------- --------- ---------
Weighted average fair value of options
granted during the year............... $ 6.14 $ 3.24 $ 0.89(a)
------------------------
(a) 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.
The following table summarizes information about the Incentive Plan and
options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED-AVG.
RANGE OF NUMBER REMAINING NUMBER
EXERCISE OUTSTANDING CONTRACTUAL WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
PRICES AT 12/31/00 LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
--------------------- ----------- ------------- -------------- ----------- --------------
0.7$5 to $1.00.... 431,550 7.5 years $0.76 241,775 $0.76
2.2$5 to $3.47.... 155,065 6.5 years $3.08 88,190 $2.83
3.7$5 to $4.38.... 242,300 4.6 years $4.02 207,237 $4.02
5.0$0 to $7.50.... 485,338 9.5 years $6.15 3,449 $5.64
--------- -------
0.7$5 to $7.50.... 1,314,253 540,651
========= =======
Option Care 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.
38
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) STOCK INCENTIVE PLAN (CONTINUED)
Had compensation cost for Option Care's stock-based compensation plan been
determined based on FASB Statement No. 123, Option Care's net income (loss) and
income (loss) per common share in 2000, 1999, and 1998 on a pro-forma basis
would have been:
2000 1999 1998
-------- -------- --------
Net income (loss):
as reported............................................... $7,455 $4,627 $ (691)
pro forma................................................. $7,313 $4,533 $ (731)
Net income (loss) per common share--basic:
as reported............................................... $ 0.61 $ 0.40 $(0.06)
pro forma................................................. $ 0.60 $ 0.39 $(0.07)
Net income (loss) per common share--diluted:
as reported............................................... $ 0.60 $ 0.39 $(0.06)
pro forma................................................. $ 0.59 $ 0.38 $(0.07)
The fair value of options granted under Option Care's stock option plan
during 2000, 1999 and 1998 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, expected volatility of 67% for 2000, 74% for 1999, and 65% for 1998, risk
free interest rate of 5.00% for 2000, 5.00% for 1999, and 4.65% for 1998, and
expected lives of 5 years for each year.
(8) EMPLOYEE BENEFIT PROGRAMS
(a) 401(k) PLAN
Option Care has a defined contribution plan under which Option Care may make
matching contributions based on employee contributions. The match, if any, is
determined at discretion by the Board of Directors of Option Care. 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 are eligible for participation in the plan. As of
January 2001, the one-year service requirement has been reduced to three months.
The amount of expense recognized in 2000, 1999, and 1998 related to this plan
totaled $407, $322, and $304, respectively. In each of these years, Option Care
elected to match 100% of the first 3% contributed by each employee.
(b) EMPLOYEE STOCK PURCHASE PLAN
The 1996 Employee Stock Purchase Plan, (ESPP) which had an expiration date
of December 31, 2000, permitted eligible employees, per the ESPP, the ability to
acquire shares of Option Care's stock through payroll deductions, up to a
maximum of $21,250, or 15% of eligible wages. Employees could enroll in the ESPP
once a year, in December of the prior year for participation in the next year.
Employees were allowed to stop their participation at any time during the year,
but could not re-enroll until the following year. In addition, enrolled
employees could increase or decrease their participation percentage in June,
effective July 1 of that year.
39
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) EMPLOYEE BENEFIT PROGRAMS (CONTINUED)
The price paid for the shares issued under the ESPP is at a 15% discount
from the lower of the average of the ask and bid prices, as listed on the Nasdaq
National Market, for Option Care'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 2000 plan year, 124,901 shares were issued in
January 2001. 123,925 shares were issued in January of 2000 for the 1999 plan
year.
A new 2001 Employee Stock Purchase Plan was approved by the shareholders and
the Board of Directors on May 12, 2000. The most significant change is that the
2001 plan has two enrollment periods, instead of one as in the 1996 plan.
Employees may enroll in December to participate effective January 1st of the
plan year, or in June to participate effective July 1st. However, shares are
still only purchased once, in January of the following year, and an employee may
not re-enroll after stopping participation in the current plan year. The price
paid per share under the 2001 plan has been changed slightly. The price will be
at a 15% discount from the lower of the closing price on the beginning and
ending dates of the enrollment period, as listed on the Nasdaq National Market.
However, if either day is not a trading day, the price used for that day will
equal the lower of the closing price per share on the last preceding and next
following trading days.
(9) COMMITMENTS AND CONTINGENCIES
Certain of Option Care's purchase agreements for acquisitions made in 1997
and 1996, obligated Option Care to pay additional consideration to former owners
based upon either the acquired business's achievement of certain milestones, the
attainment of certain financial results, or per contractual obligation. The
contingency period for these payments is through December 31, 2001. Amounts to
be paid out under these agreements will be recorded as additional goodwill in
the year that the amounts become certain. 303,746 shares and 204,563 shares of
Option Care's Common Stock were issued under these agreements in 2000 and 1999,
respectively. Based on 2001 performance, an additional $254 in cash could become
payable under the 1996 and 1997 purchase agreements. This represents the maximum
future obligation under these agreements.
Our 2000 purchase agreements for the Option Care franchises in Sterling, VA,
Hemet, CA, and Rockwall, TX require Option Care to pay additional consideration
if certain financial results are achieved. The minimum future obligation is
$400. Measurement periods range from six months to three years after the
acquisition date, with the final period ending on December 31, 2003. None of the
future obligations is payable in Option Care Common Stock.
Certain management employees of Option Care 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 Option Care currently has no
plans in extending the agreements currently in place.
Option Care is subject to claims and legal actions that may arise in the
ordinary course of business. However, Option Care maintains insurance to protect
against such claims or legal actions. Option Care is not aware of any litigation
either pending or filed that might have a potential impact on Option Care's
financial position and results of operations.
40
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Option Care leases office space under leases that are classified as
operating leases. Operating lease expense for 2000, 1999, and 1998 was $3,250,
$3,350, and $2,980, respectively. The future minimum lease payments for our
facility leases are as follows:
YEAR ENDING DECEMBER 31,
------------------------
2001...................................................... $2,071
2002...................................................... 1,323
2003...................................................... 821
2004...................................................... 477
2005 and beyond........................................... 186
------
$4,878
======
(10) SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 1998
-------- -------- --------
Interest and taxes paid (refund):
Interest.................................................... $ 978 $ 996 $3,125
====== ====== ======
Income taxes paid (refund).................................. 4,465 2,422 (876)
====== ====== ======
Non-cash investing and financing activities:
Stock issued for 1996 & 1997 franchise acquisitions......... 1,519 729 88
====== ====== ======
Additions to obligation under capital leases (a)............ $ 61 $ -- $ 23
====== ====== ======
------------------------
(a) The additional capital lease obligations in 2000 were related to lease
obligations assumed under our 2000 business acquisition agreements. No other
new capital leases were signed in 2000.
(11) SUBSEQUENT EVENTS
On January 16, 2001, Option Care acquired the assets of the Option Care
franchise in Columbus, OH, which operates a home health agency and network
management business in addition to its Option Care home infusion franchise. On
February 8, 2001, Option Care acquired the assets of Professional Home Health
Services, LLP, an independent home infusion and home health agency business
operating in the Los Angeles suburb of Thousand Oaks, CA. The aggregate purchase
price for these acquisitions was $2,850, paid in cash. Additional consideration,
up to a maximum of $1,350, will be payable in cash in 2001 and 2002 if certain
financial targets are reached.
41
OPTION CARE, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
BALANCE BALANCE
BEGINNING CHARGED (A) END
YEAR ENDED OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
---------- --------- ---------- ---------- ---------
December 31, 1998.................................... $3,753 $4,936 $(5,113) $3,576
December 31, 1999.................................... 3,576 2,970 (2,433) 4,113
December 31, 2000.................................... $4,113 $2,350 $(1,371) $5,092
ALLOWANCE FOR UNCOLLECTIBLE NOTES RECEIVABLE--CURRENT AND LONG TERM:
BALANCE BALANCE
BEGINNING CHARGED (A) END
YEAR ENDED OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
---------- --------- ---------- ---------- ---------
December 31, 1998.................................... $151 $ -- $(122) $ 29
December 31, 1999.................................... 29 329 -- 358
December 31, 2000.................................... $358 $(53) $ -- $305
------------------------
(A) Represents accounts written off in current year, less collections on
prior years' write-offs.
42
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.
OPTION CARE, INC.
By: /s/ RAJAT RAI
-----------------------------------------
Rajat Rai
PRESIDENT, CHIEF OPERATING OFFICER
Date: March 28, 2001
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.
NAME TITLE DATE
---- ----- ----
/s/ RAJAT RAI President, Chief Operating
------------------------------------------- Officer March 28, 2001
Rajat Rai
Chief Financial Officer
/s/ CARLA M. PONDEL (Principal Accounting
------------------------------------------- Officer and Principal March 28, 2001
Carla M. Pondel Financial Officer)
/s/ JAMES G. ANDRESS Director
------------------------------------------- March 28, 2001
James G. Andress
/s/ JAMES M. HUSSEY Director
------------------------------------------- March 28, 2001
James M. Hussey
/s/ JOHN N. KAPOOR Chairman of the Board and
------------------------------------------- Chief Executive Officer March 28, 2001
John N. Kapoor
/s/ JEROME F. SHELDON Director
------------------------------------------- March 28, 2001
Jerome F. Sheldon
/s/ ROGER W. STONE Director
------------------------------------------- March 28, 2001
Roger W. Stone
43
EXHIBIT INDEX
EXHIBIT
NUMBER
---------------------
3.1 Certificate of Incorporation of the Registrant, together
with Certificate of Amendment thereto filed February 18,
1992. Filed as Exhibit 3(a) to Option Care'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 Option Care'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 Option Care'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 Option Care'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 Option Care's Registration
Statement (No. 33-45836) dated April 15, 1992 and
incorporated by reference herein. *
10.3 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 Option Care's Annual Report on Form 10-K for the
year ending December 31, 1994 and incorporated by reference
herein. *
10.4 Amendment to the 1991 Stock Incentive Plan of the
Registrant, dated May 22, 1997. Filed as Exhibit 10.2(b) to
Option Care's Annual Report on Form 10- K for the year
ending December 31, 1997 and incorporated by reference
herein *
10.5 Option Care, Inc. 401(k) Profit Sharing Plan. Filed as
Exhibit 10(b) to Option Care's Registration Statement (No.
33-45836) dated April 15, 1992 and incorporated by reference
herein. *
10.6 Amendment to the 1992 401(k) Profit Sharing Plan of the
Registrant dated January 1, 1996. Filed as Exhibit 10.3(a)
to Option Care's Annual Report on Form 10-K for the year
ending December 31, 1997 and incorporated by reference
herein. *
10.7 Consulting Agreement dated as of September 27, 1990 between
EJ Financial Enterprises and Michael Prime. Filed as Exhibit
10(h) to Option Care's Registration Statement
(No. 33-45836) dated April 15, 1992 and incorporated by
reference herein. *
10.8 Form of Franchise Agreement. Filed as Exhibit 10.5 to Option
Care's Annual Report on Form 10-K for the year ending
December 31, 1996 and incorporated by reference herein.
10.9 Lease dated as of October 23, 1996 between the Registrant
and LaSalle National Trust, N.A., as Trustee. Filed as
Exhibit 10.6 to Option Care's Annual Report on Form 10-K for
the year ending December 31, 1996 and incorporated by
reference herein.
44
EXHIBIT
NUMBER
---------------------
10.10 Consulting Agreement between the Registrant and EJ Financial
Enterprises, Inc. Filed as Exhibit 10(o) to Option Care's
Registration Statement (No. 33-45836) dated April 15, 1992
and incorporated by reference herein.
10.11 Management Agreement between Pinecrest Healthcare
Consultants, Inc., and Option Care, Inc. dated April, 1997.
Filed as Exhibit 10.14 to Option Care's Annual Report on
Form 10-K for the year ending December 31, 1997 and
incorporated by reference herein. *
10.12 Amended Option Care, Inc. 1996 Employee Stock Purchase Plan,
dated January 1, 1996. Filed as Exhibit 10.19 to Option
Care's Annual Report on Form 10-K for the year ending
December 31, 1995 and incorporated by reference herein. *
10.13 Executive Severance Agreement between James A. Hodges, Jr.
and Option Care, Inc., dated December 19, 1997. Filed as
Exhibit 10.17 to Option Care's Annual Report for the year
ending December 31, 1997 and incorporated by reference
herein.*
10.14 Executive Severance Agreement between Cathy Bellehumeur and
Option Care, Inc., dated November 12, 1997. Filed as Exhibit
10.18 to Option Care's Annual Report for the year ending
December 31, 1997 and incorporated by reference herein.*
10.15 Promissory Note between Brooks Home I.V., Inc., and Option
Care, Inc., dated December 8, 1997. Filed as Exhibit 10.22
to Option Care's Annual Report for year ending December 31,
1997 and incorporated by reference herein.*
10.16 Facility Provider Agreement between Foundation Health
Corporation Affiliate(s) and Option Care, Inc. dated June 1,
1997. Filed as Exhibit 10.24 to Option Care's Annual Report
for year ending December 31, 1997 and incorporated by
reference herein.
10.17 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 Option
Care's Annual Report for year ending December 31, 1997 and
incorporated by reference herein.
10.18 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 Option Care's Annual Report for year ended
December 31, 1998 and incorporated by reference herein.
10.19 Employment Agreement between Michael A. Rusnak and Option
Care, Inc., dated October 1, 1998. Filed as Exhibit 10.27 to
Option Care's Annual Report for year ended December 31, 1998
and incorporated by reference herein.*
10.20 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 Option
Care's Annual Report for year ended December 31, 1998 and
incorporated by reference herein.
10.21 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 Option Care's Annual Report for year ended
December 31, 1998 and incorporated by reference herein.
45
EXHIBIT
NUMBER
---------------------
10.22 Amendment No. 1 to the Consulting Agreement By and Between
EJ Financial Enterprises, Inc. and Option Care, Inc., dated
October 1, 1999. Filed as Exhibit 10.30 to Option Care's
Annual Report for the year ended December 31, 1999 and
incorporated by reference herein.
10.23 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. Filed as Exhibit 10.31 to Option Care's Annual Report
for the year ended December 31, 1999 and incorporated by
reference herein.
10.24 2001 Employee Stock Purchase Plan. Filed as Exhibit A to the
registrants definitive proxy statement for the 2000 Annual
Shareholders Meeting and incorporated by reference herein.*
21 Subsidiaries of the Registrant. Filed as Exhibit 21 to
Option Care's Annual Report for year ended December 31, 1998
and incorporated by reference herein.
23 Consent of Ernst & Young LLP.
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* Management contracts and compensatory plans and arrangements.
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