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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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NO. 0-19878
OPTION CARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3791193
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 CORPORATE NORTH, SUITE 212, BANNOCKBURN, ILLINOIS 60015
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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
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TITLE OF EACH CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _______
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
-
The aggregate market value of voting stock held by non-affiliates of the
registrant as of January 31, 1997 was approximately $23,600,000 (based on
closing sale price of $6.813 per share as reported by the Nasdaq National Market
and published in the Wall Street Journal.)
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of January 31, 1997 was 10,537,616.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into items 10-13 in Part III of this
Report.
Page 1 of 48 pages
Exhibit index is on Page 45 of this Annual Report on Form 10-K.
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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..................................................................................... 12
Item 3. Legal proceedings.............................................................................. 12
Item 4. Submission of matters to a vote of security holders............................................ 14
PART II:
Item 5. Market for registrant's common equity and related stockholder matters.......................... 15
Item 6. Selected financial data........................................................................ 17
Item 7. Management's discussion and analysis of financial condition and results of operations.......... 19
Item 8. Financial statements and supplementary data.................................................... 24
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure........... 41
PART III:
Item 10. Directors and executive officers of the registrant............................................. 41
Item 11. Executive compensation......................................................................... 41
Item 12. Security ownership of certain beneficial owners and management................................. 41
Item 13. Certain relationships and related transactions................................................. 41
PART IV:
Item 14. Exhibits, financial statement schedules, and reports on Form 8-K............................... 41
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Annual
Report on Form 10-K and other materials filed or to be filed by the Company with
the Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are or will be forward looking, such as statements
relating to acquisitions and other business development activities, future
capital expenditures and the effects of future regulation and competition. Such
forward looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by, or on behalf of, the Company. These risks and uncertainties include,
but are not limited to, uncertainties affecting businesses of the Company and
its franchisees relating to acquisitions and divestitures (including continuing
obligations with respect to completed transactions), sales and renewals of
franchises, government and regulatory policies (including federal, state and
local efforts to reform the delivery of and payment for healthcare services),
general economic conditions (including economic conditions affecting the
healthcare industry in particular) the pricing and availability of equipment and
services, technological developments and changes in the competitive environment
in which the Company operates.
2
PART I
ITEM 1. BUSINESS
Introduction
Option Care, Inc. (together with its subsidiaries, collectively "Option
Care" or "the Company") is a full service home healthcare business providing
services through its owned locations and through its supporting franchise
network. The Company was incorporated in Delaware on July 9, 1991. The
Company's predecessor was incorporated in California in January 1984.
Option Care has established a nationwide presence. The advantages of a
national presence include a strong brand identity and accessibility for managed
care payors and customers. As of December 31, 1996, 186 Option Care locations
were operating in 37 states. Existing offices include 164 locations owned and
operated by franchise owners and 22 locations owned and operated by the Company.
Aggregate gross billings for patient care services for all owned and franchised
Option Care offices were approximately $255,000,000 for the year ended December
31, 1996.
The Company owns and operates alternate site healthcare businesses. The
Company operated 22 such locations at December 31, 1996. These Company-owned
locations offer infusion therapy services, nursing, respiratory therapy and
durable medical equipment. The Company expects to increase the number of its
owned locations through acquisitions.
The Company and its franchise network provide managed care companies and
payors with one-stop shop services. Many referral sources, such as hospitals,
physicians, third-party payors and case management companies, may prefer making
patient referrals to multi-office companies or systems, such as the Option Care
system. Under the Company's OPTIONET program, the Company has contracted with
certain regional and national third-party payors and case management companies
to refer patients to participating Option Care locations.
The Company is committed to the provision of high quality care and believes
that an important measure of quality in the home healthcare industry is
accreditation by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") or similar organizations. As of December 31, 1996, 165
of the Company's franchised and owned locations were accredited. All new
franchises since April 1, 1990 have been required by the Company to apply for
accreditation within their first year of operation. The Company's goal is for
substantially all Option Care locations to become accredited.
The Company plans to continue to expand and develop its business through
(i) acquiring selected existing franchised locations or other providers of home
healthcare services, (ii) providing managed care companies and payors one-stop
services through owned or networked providers, (iii) entering into strategic
alliances with outpatient services providers, hospitals, physicians and payors,
and (iv) increasing the volume of current therapies and adding new therapies and
services. Additional debt or equity financing may be required to carry out the
Company's future acquisition strategy. The Company can give no guarantees that
such financing will be available or available at an acceptable cost.
THE HOME HEALTHCARE MARKET
Home healthcare principally involves the in-home or non-hospital provision
of nursing services, infusion therapy, respiratory services and durable medical
equipment. These services often begin during hospitalization and continue in
the
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home or other non-acute care setting, but may also be provided following
outpatient surgery or in connection with the treatment of conditions not
requiring hospitalization.
The market for home healthcare services has experienced significant growth.
The Company believes that the following factors have contributed to this growth:
(i) cost containment efforts by third-party payors promoting use of relatively
less expensive home healthcare therapy rather than longer hospital stays; (ii)
increased awareness and acceptance among physicians and third-party payors of
alternatives to in-hospital treatment; (iii) the desire of patients to be
treated at home; and (iv) improved technology. Consolidation of providers has
been a recent dominant trend in the home healthcare industry.
SERVICES
The Company is a full service home healthcare provider with a supporting
franchise network. The Company offers infusion therapy, nursing services,
respiratory therapy and durable medical equipment through its owned offices and
infusion therapy through its franchise network. The Company's franchise network
locations compound, dispense and administer pharmaceuticals, sell medical
supplies, sell or rent associated medical equipment, provide skilled nursing
services, train patients and their care givers, consult with attending
physicians, and process reimbursement claims. The decision to proceed with
alternate-site therapies is generally made jointly by the patient, the attending
physician and a representative of the Option Care office involved. This
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 care giver's willingness and ability to participate in the
management of care in the home setting.
The majority of the Company's patient care service revenue is derived from
home infusion therapy related services. The principal home infusion therapies
include the following:
Total Parenteral Nutrition ("TPN")
TPN involves the intravenous administration of life sustaining nutrients to
patients whose digestive tracts are unable to function normally due to severe
gastrointestinal illness or injury. In many cases the TPN patient's underlying
condition is chronic in nature and he or she may require TPN for life.
Anti-infective Therapy
Anti-infective therapy involves the parenteral administration of
antibiotics, antivirals and antifungals to treat a variety of serious
infections such as those associated with AIDS, osteomyelitis, endocarditis,
urinary tract infection or wounds. Anti-infective therapy is generally
administered in the patient's home as a continuation of therapy initiated on an
outpatient basis or during hospitalization.
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Pain Management
Pain management therapy is the parenteral administration of analgesic drugs
to patients suffering from acute or chronic pain. Specialized infusion devices
permit patients to control the administration of analgesic drugs to respond to
the severity of their pain.
Enteral Nutrition
Enteral patients are usually unable to receive adequate nutrition orally
due to disorders including stroke, intestinal obstruction or cancer. Patients
receive nutritional formulas via a tube placed directly into the stomach or
small intestine, bypassing the dysfunctional portion of the patient's digestive
tract.
Chemotherapy
Chemotherapy is the parenteral administration of drugs to treat patients
suffering from cancer. As chemotherapy is commonly administered periodically for
several weeks or months, patients may receive their therapy regimen in alternate
settings.
Other therapies provided by Option Care offices may include: (i) hydration
therapy; (ii) blood components (packed red blood cells, Factor VIII and
immunoglobin); (iii) human growth hormone; (iv) aerosolized pentamidine for
prevention of pneumonia often contracted by AIDS patients; (v) intradialytic
parenteral nutrition for chronic kidney failure patients; (vi) deferoxamine for
patients with chronic iron overload; and (vii) pre-term labor monitoring and
tocolytic infusions for high-risk pregnancies.
The following table sets forth the aggregate percentages of revenues by
home infusion therapy of Company-owned offices for the periods indicated:
YEAR ENDED
DECEMBER 31,
-------------------------
1996 1995 1994
----- ----- -----
Total parenteral nutrition therapy.. 19% 22% 29%
Anti-infective therapies............ 34 37 22
Pain management therapy............. 8 8 10
Enteral nutrition therapy........... 10 7 6
Chemotherapy........................ 4 5 4
Other therapies or services......... 25 21 29
---- ---- ----
Total.......................... 100% 100% 100%
==== ==== ====
5
Approximately 20% of the Company's patient care service revenue is derived
from nursing services. Option Care's nursing services include providing support
for infusion therapies and providing traditional home health nursing services
in many markets. These services include patient assessment, training,
monitoring, documentation and physician communication. In addition to nursing
support for infusion therapies, many Option Care locations provide skilled
nursing care for a full range of other services, as well as private duty
nursing.
In addition to the services mentioned above, Option Care derives
approximately 6% of its patient care service revenue from the sale of home
medical equipment (HME) and respiratory therapy.
COMPANY-OWNED LOCATIONS
The Company operates and owns controlling interests in the following Option
Care locations:
DATE OF OWNED BY
OWNERSHIP COMMENCEMENT COMPANY
OWNED LOCATIONS INTEREST OF OPERATIONS SINCE
- ------------------------------- ---------- -------------- --------------
Chico, California.............. 100% April 1980 January 1984
Fort Myers, Florida............ 100 July 1984 April 1991
Tampa, Florida................. 100 August 1993 August 1993
Columbia, Missouri............. 100 March 1985 April 1992
Kirksville, Missouri........... 100 July 1989 January 1996
Jefferson City, Missouri....... 100 May, 1988 March 1996
Bethlehem, Pennsylvania........ 80 November 1986 May 1992
Horsham, Pennsylvania.......... 80 February 1989 May 1992
Bullhead City, Arizona......... 100 March 1988 April 1993
Bellingham, Washington......... 100 November 1984 November 1993
Omaha, Nebraska................ 100 May 1984 August 1994
Grand Junction, Colorado....... 100 December 1991 November 1994
Grand Medical Supply........... 100 February 1981 October 1996
Gadsden, Alabama............... 50 June 1987 November 1994
Houston, Texas................. 100 January 1988 January 1996
Bellaire Infusion Center, TX. 100 May 1994 June 1996
Ontario, California............ 100 December 1989 February 1996
Bethel, Ohio................... 100 July 1987 April 1996
Milford, Ohio.................. 100 July 1987 April 1996
Everett, Washington............ 100 April 1985 May 1996
Oklahoma City, Oklahoma........ 100 April 1986 September 1996
Kennewick, Washington.......... 100 September 1985 December 1996
FRANCHISING PROGRAM
As of December 31, 1996, the Company had 165 franchise locations. The
Company's current franchise agreement grants the franchise owner the authority
to own and operate an Option Care franchise within a granted territory for a 20-
year term. The initial franchise fee for start-up franchises ranges from
$15,000 to $35,000 and is payable by the franchise owner upon execution of the
franchise agreement. The exact amount of the initial franchise fee is
determined by the
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Company based on the population in the territory granted to the franchise owner.
Conversion franchise fees are lower than those for start-ups.
The Company's franchise agreements generally provide for royalties on a
sliding scale ranging from a high of 9% to a low of 2% of annual gross cash
receipts depending on the levels of such receipts, whether the franchise owner
conducted a similar business prior to the execution of the franchise agreement,
and other factors.
Each Option Care office is required to maintain a licensed pharmacy
equipped to prepare sterile patient medications and parenteral solutions as
prescribed by the patient's physician. Each location operates under a
confidential, proprietary system developed by the Company which includes
procedures for quality assurance, office administration and patient care,
consistency and uniformity of pharmaceuticals and offered services, initial
training and ongoing assistance.
Key employees of each franchised Option Care office, including pharmacists,
nurses, and managers, must complete initial training programs provided by the
Company. In addition to required initial training, the Company offers advanced
training in selected topics to franchise owners and their employees.
The Company furnishes Option Care franchisees with its system of training,
marketing and operating support services. In addition, franchised locations
may, but are not required to, purchase or otherwise acquire from or through the
Company certain pharmaceuticals, supplies, and pharmacy-related equipment. The
Company's initial training and ongoing support provided to its owned and
franchised locations stresses the importance of consistent quality and
responsive service.
The Company's franchise agreements require, among other things, franchise
owners to meet the Company's policies on quality assurance, clinical services
and local marketing and to obtain specified liability insurance protecting the
franchise owner and the Company against claims arising out of the operation of
the franchised business.
The Company conducts franchise owner meetings on both regional and
national levels to provide operating assistance, information on new Option Care
programs, new marketing concepts and other assistance. The Company also works
with its franchise owners' National Advisory Council in communicating with
franchise owners and receiving their recommendations for changes and
improvements to the Option Care system.
The following table indicates the number of Option Care franchise locations
at the beginning of the year, the number of new franchises sold, the number of
franchises terminated or consolidated and the number of franchises at the end of
each year in the three-year period ended December 31, 1996:
1996 1995 1994
---- ---- ----
Number of franchise locations at beginning of year.. 166 173 192
New franchises opened............................... 13 13 2
Franchises terminated or consolidated............... 15 20 21
---- ---- ----
Number of franchise locations at end of year........ 164 166 173
==== ==== ====
7
REIMBURSEMENT FOR SERVICES
Most of the patient care revenues of owned Option Care locations are
derived from third-party payors, such as insurance companies, health maintenance
organizations, self-insured employers, Medicare and Medicaid. Where permitted
by law or contract, patients are billed for amounts not reimbursed by third-
party payors. Private third-party payors typically reimburse a higher amount
and faster for a given service and provide a broader range of benefits than
government programs.
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.
Reimbursement of home healthcare is covered to varying degrees by third-
party payors. Obtaining reimbursement can be subject to delays and is not
always assured. Slower receivable collections may result in a need for higher
levels of short-term financing. Lack of adequate financing may limit growth.
The following table sets forth the approximate percentages of revenues
attributable to private and government reimbursement sources for Company-owned
locations for the periods indicated:
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995 1994
------ ------ ------
Private insurance and other private payors.. 55% 58% 68%
Medicare and Medicaid programs.............. 45 42 32
--- --- ---
Total.................................. 100% 100% 100%
=== === ===
SALES AND MARKETING
Generating patient referrals is vital to the success of any home healthcare
business. Option Care offices are required to employ sales personnel whose
primary responsibility is to market Option Care services to potential referral
sources. Marketing efforts focus on area hospitals, physicians, managed-care
and other payors and case management companies. The active role which general
managers and franchise owners typically play in the operation of the business
also helps create a focused effort on developing the market for each office.
In 1991, the Company initiated a field sales and marketing program to
support the efforts of its franchise system. The field staff focus varies with
the strategy of the Company. Currently, the field staff assist Option Care
offices in developing business and marketing plans, marketing their services
locally, introducing additional therapies and services and coordinating regional
sales programs largely targeted to managed care organizations.
The Company has established a program called OPTIONET, through which the
Company contracts with certain regional and national third-party payors (e.g.,
insurance companies, health maintenance organizations and large self-insured
employers) and case management companies to refer patients to participating
Option Care offices. Under OPTIONET agreements, each participating Option Care
office provides local services for covered patients. Based on payor preference
or requirements, Option Care offices bill the payor directly for services
8
rendered, or the Company arranges for a third-party billing service to bill the
payor for a billing fee.
The Company maintains a National Advertising and Education Fund for
marketing the services of Option Care offices to patient referral sources such
as physicians, hospitals, nursing agencies, third-party payors and case
management companies, and for the cost of educational programs for franchise
owners. Option Care offices are required to contribute at various rates up to 1
1/2% of gross receipts to these funds.
SUPPLIERS
Option Care offices must acquire pharmaceuticals, supplies, equipment and
services relating to their businesses from suppliers which satisfy certain
standards and possess adequate quality controls. The Company may derive revenue
through administrative fees received from contracted manufacturers.
Neither the Company nor its franchises have experienced significant
difficulty in purchasing pharmaceuticals, supplies or equipment. In the event
that current suppliers cease to sell pharmaceuticals, supplies or equipment to
the Company or its franchises, the Company believes that alternate sources can
be located without undue burden, which would adequately meet their needs.
GOVERNMENT REGULATION
Health Care Regulation
Home healthcare is subject to regulation by the various states in which the
Company and its franchise owners conduct their businesses, as well as by the
federal government. Option Care locations are subject to state laws (including
licensing laws) governing pharmacies, home health agencies, nursing services,
health planning and professional conduct. Each Option Care location must be
appropriately registered with the United States Food and Drug Administration and
Drug Enforcement Administration and comply with record keeping and inventory
requirements for the dispensing of controlled substances. Although the Company
provides its franchised locations guidance in compliance with regulatory
requirements, it is not responsible for such compliance. The failure of an
Option Care location to obtain, renew or maintain any required regulatory
approvals or licenses could adversely affect that location and could prevent
such location from offering services to patients.
To the extent Option Care locations provide services under the Medicare and
Medicaid programs, they are subject to a broad body of laws regulating those
programs, including "fraud and abuse" laws. Among other things, these laws
prohibit any bribe, kickback or rebate in return for the referral of Medicare or
Medicaid patients. In addition, many of the states in which Option Care
locations operate have laws that prohibit certain direct or indirect payments or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. Bills have been
introduced in several states that would increase restrictions or prohibit
referrals where a physician has a financial relationship with the provider. In
addition, some states restrict certain business relationships between physicians
and pharmacies. These statutes vary from state to state. The Company exercises
care in structuring its arrangements with health care providers and referral
sources to comply with the relevant statutes, but there can be no assurance that
9
such laws will ultimately be interpreted in a manner consistent with the
practices of the Company or the franchise owners.
Other state and federal laws and regulations could also adversely affect
existing or future financial relationships between physicians and health care
businesses, including franchised businesses. The Omnibus Reconciliation Act of
1993 prohibits physicians, subject to certain exceptions, who have a "financial
relationship" with an entity from referring patients to that entity for the
provision of "designated health services" which may be reimbursed by Medicare or
Medicaid. The eleven "designated health services" include parenteral and
enteral nutrients, equipment and supplies; outpatient prescription drugs; and
durable medical equipment. With certain exceptions, this Act also requires
entities seeking payment from the Medicare and Medicaid programs to report any
ownership and compensation arrangements with physicians. This federal law bars,
with limited exceptions, physician ownership of an Option Care franchised
business.
The United States Department of Health and Human Services, Office of the
Inspector General ("OIG"), has been utilizing a civil statute, the False Claims
Act, in challenging Medicare billing practices. In particular, the False Claims
Act provides that any person who knowingly presents, or causes to be presented,
to an officer or employee of the United States Government or a member of the
Armed Forces of the United States a false or fraudulent claim for payment or
approval is liable to the United States Government for a civil penalty of not
less than $5,000 and not more than $10,000, plus 3 times the amount of damages
which the Government sustains because of the act of that person.
It is the Company's understanding that the OIG considers each claim that is
submitted for reimbursement to the Medicare program to be a claim for purposes
of the False Claims Act. Accordingly, if 100 claims are submitted knowingly
containing false or fraudulent information, the party submitting the claim may
be liable for not only treble damages, but also $1,000,000 in fines.
There are also various proposals under development or consideration to
enact health care reform. In broad terms, most of these proposals are designed
to control health care costs through regulatory actions and/or market forces and
limit self-referrals. Health care reform could impact providers of Option Care
services, although it is not possible at this time to predict the nature or
extent of any impact upon franchised businesses.
The Company is unable to predict whether any new legislation or regulations
may be enacted in the future which may affect the business of the Company,
Option Care locations or the health care industry, including third-party
reimbursement. Accordingly, the Company cannot predict whether any such new
legislation or regulations would have a material adverse impact on the Company.
Franchise Regulation
The Company's franchising operations are subject to Federal Trade
Commission ("FTC") regulation and state laws which regulate the offer and sale
of franchises. The Company is also subject to a number of state laws which
regulate substantive aspects of the relationship between franchisors and
franchise owners.
The FTC's Trade Regulation Rule on Franchising (the "FTC Rule") requires
the Company to furnish prospective franchise owners with a franchise offering
circular containing information prescribed by the FTC Rule. At least 12 states
presently regulate the offer and sale of franchises and, in almost all cases,
require registration of the franchise offering with state authorities.
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State laws which regulate the relationship between franchisors and
franchise owners presently exist in a substantial number of states. Such laws
regulate the franchise relationship by, for example, requiring the franchisor to
deal with its franchise owners in good faith, prohibiting interference with the
right of free association among franchise owners, and limiting the imposition of
standard charges, royalties or fees. These laws have not precluded the Company
from seeking franchise owners in any given area and have not had a significant
effect on the Company's operations.
The Company is not aware of any pending franchise legislation which in its
view is likely to significantly affect the operations of the Company. The
Company believes that its operations comply substantially with the FTC Rule and
applicable state franchise laws.
COMPETITION
The home healthcare market is intensely competitive. Although the market
is somewhat fragmented, there are several major providers of home healthcare
services and increasing pressures toward market consolidation. Home Care
Magazine, in its December 1996 issue, named Option Care the 28th largest home
healthcare company. Certain other national competitors are larger and have
greater resources than those of the Company. Competition varies by market
location. Option Care's competitors include numerous small, local companies and
physician groups, major national and regional companies, hospital-based
programs, and nursing agencies. To the extent that the Company acquires or
franchises operations in new areas, the Company may face additional competition.
In addition, new competitors may enter the home healthcare market and
existing competitors may expand the variety of services that they offer. Option
Care locations compete on the basis of a number of factors, including quality,
consistency, responsiveness and diversity of services; geographic coverage; the
ability to develop and maintain goodwill or contractual relationships with
referral sources such as hospitals, managed care providers, physicians and other
related entities; and price. Option Care continues to develop ways to present
comprehensive home healthcare services in response to payor interest in "one
stop shop" home care service. Purchasing, diversification and network
development are alternative routes to providing this service.
SERVICE MARKS
The Company has registered with the federal government OPTION CARE(R),
among others, as a service mark. The Company believes that this service mark is
becoming increasingly recognized by many referral sources as representing a
reliable, cost-effective source of home healthcare services. The Company
believes that its use of this service mark does not violate or otherwise
infringe on the rights of others.
EMPLOYEES
At December 31, 1996, the Company employed 532 persons on a full-time basis
and 55 persons on a part-time basis. Of the Company's full-time employees, 81
were corporate management and administrative personnel and the remaining 451
were
11
employees of Company-owned locations, primarily in clinical, management and
administrative positions.
The Company considers its employee relations to be good. None of the
Company's employees are covered by a collective bargaining agreement.
INSURANCE
The Company currently maintains insurance for general and professional
liability claims in an aggregate amount which it believes to be sufficient given
the nature of its business. In addition, the Company maintains insurance for
vicarious liability of the Company, if any, for the acts and omissions of its
franchises, and the Company requires each franchise to maintain general
liability insurance and professional liability insurance on each of its
professionals, in each case covering both the franchise and the Company, with
coverage at levels which the Company believes to be sufficient. These policies
generally provide coverage on a claims made or occurrence basis and have certain
exclusions from coverage. These insurance policies must generally be renewed
annually. There can be no assurance that insurance coverage will be adequate to
cover liability claims that may be asserted against the Company or that adequate
insurance will be available in the future at acceptable cost. To the extent
that liability insurance is not adequate to cover liability claims against the
Company, the Company will be responsible for the excess.
ITEM 2. PROPERTIES
The Company maintains executive offices at 100 Corporate North, Suite 212,
Bannockburn, Illinois 60015, consisting of approximately 13,655 square feet of
leased space.
At December 31, 1996, the Company owned operations located in Bullhead
City, AZ, Chico, CA, Columbia, MO, Bethlehem, PA, Horsham, PA, Bellingham, WA,
Omaha, NE, Grand Junction, CO, Gadsden, AL, Houston, TX, Little Rock, AR,
Bellaire, TX, Bethel, OH, Milford, OH, Everett, WA, Oklahoma City, OK, Tampa,
FL, Kirksville, MO, Jefferson City, MO, Ontario, CA, Kennewick, WA and Ft.
Myers, FL. These facilities consist of approximately 124,522 square feet in
total.
All the Company's offices and facilities are leased by the Company with
remaining lease terms ranging from six months to six years. All the Company's
offices and facilities are in good condition and well maintained, and are
adequate to fulfill the operational needs of the Company for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS/LITIGATION
On January 17, 1995, an action entitled Dennis H. Birenbaum v. Option Care,
Inc., Case No. 95-439, was filed with the District Court of Dallas County,
Texas. Plaintiff alleged breach of contract, promissory estoppel and negligent
misrepresentation concerning an alleged agreement for the sale and purchase of
Plaintiff's company. In response, the Company produced evidence showing no
agreement was ever made. Dr. Birenbaum's lawsuit was dismissed and the Company
was awarded summary judgment by the Court. Dr. Birenbaum has filed an appeal
which the Company is vigorously contesting.
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On January 28, 1994, an action entitled George Harvey v. Option Care, Inc.,
et al. (U.S. District Court, Clark County, Nevada, Case No. A329456), was filed
against Option Care, Inc., Option Care Enterprises, Inc., a former employee of
Option Care, Inc., and the corporate owner of the Las Vegas Option Care Office
and two of its employees. At the time the action was filed, Option Care
Enterprises, Inc. managed the Las Vegas Option Care Office through a management
agreement. The plaintiff is pursuing claims for breach of contract, breach of
fiduciary duties, fraud, negligent misrepresentation and breach of implied
covenant of good faith and fair dealing relating to the performance of the
Management Agreement. The Company has filed a motion to dismiss, which was
granted on April 1, 1994 regarding the alleged breach of fiduciary duty, breach
of contract and fraud. There has been no subsequent pursuit of the remaining
claims. Should the plaintiff pursue these claims in the future, the Company
will vigorously contest such claims.
On August 29, 1991, an action entitled Ronald L. Rennick, et al. v. Option
Care, Inc., Case No. CV-S-91-1169 GEB-GGH, was filed in the United States
District Court, Eastern District of California. Plaintiffs were owners of two
former Option Care franchises located in Oregon, and related persons and
entities which wanted to introduce alternate setting infusion care into Canada
and to expand their Option Care franchise holdings in the United States.
Following an amendment of their complaint, the dismissal of some of their
claims, and the withdrawal of other of their claims, plaintiffs pursued claims
for breach of contract, breach of the covenant of good faith and fair dealing,
breach of alleged fiduciary duties, promissory estoppel and violations of
California franchise laws. Their claims were based on allegations that Option
Care breached an agreement with plaintiffs whereby plaintiffs acquired exclusive
rights for the Option Care system in Canada, rights to open 10 new Option Care
franchises in the United States, and rights to acquire 10 existing Option Care
franchises in the United States. Plaintiffs alleged lost profits of $24.197
million. Option Care denied the existence of any such agreement, and filed
counterclaims against plaintiffs, including claims for monies owed under two
terminated franchise agreements with certain of plaintiffs. By order dated
September 28, 1993, the court granted Option Care's motion for summary judgment
on all counts of the amended complaint and entered judgment in favor of Option
Care on several of its counterclaims. The plaintiffs appealed the district
court's ruling to the United States Court of Appeals for the Ninth Circuit,
which, on February 22, 1996, affirmed the district court's decision. The
Plaintiffs then petitioned the Supreme Court of the United States for a writ of
certiorari. The Supreme Court of the United Stated denied the petition for a
writ of certiorari on October 7, 1996.
Despite the inherent uncertainties of litigation, management of the Company
at this time does not believe that the lawsuits will have a material adverse
impact on the financial condition of the Company.
The Company is also a party to other legal proceedings incidental to its
business. The Company does not believe that these other legal proceedings will
have a material adverse impact on its financial position or results of
operations.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through the
solicitation of proxies, or otherwise during the fourth quarter of the fiscal
year ended December 31, 1996.
EXECUTIVE OFFICERS
The names, ages and positions of the executive officers of the Company are set
forth below. Executive officers of the Company serve at the discretion of the
Board of Directors.
NAME AGE POSITION
- ---- --- --------
Erick E. Hanson 50 President, Chief Executive Officer and
Director
Cathy Bellehumeur 46 Senior Vice President, General Counsel
and Secretary
Paul S. Jurewicz 41 Senior Vice President and Chief Financial
Officer
James W. Duncan 57 Senior Vice President
All executive officers are elected for one year terms. There are no family
relationships between any of the Company's executive officers and directors and
there are no arrangements or understandings between any of the executive
officers and any other person pursuant to which the executive officer was
selected as an officer.
Mr. Erick E. Hanson joined the Company as Senior Vice President in April
1995, was appointed Executive Vice President and Chief Operating Officer in
August 1995, and was appointed Director and President in March 1996. Mr. Hanson
was appointed Chief Executive Officer in April 1996. From November 1991 to
April 1995 Mr. Hanson held executive positions, including that of Vice President
Corporate Sales and Marketing, at Caremark, Inc., in Northbrook, IL. From April
1989 to November 1991 Mr. Hanson served as President and Chief Operating Officer
of Clinical Partners, Inc. in Boston, MA. Prior to April 1989, Mr. Hanson was
with Blue Cross & Blue Shield of Indiana for over twenty years, holding a
variety of executive positions with that organization.
Ms. Cathy Bellehumeur has been General Counsel since February 1994,
Secretary since March 1994, Vice President since August 1994 and Senior Vice
President since January 1997. Prior to joining the Company, Ms. Bellehumeur was
an attorney in private practice with Ross & Hardies, Chicago, Illinois from
August 1991 to January 1994.
14
Mr. Paul S. Jurewicz has been Chief Financial Officer and Senior Vice
President-Finance since January 1997. Prior to joining the Company, Mr. Jurewicz
was Chief Financial Officer of Health Management Inc. from December 1995 through
December 1996 and served in various financial executive positions at Caremark
International from 1985 through 1995.
Mr. James Duncan has been Senior Vice President of Option Care, Inc. and
President of Option Care Enterprises, Inc. since January 1997. Prior to joining
the Company, Mr. Duncan was Executive Vice President and Chief Operating Officer
of Medisense, Inc., a medical device manufacturer, from February 1995 through
September 1995. Mr. Duncan also served as President and Chief Executive Officer
of Cardiac Alliance, Inc. from September 1991 through August 1994.
For purposes of determining the aggregate market value of the Company's
common stock held by non-affiliates, shares held by all directors and executive
officers of the Company have been excluded. The exclusion of such shares is not
intended to, and shall not, constitute a determination as to which persons may
be "affiliates" of the Company as defined by the Securities and Exchange
Commission.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "OPTN". The following table sets forth, for the periods indicated,
the high and low sales prices for the Company's common stock.
RANGE OF HIGH AND LOW SALES PRICE INFORMATION
CALENDAR QUARTER HIGH LOW
---------------- ---- ---
1996
----
First Quarter $4.50 $3.12
Second Quarter $8.38 $4.12
Third Quarter $7.88 $5.75
Fourth Quarter $6.62 $4.75
1995
----
First Quarter $3.38 $1.75
Second Quarter $4.38 $2.88
Third Quarter $5.12 $2.62
Fourth Quarter $5.25 $3.00
As of December 31, 1996, there were approximately 319 holders of record of
the Company's Common Stock. Closing price at January 31, 1997 was $6.813 per
share as reported by the Nasdaq National Market.
15
The Company did not pay cash dividends in 1995 or 1996, and is prohibited
by its revolving credit agreement with PNC Bank from doing so. See Note 4 of
Notes to Consolidated Financial Statements.
On September 19, 1996 the Company sold two hundred fifty thousand (250,000)
unregistered shares of common stock of the Company to Linda J. Addison. No
underwriters were utilized in this transaction. This sale was made in
consideration of and in exchange for two hundred fifty (250) shares of Addison
Home Care, Inc. pursuant to an Agreement and Plan of Merger under which the
Company purchased all of the issued and outstanding shares of Addison Home Care,
Inc. These shares were not registered under (I) the Securities Act of 1933, as
amended (the "Act"), by reason of an exemption to registration provided under
Section 4(2) of the Act; (II) The Illinois Securities Law of 1953, as amended,
by reason of their issuance pursuant to the exemption provided by Section 3(g)
and the rules and regulations promulgated thereunder or (III) the Texas
Securities Act, as amended by reasons of their issuance pursuant to the
exemption provided by Section 6(F) and the rules and regulations promulgated
thereunder. In order to convert these unregistered shares into registered shares
Linda J. Addison must send written notice to the Company demanding that all of
such unregistered shares in the Company be registered under the Act, which
demand must be made within two years of the date of the sale, or such shorter
period as may be specified from time to time by Rule 144(d) under the Act or any
successor rule relating to the resale of "restricted stock".
On September 19, 1996 the Company sold two hundred fifty thousand (250,000)
unregistered shares of common stock of the Company to Jerry G. Addison. No
underwriters were utilized in this transaction. This sale was made in
consideration of and in exchange for two hundred fifty (250) shares of Addison
Home Care, Inc. pursuant to an Agreement and Plan of Merger under which the
Company purchased all of the issued outstanding shares of Addison Home Care,
Inc. These shares were not registered under (I) the Securities Act of 1933, as
amended (the "Act"), by reason of an exemption to registration provided under
Section 4(2) of the Act; (II) The Illinois Securities Law of 1953, as amended,
by reason of their issuance pursuant to the exemption provided by Section 3(g)
and the rules and regulations promulgated thereunder or (III) the Texas
Securities Act, as amended by reasons of their issuance pursuant to the
exemption provided by Section 6(F) and the rules and regulations promulgated
thereunder. In order to convert these unregistered shares into registered
shares Jerry G. Addison must send written notice to the Company demanding that
all of such unregistered shares in the Company be registered under the Act,
which demand must be made within two years of the date of the sale, or such
shorter period as may be specified from time to time by Rule 144(d) under the
Act or any successor rule relating to the resale of "restricted stock".
On December 29, 1995 the Company sold sixty-five thousand eight hundred
eighty-seven (65,887) shares of unregistered shares of common stock of the
Company to Greg Steinhoff. No underwriters were utilized in this transaction.
This sale was made in consideration of and in exchange for one thousand (1000)
shares of Pharmacy I.V. Associates, Inc. and six thousand six hundred sixty-six
and two-thirds (6,666.2/3) shares of Home Care of Boone County, Inc. These
shares were not registered under (I) the Securities Act of 1933, as amended (the
"Act"), by reason of an exemption to registration provided under Section 4(2) of
16
the Act; or (II) Section 409.402(b)(10) of the Missouri statutes. Before Greg
Steinhoff may transfer any of such shares, Steinhoff shall give Company written
notice of his intention to effect such transfer, which notice shall describe the
manner of the proposed transfer and, if requested by Company, shall be
accompanied by an opinion of counsel, obtained by Steinhoff, satisfactory to
Company, to the effect that the proposed transfer may be effected without
registration under the Act or qualification under any applicable state
securities law.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for the
Company for each of the five years ended December 31, 1996. The selected
consolidated financial data are affected by the Company's acquisitions, all of
which were accounted for using the purchase method of accounting, except for
Oklahoma City, which was treated as a pooling of interests. This summary should
be read in conjunction with the consolidated financial statements of the
Company, including the related notes, included elsewhere herein.
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 (1) 1995(1) 1994 1993 1992
--------- -------- --------- -------- --------
Revenues:
Patient care services................................ $49,035 $41,989 $34,703 $23,861 $18,699
Royalty fees and other............................... 12,193 12,517 11,915 12,323 11,960
Product sales.......................................... 9,293 10,997 15,401 16,659 12,940
------ ------- ------- ------- -------
Total revenues...................................... 70,521 65,503 62,019 52,843 43,599
------ ------- ------- ------- -------
Cost of revenues:
Patient care services operations..................... 29,038 24,838 19,947 14,392 8,813
Products sold to franchises and patients............. 22,160 22,275 23,401 19,859 16,275
------ ------- ------- ------- -------
Total cost of revenues............................ 51,198 47,113 43,348 34,251 25,088
------ ------- ------- ------- -------
Gross profit.......................................... 19,323 18,390 18,671 18,592 18,511
Operating expenses:
Selling, general and administrative.................. 10,676 10,709 12,112 11,534 9,692
Provision for doubtful accounts...................... 1,861 1,653 1,899 2,044 1,322
Amortization of goodwill............................. 960 914 825 729 694
Asset write-offs and other charges (2)............... 24,164 --- 6,536 --- ---
Reorganization expenses (2).......................... --- --- --- 4,250 ---
------ ------- ------- ------- -------
Total operating expenses........................... 37,661 13,276 21,372 18,557 11,708
------ ------- ------- ------- -------
Operating income (loss)............................... (18,338) 5,114 (2,701) 35 6,803
Other income (expense), net........................... 380 93 130 808 (231)
------ ------- ------- ------- -------
Income (loss) before income taxes..................... (17,958) 5,207 (2,571) 843 6,572
Provision (benefit) for income taxes.................. 2,298 2,219 (593) 571 2,883
------ ------- ------- ------- -------
Net income (loss).................................... $(20,256) $ 2,988 $(1,978) $ 272 $ 3,689
========= ======== ======== ======== =======
Net income (loss) per common share................... $ (1.93) $ 0.29 $ (0.19) $ 0.03 $ 0.36
========= ======== ======== ======== =======
Dividends per common share............................ $ --- $ --- $ --- $ --- $ ---
========= ======== ======== ======== =======
Average common and common equivalent
shares outstanding................................... 10,494 10,453 10,435 10,383 10,130
========= ======== ======== ======== =======
17
BALANCE SHEET DATA:
(IN THOUSANDS)
DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ------------ ---------- ----------- -----------
Accounts receivable..... $20,558 $16,558 $16,575 $14,978 $10,287
Working capital......... 21,458 16,131 16,614 12,204 9,833
Intangible assets....... 9,832 30,328 30,554 30,720 28,352
Total assets............ 44,041 58,997 59,525 60,314 49,143
Long-term debt.......... 12,461 6,696 9,517 6,759 523
Stockholders' equity... $23,540 $43,506 $40,847 $43,209 $41,713
_______________
(1) Refer to Note 2 in the Notes to Consolidated Financial Statements for
information regarding businesses acquired in fiscal 1995 and 1996.
(2) Refer to Note 9 in the Notes to Consolidated Financial Statements. The
Company recorded a write-off of certain assets in 1994 and a write-off of
certain intangible assets in 1996.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Option Care, Inc. (the "Company") is a full service home healthcare
provider with a supporting franchise network. The Company offers infusion
therapy, nursing services, respiratory therapy and durable medical equipment
through its owned locations and infusion therapy through its franchise network.
The Company has also developed capability to manage networks of outpatient
service providers.
RESULTS OF OPERATIONS
The Company's revenues are derived primarily from three sources: (i)
patient care services from Company-owned offices, (ii) royalty fees and other
revenues from franchise owners and (iii) product sales to the franchised
locations. Revenues from network management were immaterial during the
reporting periods. The following table sets forth the percentage relationships
that certain items from the Company's Consolidated Statements of Operations bear
to revenues for the years ended December 31, 1996, 1995, and 1994. This
information should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto contained elsewhere in this Annual Report
on Form 10-K:
1996 1995 1994
------ ------ ------
Revenues
Patient care services 69.5% 64.1% 56.0%
Royalty fees and other 17.3 19.1 19.2
Product sales 13.2 16.8 24.8
----- ----- -----
Total revenues 100.0 100.0 100.0
Gross profit 27.4 28.1 30.1
Selling, general &
administrative expenses 15.1 16.3 19.5
Operating income (loss) (26.0) 7.8 (4.4)
Net income (loss) (28.7%) 4.6% (3.2%)
====== ===== ======
1996 COMPARED TO 1995
For 1996, total revenue rose 7.7 percent to $70,521,000 from $65,503,000 in
1995. Patient care services revenue rose 16.8 percent, primarily reflecting the
results of 1996 acquisitions as well as a full year's operations of the
Company's 1995 acquisitions. Product sales revenue decreased 15.5 percent or
$1,704,000 due primarily to management's transition to direct billing of
franchisees by selected manufacturers, which was completed in mid-1996. The
administrative fees that the Company recognizes from such sales are recorded as
other income rather than as revenue. Management expects the transition to
continue to have a negative effect on gross profit but an immaterial effect on
net income. Royalty fees and other revenue decreased 2.6 percent, reflecting
the acquisition of several large franchises in 1996. The Company sold fourteen
new
19
franchises during 1996, and terminated or consolidated fifteen franchises,
continuing the trend towards consolidation. The Company has only two franchise
agreements up for renewal before 2004. Management generally makes extensive
efforts to renew its franchise agreements, since existing franchises provide a
greater royalty stream than new franchises. The terms of the renewal agreements
may not be identical to those under existing agreements. Though the loss of
larger, mature franchises tends to reduce royalties, the Company expects
increased patient care services revenue to offset the decrease in royalty fees
and product sales revenue.
Gross profit increased 5.1 percent for the year to $19,323,000, primarily
due to increased patient care services revenue. As a percentage of revenues,
gross profit declined from 28.1 percent to 27.4 percent. The decline in gross
margin is due primarily to changes in the Company's revenue mix, specifically
the decline in royalty fees and product sales coupled with growth in patient
care service revenue. Revenues from patient care services (associated with
Company-owned Option Care offices) have a higher cost of revenue than the
Company's franchise business, which is generally associated with revenues from
royalty and other fees. Three owned office locations were sold and three
locations closed in 1996 due to population demographics and financial trends
which limited the potential for long-term profitability. These transactions
were part of management's program to improve profitability of Company operations
through a reduced cost structure. Management will continue to evaluate the
profitability of operations as it also evaluates strategies to increase
revenues.
Total operating expenses increased 183.7 percent to $37,661,000 from
$13,276,000 in 1995. Selling, general and administrative expenses decreased 0.3
percent as a result of increased personnel productivity. The Company's
provision for doubtful accounts increased 12.6% or $208,000, due to increased
patient care service revenue. Amortization of goodwill increased 5.0 percent due
to 1995 and 1996 acquisitions. During 1996, the Company recognized $24,164,000
in non-cash charges relating to write-offs of goodwill. This write-off
primarily relates to goodwill recorded through pushdown accounting for a change
of control in 1990, as well as goodwill related to prior year acquisitions. The
write-off resulted from the Company's stated objective of purchasing existing
franchises as well as from evaluation of expected future cash flows for
purchased businesses. If the effect of these 1996 charges is excluded, total
operating expenses increased 1.7 percent in 1996.
The effective combined federal and state income tax rate was negative 12.8
percent and 42.6 percent for 1996 and 1995, respectively. The effective tax
rate is higher than the federal statutory tax rate of 34% due to state taxes and
to non-tax deductible expenses, primarily goodwill amortization. Goodwill
amortization is a fixed expense, so the effective tax rate decreases as pre-tax
income increases. The 1996 negative effective tax rate is due to the non-
deductible nature of the write-off of goodwill. The Company had a net loss of
$20,256,000 in 1996 versus net income of $2,988,000 in 1995. Net income for
1996 was $3,563,000 excluding the write-off of goodwill.
20
1995 COMPARED TO 1994
For 1995, total revenue rose 5.6 percent to $65,503,000 from $62,019,000 in
1994. Patient care services revenue rose 21.0 percent, primarily reflecting a
full year's operations of the Company's 1994 acquisitions as well as the results
of 1995 acquisitions. Same store growth of patient care services revenue was
approximately 7.1 percent in 1995. Product sales revenue decreased 28.6 percent
or $4,400,000 due primarily to management's planned transition to direct
billing of franchisees by selected manufacturers. The administrative fees that
the Company recognizes from such sales are recorded as other income rather than
as revenue. Management expects the transition to continue to have a negative
effect on gross profit but an immaterial effect on net income. Royalty fees and
other revenue increased 5.1 percent, reflecting increased fees earned from new
franchise sales. The Company sold thirteen new franchises during 1995, and
terminated or consolidated twenty franchises, continuing the trend towards
consolidation.
Gross profit decreased 1.5 percent for the year to $18,390,000, primarily
due to the planned decline in product sales. This decline in gross profit was
substantially offset by increased vendor administration fees recorded as other
income. As a percentage of revenues, gross profit declined from 30.1 percent to
28.1 percent. The decline in gross margin is due primarily to changes in the
Company's revenue mix, specifically the decline in product sales coupled with
growth in patient care service revenue. Revenues from patient care services
(associated with Company-owned offices) have a higher cost of revenue than the
Company's franchise business, which is generally associated with revenues from
royalty and other fees. Two owned office locations were closed in the third
quarter of 1995 due to population demographics and financial trends which
limited the potential for long-term profitability. The closures were part of
management's program to improve profitability of Company operations through a
reduced cost structure. Management will continue to evaluate the profitability
of operations as it also evaluates strategies to increase revenues.
Total operating expenses decreased 37.9 percent to $13,276,000 from
$21,372,000 in 1994. Selling, general and administrative expenses decreased
11.6 percent as a result of increased personnel productivity and streamlining of
headquarters operations. The Company's provision for doubtful accounts
decreased 13.0% or $246,000, with increased expense associated with increased
patient care revenue offset by decreased expense on the franchise business due
to improved receivable aging. Amortization of goodwill increased 10.8 percent
due to 1994 and 1995 acquisitions. During 1994, the Company recognized
$6,536,000 in primarily non-cash charges relating to write-offs of notes
receivable and capitalized software development costs, additional reserves for a
note receivable, and severance. If the effect of these 1994 charges is
excluded, total operating expenses decreased 10.5 percent in 1995.
The effective combined federal and state income tax rate was 42.6 percent
and 23.1 percent (benefit) for 1995 and 1994, respectively. The 1995 effective
tax rate is higher than the federal statutory tax rate of 34% due to state taxes
and to non-tax deductible expenses, primarily goodwill amortization. Goodwill
amortization is a fixed expense, so the effective tax rate decreases as pre-tax
income increases. The Company had net income of $2,988,000 in 1995 versus a net
loss of $1,978,000 in 1994.
21
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of
$1,223,000. Working capital at that date was $21,458,000 versus $16,131,000 at
December 31, 1995. The Company attempts to manage its cash balances to minimize
interest expense on its line of credit borrowing. The Company has implemented
strict policies and procedures for controlling cash collections and
disbursements.
As indicated in Note 4 to the Consolidated Financial Statements, in 1996
the Company entered into a $30 million revolving credit arrangement, subject to
certain financial covenants. The credit availability was increased to $35
million in early 1997. Management believes that cash flow from operations, in
conjunction with borrowing availability under its credit facility, will be
sufficient to meet the cash needs of the business for the immediate future, but
additional long-term financing may be needed to meet the Company's acquisition
plans. There are no guarantees that such financing will be available or
available at an acceptable cost.
There are currently various proposals under development to enact health
care reform on a national, state and local level. It is not possible at this
time to predict the cash flow impact, if any, which any such changes may have
on providers of home healthcare services and on the Option Care locations.
22
QUARTERLY INFORMATION
Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 1996 and 1995 (in
thousands, except per share data):
QUARTER
1996: FIRST SECOND THIRD FOURTH
- ----- ----- ------ ----- ------
Total revenues $15,706 $18,110 $18,019 $ 18,686
Gross profit 4,582 5,027 5,120 4,594
Pretax income (loss) 1,523 1,538 1,653 (22,672)
Net income (loss) 850 866 1,004 (22,976)
Earnings (loss)
per share $ .08 $ .08 $ .09 $ (2.18)
======= ======= ======= ========
1995: FIRST SECOND THIRD FOURTH
- ----- ----- ------ ----- ------
Total revenues $16,168 $16,915 $16,186 $ 16,234
Gross profit 4,671 4,925 4,560 4,234
Pretax income 1,215 1,516 1,508 968
Net income 666 888 873 561
Earnings
per share $ .06 $ .08 $ .08 $ .05
======= ======= ======= ========
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and its
subsidiaries, and the Independent Auditors' Report thereon are included on pages
23 through 37 of this Annual Report on Form 10-K.
PAGE
----
Independent Auditors' Report................................................ 24
Consolidated Balance Sheets - December 31, 1996 and 1995.................... 25
Consolidated Statements of Operations - Years Ended
December 31, 1996, 1995 and 1994.......................................... 27
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1996, 1995 and 1994.......................................... 28
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, 1995 and 1994.......................................... 29
Notes to Consolidated Financial Statements.................................. 30
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Option Care, Inc.:
We have audited the consolidated financial statements of Option Care, Inc.
and subsidiaries as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 financial position of Option Care,
Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
March 5, 1997
25
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
1996 1995
------- -------
Current assets:
Cash and cash equivalents...................... $ 1,223 $ 502
Trade accounts receivable, less allowance
for doubtful accounts of $1,738 in 1996
and $1,273 in 1995........................... 20,558 16,558
Current portion of notes receivable and
net investment in direct financing
leases, less allowance for uncollectible
notes of $116 in 1996 and $342 in 1995...... 1,202 1,668
Inventory...................................... 1,598 1,395
Deferred income taxes.......................... 1,154 1,402
Other assets................................... 3,081 2,081
------- -------
Total current assets................. 28,816 23,606
Notes receivable and net investment in direct
financing leases, less current portion....... 539 1,076
Property and equipment, net of accumulated
depreciation and amortization................ 4,322 3,502
Goodwill, net.................................. 7,873 30,228
Other assets................................... 2,491 585
------- -------
Total assets......................... $44,041 $58,997
======= =======
See accompanying notes to consolidated financial statements.
26
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
--------- -------
Current liabilities:
Current portion of long-term debt.................. 1,399 1,341
Trade accounts payable............................. 2,685 2,947
Accrued wages and related employee benefits........ 1,838 1,940
Accrued expenses................................... 1,436 1,247
-------- -------
Total current liabilities...................... 7,358 7,475
-------- -------
Long-term debt, less current portion............... 12,461 6,696
Deferred income taxes.............................. 637 1,024
Minority interest.................................. 45 296
-------- -------
Total liabilities.............................. 20,501 15,491
-------- -------
Stockholders' equity:
Common stock, $.01 par value, 30,000,000
shares authorized, 10,527,000 and 10,415,000
shares issued and outstanding at December 31,
1996 and 1995, respectively.................... 106 105
Additional paid-in capital....................... 41,517 41,151
Retained earnings (deficit)...................... (18,083) 2,250
-------- -------
Total stockholders' equity..................... 23,540 43,506
-------- -------
Total liabilities and
stockholders' equity......................... $ 44,041 $58,997
======== =======
See accompanying notes to consolidated financial statements.
27
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
--------- -------- --------
Revenues:
Patient care services................. $ 49,035 $41,989 $34,703
Royalty fees and other................ 12,193 12,517 11,916
Product sales......................... 9,293 10,997 15,401
-------- ------- -------
Total revenues................... 70,521 65,503 62,019
Cost of revenues:
Patient care services operations..... 29,038 24,838 19,947
Products sold to franchises and
patients............................ 22,160 22,275 23,401
-------- ------- -------
Total cost of revenues........... 51,198 47,113 43,348
-------- ------- -------
Gross profit........................... 19,323 18,390 18,671
Operating expenses:
Selling, general and administrative
expenses........................... 10,676 10,709 12,112
Provision for doubtful accounts...... 1,861 1,653 1,899
Amortization of goodwill............. 960 914 825
Asset write-offs and other charges... 24,164 --- 6,536
-------- ------- -------
Total operating expenses......... 37,661 13,276 21,372
-------- ------- -------
Operating income (loss)................ (18,338) 5,114 (2,701)
Other income (expense), net:
Interest expense..................... (550) (403) (709)
Other, net........................... 930 496 839
-------- ------- -------
Total other income, net................ 380 93 130
-------- ------- -------
Income (loss) before income taxes...... (17,958) 5,207 (2,571)
Provision (benefit) for income taxes... 2,298 2,219 (593)
-------- ------- -------
Net income (loss).................... $(20,256) $ 2,988 $(1,978)
======== ======= =======
Net income (loss) per common and
common equivalent share.............. $(1.93) $0.29 $(0.19)
======== ======= =======
Weighted average common and common
equivalent shares outstanding........ 10,494 10,453 10,435
======== ======= =======
See accompanying notes to consolidated financial statements.
28
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
------ ----------- ---------- --------------
BALANCES, DECEMBER 31, 1993............ 105 $41,273 $ 1,832 $ 43,210
------ ------- -------- --------
Net loss............................... --- --- (1,978) (1,978)
Distribution from Subchapter S
Corporation.......................... --- --- (404) (404)
Issuance of common stock............... --- 20 --- 20
------ ------- -------- --------
BALANCES, DECEMBER 31, 1994............ 105 41,293 (550) 40,848
------ ------- -------- --------
Net income............................. --- --- 2,988 2,988
Distribution from Subchapter S
Corporation.......................... --- --- (188) (188)
Issuance (retirement) of common stock --- (142) --- (142)
------ ------- -------- --------
BALANCES, DECEMBER 31, 1995............ 105 41,151 2,250 43,506
------ ------- -------- --------
Net loss............................... --- --- (20,256) (20,256)
Distribution from Subchapter S
Corporation.......................... --- --- (77) (77)
Issuance of common stock............... 1 366 --- 367
------ ------- -------- --------
BALANCES, DECEMBER 31, 1996............ $106 $41,517 $(18,083) $ 23,540
====== ======= ======== ========
See accompanying notes to consolidated financial statements.
29
OPTION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
1996 1995 1994
--------- -------- ---------
Cash flows from operating activities:
Net income (loss)............................... $(20,256) $ 2,988 $(1,978)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............... 2,521 2,078 1,919
Asset write-offs and other charges.......... 24,164 --- 6,536
Provision for doubtful accounts............. 1,861 1,654 1,899
Changes in assets and liabilities, net
of effects from purchase of infusion
therapy companies:
Accounts and notes receivable............... (2,320) (2,171) (3,836)
Inventory................................... 180 (42) 343
Other current assets........................ (1,205) 31 (227)
Deferred income taxes....................... (139) 573 (343)
Accounts payable............................ (1,015) 687 481
Accrued expenses and minority interest. (975) (1,212) (1,969)
-------- ------- -------
Net cash provided by
operating activities............... 2,816 4,586 2,825
-------- ------- -------
Cash flows from investing activities:
Payments for purchase of property
and equipment............................. (1,423) (1,010) (1,587)
Additions to other assets................... (426) (411) (1,382)
Payments for acquisitions, net
of cash acquired.......................... (4,636) (7) (871)
-------- ------- -------
Net cash used by
investing activities.............. (6,485) (1,428) (3,840)
-------- ------- -------
Cash flows from financing activities:
Net (payments) borrowing under
line-of-credit agreement.................. 5,800 (1,920) 3,600
Proceeds from (payments on) long-term
debt and capitalized leases............... (543) 340 (365)
Repayments of notes payable................. (1,157) (1,141) (1,868)
Issuance (retirement) of common stock,
net of related costs...................... 367 (142) 20
Distribution from S Corporation............. ( 77) (188) (404)
-------- ------- -------
Net cash provided (used)by
financing activities.................... 4,390 (3,051) 983
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents.............................. 721 107 (32)
Cash and cash equivalents, beginning of year 502 395 427
-------- ------- -------
Cash and cash equivalents, end of year.......... $ 1,223 $ 502 $ 395
======== ======= =======
See accompanying notes to consolidated financial statements.
30
OPTION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Option Care, Inc. is a full service provider of home healthcare services.
The Company was incorporated in Delaware on July 9, 1991. The Company's
predecessor was incorporated in California in January 1984. As of December 31,
1996, 187 Option Care locations were operating in assigned territories in 37
states. Existing offices include 165 locations owned and operated by franchise
owners and 22 locations owned and operated by the Company.
(B) CONSOLIDATION
The financial statements include Option Care, Inc. and its 50 percent or
more owned subsidiaries. The Company uses the cost method to account for
affiliates less than 20 percent owned. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(C) INVENTORY
Inventory, which consists of medical supplies, pharmaceuticals, and
displays and brochures is stated at cost, which approximates market, on a first-
in, first-out (FIFO) basis.
(D) PROPERTY AND EQUIPMENT
Property and equipment 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 or double
declining balance method over the estimated useful lives of the assets (3-7
years for equipment). Leasehold improvements and equipment purchased under
capital leases are both amortized on the straight-line method over the shorter
of the lease term or estimated useful life of the asset.
(E) GOODWILL
Goodwill, which represents the excess of fair market value over the cost of
net assets acquired, is amortized on a straight-line basis over 40 years.
Accumulated amortization was $592,000, $3,753,000, and $2,805,000 at December
31, 1996, 1995, and 1994, respectively.
The Company assesses the recoverability of goodwill related to acquired
franchises by determining whether the amortization of such goodwill balance over
its remaining life can be recovered through undiscounted future operating cash
flows of the acquired operations. With regard to other goodwill, the Company
31
assesses impairment of this asset based on several factors, including probable
fair market value, cash flows, and the aggregate value of the franchise business
as a whole. See Note 9 of Notes to Consolidated Financial Statements.
(F) INCOME TAXES
The Company files a consolidated federal income tax return with all of its
80 percent or more owned subsidiaries.
(G) PATIENT CARE SERVICES REVENUES
A substantial portion of the Company's revenues are billed to third-party
payors. These revenues are recognized when service is provided, net of
contractual allowances. Payment from third-party payors is dependent upon the
specific benefits provided in the patient's policy. The Company adjusts
recognized revenues and the carrying value of patient receivables to provide for
the difference between billed charges and expected collections.
(H) ROYALTY FEES AND OTHER REVENUES
Royalty fees and other revenues consist primarily of initial franchise fees
and royalty fees. Initial franchise fees are recognized when the franchise
training is completed and substantially all services have been provided. Royalty
fees are recognized when cash is reported as received by the franchises.
Franchise agreements provide for royalties to be paid to the Company based on
either 9 percent of gross cash receipts (subject to certain minimums and
discounts), or on a sliding scale ranging from 9 percent to 2 percent of gross
cash receipts depending on the levels of such receipts and other factors.
(I) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based upon average common and common
equivalent shares outstanding. Common equivalent shares include the dilutive
effect of stock options, if any.
(J) STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
(L) FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments approximates their
carrying value.
32
(2) BUSINESS COMBINATIONS
At various dates during 1996, the Company purchased the assets of
franchises located in Bethel and Milford, OH, Everett, WA and Kennewick, WA as
well as all the outstanding stock of the franchise located in Oklahoma City, OK.
The Company also purchased the outstanding minority interest in the Bullhead
City, AZ location. The Company also purchased the assets of other healthcare
related businesses in Bethel and Milford, OH, Kirksville, MO, Jefferson City,
MO, Bullhead City, AZ, Grand Junction, CO, Little Rock, AR, Ontario, CA and
Houston, TX. The aggregate purchase price for these transactions, except for the
Oklahoma City acquisition was $7,220,000, of which $4,636,000 was paid in cash,
$1,305,000 in short-term obligations, $471,000 in long-term obligations and
$808,000 in forgiveness of accounts receivable. The purchase method of
accounting was used and $2,518,000 of goodwill was recorded.
The Oklahoma City franchise, which was acquired through the issuance
of 500,000 shares of common stock, was treated as a pooling of interests, and
the accompanying financial statements have been restated by immaterial amounts
to reflect this transaction. The accompanying financial statements include the
results of operations of all other acquired businesses from the date of
acquisition. The unaudited pro-forma results of operations, affected by the
acquisitions accounted for as purchases as if they had occurred as of January 1,
1995, was as follows (in thousands, except per share data):
1996 1995
--------- --------
Net Revenue $ 77,502 $88,017
Net Income (Loss) (20,233) 3,397
Net Income (Loss) per
common equivalent share (1.93) 0.32
At various dates during 1995, the Company purchased the outstanding
minority interest in its Columbia, MO and Dallas, TX locations as well as the
assets of franchises located in Danbury, CT and Mansfield, OH. The aggregate
purchase price for these transactions was $1,272,000, of which $441,000 was paid
in cash, $244,000 in short-term notes, $91,000 in long-term notes, and $496,000
in forgiveness of accounts receivable. The purchase method of accounting was
used and $452,000 of goodwill was recorded. The accompanying financial
statements include the results of operations of these acquired businesses from
the date of acquisition. Had the acquisitions taken place at the beginning of
1994, the effect on the Company's financial position and results of operations
would have been immaterial.
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
1996 1995
--------- ---------
Equipment..................................... $ 8,604 $ 6,968
Leasehold improvements........................ 748 613
--------- ---------
9,352 7,581
Less accumulated depreciation and
amortization................................ 5,030 4,079
--------- ---------
$ 4,322 $ 3,502
========= =========
33
(4) LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
1996 1995
-------- -------
Payable under lines of credit.................... $ 11,900 $ 6,100
Notes payable, secured by various assets,
with maturities through 2005 at interest
rates ranging from 6.0% to 10.5%................ 1,640 1,627
Capitalized lease obligations.................... 320 310
-------- -------
13,860 8,037
Less current portion............................. 1,399 1,341
-------- -------
Long-term debt................................... $ 12,461 $ 6,696
======== =======
Maturities of long-term debt and capitalized lease obligations are as follows
(in thousands):
CAPITALIZED
YEAR ENDING LONG-TERM LEASE
DECEMBER 31, DEBT OBLIGATIONS
------------ --------- -----------
1997........................................... $ 1,205 $ 207
1998........................................... 12,010 88
1999........................................... 91 51
2000........................................... 42 0
2001 and beyond................................ 192 0
-------- ----------
$13,540 346
========
Less amounts representing interest.............. 26
----------
Present value of net minimum lease payments..... $ 320
==========
All equipment purchased under capital leases is pledged as collateral.
In December 1996, the Company entered into a $30,000,000 revolving credit
agreement ($15,000,000, $10,000,000 and $5,000,000 with PNC Bank, Harris Bank
and The Northern Trust Company, respectively), of which there were outstanding
borrowings of $11,900,000 at December 31, 1996. The agreement was amended in
early 1997 to increase the maximum available amount to $35,000,000 and to add
The First National Bank of Chicago to the lending syndicate. Borrowing under
this revolving credit facility will be used to satisfy the Company's working
capital requirements, as needed, and to fund acquisitions. The total outstanding
principal balance is payable in full on December 20, 1998. Outstanding
borrowings under this facility currently bear interest at the lenders' prime
rate plus 0.5 percent, which interest rate was 8.75 percent at December 31,
1996.
The agreement provides that an annual commitment fee be paid by the Company
based on 0.375 percent average daily unused amount of the facility. The
agreement also requires the Company to maintain certain financial covenants
including, but not limited to: maximum leverage ratio, minimum interest coverage
ratio, minimum net worth and minimum capitalization. The agreement prohibits the
Company from declaring any cash dividends on its common stock. The revolving
credit facility is secured by all of the issued and outstanding common stock of
the Company and it's subsidiaries.
34
(5) LEASE COMMITMENTS
The Company leases certain medical equipment under long-term lease
agreements. Most of the lease agreements have a term of 36 months and are
classified as capital leases. A majority of the medical equipment leased under
capital leases has been subleased to franchises.
The Company leases office space under leases which are classified as
operating leases. Operating lease expense for 1996, 1995 and 1994 was
$2,609,000, $2,100,000, and $1,570,000, respectively. The future minimum lease
payments for these leases are as follows:
YEAR ENDING DECEMBER 31,
1997............................................... $1,479,000
1998............................................... 1,059,000
1999............................................... 754,000
2000............................................... 592,000
2001 and beyond.................................... 730,000
----------
$4,614,000
==========
(6) RETIREMENT PLAN
All employees who have attained the age of 20 1/2 with one year's service
are eligible for participation in the Company's 401(k) Plan. The expense
recognized in 1996, 1995, and 1994 related to this plan totaled $298,000,
$421,000, and $392,000, respectively. The employer's matching contribution is a
percentage of the amount contributed by each employee and is funded on a current
basis. The restated amounts for 1995 and 1994 include discretionary
contributions to the Oklahoma City retirement plan.
(7) INCOME TAXES
The income tax provision (benefit) consisted of the following (in
thousands):
CURRENT DEFERRED TOTAL
-------- --------- --------
1996:
Federal............................... $ 2,012 $ (108) $ 1,904
State................................. 425 (31) 394
-------- --------- --------
$ 2,437 $ (139) $ 2,298
======== ========= ========
1995:
Federal............................... $ 1,214 $ 443 $ 1,657
State................................. 433 129 562
-------- --------- --------
$ 1,647 $ 572 $ 2,219
======== ========= ========
1994:
Federal............................... $ (6) $ (450) $ (456)
State................................. 64 (201) (137)
-------- --------- --------
$ 58 $ (651) $ (593)
======== ========= ========
35
Income tax expense (benefit) differs from the "expected" tax expense
(benefit) for those years computed by applying the U.S. Federal corporate income
tax rate of 34% to earnings (loss) before income taxes as follows (in
thousands):
1996 1995 1994
-------- -------- -------
Computed "expected" tax expense
(benefit)....................................... $(6,124) $ 1,669 $ (818)
Increase in income taxes resulting
from:
Amortization & writeoff of
goodwill..................................... 8,248 262 281
State income taxes, net of federal
income tax benefit........................... 260 371 (91)
Other, net..................................... (86) (83) 35
-------- -------- -------
Total provision (benefit)...................... $ 2,298 $ 2,219 $ (593)
======== ======== =======
Deferred tax assets and (liabilities) at December 31, 1996 and 1995
include:
1996 1995
-------------------- --------------------
CURRENT NONCURRENT CURRENT NONCURRENT
-------- ---------- -------- ----------
Allowance for doubtful
accounts $ 939 $ --- $ 614 $ ---
Allowance for notes
receivable 46 --- 115 ---
Accrued expenses 256 --- 695 ---
Non-compete covenant --- --- --- ---
Tax accounting changes (102) (102) (38) ---
Intangible assets --- 160
Capital loss --- 590
Depreciation --- (113) --- (107)
Other, net 15 (582) 16 (917)
------ --------- ------ ---------
$1,154 $ (47) $1,402 $ (1,024)
====== =========
Valuation allowance --- (590)
------ ---------
$1,154 $ (637)
====== =========
The Company has a capital loss carryforward of $1,475,000, which expires in
2001. The valuation allowance of $590,000 and $0 at December 31, 1996 and 1995
respectively, increased due to the capital loss carryforward.
(8) STOCK OPTIONS AND INCENTIVE PLAN
The Company's 1991 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board and approved by the stockholders on September 11, 1991. The
Incentive Plan provides for the award of cash, stock, and stock unit bonuses,
and the grant of stock options and stock appreciation rights (SARs), to officers
and employees of the Company and its subsidiaries and other persons who provide
services to the Company on a regular and substantial basis. The Company has
reserved an aggregate of 1,660,000 shares of Common Stock for issuance under the
36
Incentive Plan. A proposal to increase reserved shares of Common Stock to
2,000,000 will be voted upon at the Company's 1997 Annual Meeting of
Shareholders. All options under the Incentive Plan must be exercised within ten
years after the grant date. As of December 31, 1996, no stock, stock unit
bonuses, or SARs have been granted pursuant to the Incentive Plan.
The following schedule details the changes in the Company's Stock Incentive
Plan for the three years ending December 31, 1996:
1994 1995 1996
-----------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- --------------------- ---------- --------- ---------- -------- --------- ---------
Outstanding at
beginning
of year 886,100 $4.36 868,730 $4.10 870,230 $3.52
Granted 332,920 3.46 665,050 3.49 197,350 4.47
Exercised (5,500) 3.75 (24,625) 2.25 (42,428) 2.66
Terminated (324,790) 4.32 (638,925) 3.60 (59,705) 2.88
--------- --------- --------
Outstanding at
end of year 868,730 4.10 870,230 3.52 965,447 3.58
========= ========= ========
Options exercisable
at year-end 179,995 139,490 317,223
Weighted Average
fair value of
options granted
during the year $1.33 $1.33 $1.71
The following table summarizes information about the Company's Stock Incentive
Plan and options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------------
WEIGHTED-AVG.
RANGE OF NUMBER REMAINING NUMBER
EXERCISE OUTSTANDING CONTRACTUAL WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
PRICES AT 12/31/96 LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- -------- ------------- ------------- -------------- ----------- --------------
$2.25 to $3.38 354,097 7.6 years $2.59 159,448 $2.44
$3.75 to $4.25 393,600 8.2 years $3.95 113,788 $3.75
$4.38 to $7.50 217,750 9.0 years $4.54 43,987 $4.38
------- -------
$2.25 to $7.50 965,447 8.2 years $3.58 317,223 $3.18
======= =======
37
On February 21, 1995, the Stock Option Committee of the Company's Board of
Directors repriced all outstanding employee stock options at the day's closing
price of $2.25. All vesting schedules remained unchanged.
The 1996 Employee Stock Purchase Plan permits eligible employees to acquire
shares of the Company's common stock through payroll deductions not exceeding
15% of base wages, at a 15% discount from market price on the grant date. There
were no shares related to the plan issued during 1996.
The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans.
Had compensation cost for the Company's stock-based compensations plans been
determined based on FASB Statement 123, the Company's net loss and loss per
share in 1996 and net income and earnings per share in 1995 would have been the
pro forma amounts indicated below:
1996 1995
--------- -------
Net income (loss): as reported $(20,256) $2,988
pro forma $(20,410) $2,876
Net income (loss) per common
and equivalent share: as reported $ (1.93) $ 0.29
pro forma $ (1.95) $ 0.28
The fair value of options granted under the Company's stock option plan during
1995 and 1996 was estimated on the date of grant using the Black-Scholes option-
pricing model with the following assumptions used: no dividend yield, expected
volatility of 30%, risk free interest rate of 6.5% and expected lives of 5
years.
(9) REORGANIZATION EXPENSES AND OTHER CHARGES
During 1996, the Company recorded a $24,164,000 non-cash charge related to
write-offs of various intangible assets. These write downs primarily relate to
goodwill recorded through pushdown accounting for a change of control in 1990,
as well as goodwill related to prior year acquisitions. The write-off resulted
from the Company's stated objective of purchasing existing franchises and from
evaluation of estimated future cash flows of acquired businesses.
During 1994, the Company recognized $6,536,000 in primarily non-cash
charges relating to write-offs of notes receivable and capitalized software
development costs, additional reserves for a note receivable, and severance.
(10) COMMITMENTS AND CONTINGENCIES
The Company was a defendant in a lawsuit filed in U.S. District Court,
Eastern District of California, by the former owners of two Option Care
franchises and other entities with which they are affiliated. The plaintiffs
were pursuing claims for breach of contract, breach of the covenant of good
faith and fair dealing, breach of alleged fiduciary duties, promissory estoppel,
and violations of California franchise law. On September 28, 1993, the U.S.
District Court, Eastern District of California, entered summary judgement for
the Company on all claims. The plaintiffs appealed to the United States Court
of Appeals for the Ninth Circuit, which, on February 22, 1996, affirmed the
district court's
38
decision. The plaintiffs then petitioned the Supreme Court of the United States
for a writ of certiorari. The Supreme Court of the United States denied the
petition for a writ of certiorari on October 7, 1996.
The Company is a defendant in a lawsuit filed January 28, 1994 in U.S.
District Court, Clark County, Nevada, by one of the owners of the Las Vegas, NV,
franchise, which the Company managed through a subsidiary. The plaintiff is
pursuing claims for breach of contract, breach of fiduciary duties, fraud,
negligent misrepresentation, and breach of implied covenant of good faith and
fair dealing. The Company believes that the plaintiff's claims are without
merit, and intends to vigorously defend the lawsuit. The Company has filed a
motion to dismiss, which was granted on April 1, 1994 regarding the alleged
breach of fiduciary duty, breach of contract and fraud. There has been no
subsequent pursuit of the remaining claims. Should the plaintiff pursue these
claims in the future, the Company will vigorously contest such claims.
On January 17, 1995, an action entitled Dennis H. Birenbaum v. Option Care,
Inc., Case No. 95-439, was filed with the District Court of Dallas County,
Texas. Plaintiff alleged breach of contract, promissory estoppel and negligent
misrepresentation concerning an alleged agreement for the sale and purchase of
Plaintiff's company. In response, the Company produced evidence showing no
agreement was ever made. Dr. Birenbaum's lawsuit was dismissed and the Company
was awarded summary judgment by the Court. Dr. Birenbaum has filed an appeal
which the Company is vigorously contesting.
Despite the inherent uncertainties of litigation, management of the Company
at this time does not believe that the lawsuits will have a material adverse
impact on the financial condition of the Company.
The Company may also be required, upon death or termination of employment,
to purchase stock of certain minority shareholders of subsidiaries.
39
(11) SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
1996 1995 1994
------- ------- -----
Interest and taxes paid:
Interest............................. $ 899 $ 998 $ 701
======= ======= ======
Income taxes......................... $2,105 $1,298 $ 70
======= ======= ======
Noncash investing and financing
activities:
Stock issued for acquired franchise $ 244 $ --- $ ---
Notes issued for franchise ======= ======= ======
acquisitions....................... $1,776 $ --- $ 619
======= ======= ======
Additions to obligations under
capital leases.................. $ 85 $ 27 $ 40
======= ======= ======
Additions to subleases under
direct financing leases......... $ 45 $ 22 $ 36
======= ======= ======
40
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 of Part I
of this Report and is incorporated herein by reference. Information on
directors of the registrant, executive compensation, security ownership of
certain beneficial owners and management and certain relationships and related
transactions is set forth under the Election of Directors, Security Ownership
of Certain Beneficial Owners and Management, Executive Compensation and Certain
Transactions with Management and Directors captions of the Registrant's
definitive proxy statement dated April 18, 1997 for its May 9, 1997 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
in April 1997, and such information is incorporated herein by reference;
provided, however the report of the compensation committee on executive
compensation, the performance graph and the ten-year option repricing table
shall not be deemed to be so incorporated by reference. The information under
the caption " Beneficial Ownership Reporting Compliance" of the 1997 Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following Consolidated Financial Statements of the Company and
its subsidiaries and independent auditors' report thereon are included as pages
21 through 35 of this Annual Report on Form 10-K:
PAGE
----
Independent Auditors' Report.............................. 25
Consolidated Balance Sheets - December 31, 1996 and 1995.. 26
Consolidated Statements of Operations - Years End
December 31, 1996, 1995 and 1994........................ 28
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1996, 1995 and 1994............ 29
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, 1995 and 1994........................ 30
Notes to Consolidated Financial Statements................ 31
(a)(2) The following supporting financial statement schedule and
independent auditors' report thereon are included as pages 46 through 47 of this
Annual Report on Form 10-K:
41
PAGE
----
Independent Auditors' Report.............................. 46
Schedule II - Valuation and Qualifying Accounts........... 47
All other Schedules are omitted because the required information is
not applicable or information is presented in the Consolidated Financial
Statements or related notes.
(a)(3) Exhibits:
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 the Company's Registration Statement (No. 33-45836)
dated April 15, 1992 and incorporated by reference herein.
3.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant filed March 25, 1992. Filed as Exhibit 3(c) to the
Company's Registration Statement (No. 33-45836) dated April 15, 1992
and incorporated by reference herein.
3.3 Restated By-laws of the Registrant dated June 1, 1994. Filed as
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year
ending December 31, 1994 and incorporated by reference herein.
10.1 Stock Purchase Agreement dated February 18, 1992, among the
Registrant, OCE and the stockholders of Young's I.V. Therapy, Inc.
Filed as Exhibit 2(f) to the Company's Registration Statement (No. 33-
45836) dated April 15, 1992 and incorporated by reference herein.
10.2 1991 Stock Incentive Plan of the Registrant and related forms of
Incentive and Nonqualified Stock Option Agreements. Filed as Exhibit
10(a) to the Company's Registration Statement (No. 33-45836) dated
April 15, 1992 and incorporated by reference herein.
10.2(a) Amendment to the 1991 Stock Incentive Plan of the Registrant and
related forms of Incentive and Nonqualified Stock Option Agreements,
dated February 21, 1995. Filed as Exhibit 10.6(a) to the Company's
Annual Report on Form 10-K for the year ending December 31, 1994 and
incorporated by reference herein.
10.3 Option Care, Inc. 401(k) Profit Sharing Plan. Filed as Exhibit 10(b)
to the Company's Registration Statement (No. 33-45836) dated April
15, 1992 and incorporated by reference herein.
10.4 Consulting Agreement dated as of September 27, 1990 between EJ
Financial Enterprises and Michael Prime. Filed as Exhibit 10(h) to the
Company's Registration Statement (No. 33-45836) dated April 15, 1992
and incorporated by reference herein.
42
10.5 Form of Franchise Agreement. *
10.6 Lease dated as of October 23, 1996 between the Registrant and
LaSalle National Trust, N.A., as Trustee.*
10.7 Consulting Agreement between the Registrant and EJ Financial
Enterprises, Inc. Filed as Exhibit 10(o) to the Company's
Registration Statement (No. 33-45836) dated April 15, 1992 and
incorporated by reference herein.
10.8 Credit Agreement with ancillary documentation dated December 23,
1996, among Registrant, Option Care Enterprises, Inc. ("OCE"),
Option Care, Inc. (California), and Option Care Capital Services
and PNC Bank as agent and lender and Harris Bank and The Northern
Trust Company as lenders re: $30,000,000 credit agreement.*
10.9 Stock Sale Agreement, Franchise Agreement and Addendum to
Franchise Agreement dated December 31, 1996 among the Registrant
and J. Harris Morgan, Jr. *
10.10 Promissory Note between Convention Center Drug, Inc., and Option
Care, Inc., dated November 15, 1996.*
10.11 Security Agreement between Convention Center Drug, Inc. and
Option Care, Inc., dated November 15, 1996.*
10.12 Promissory Notes between Home I.V., Inc. and Option Care, Inc.,
dated March 17, 1995. Filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ending December 31, 1995
and incorporated by reference herein.
10.13 Promissory Note between F.Y.V.O., Inc., and Option Care, Inc.,
dated November 1, 1995. Filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ending December 31, 1995
and incorporated by reference herein.
10.14 Promissory Note between Option Home Health, Inc. and Option Care,
Inc., dated November 1, 1995. Filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ending December
31, 1995 and incorporated by reference herein.
10.15 Amended Option Care, Inc. 1996 Employee Stock Purchase Plan,
dated January 1, 1996. Filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ending December 31, 1995
and incorporated by reference herein.
10.16 Executive Severance Agreement between Erick E. Hanson and Option
Care, Inc., dated June 28, 1996.*
10.17 Executive Severance Agreement between Jeffery Fox and Option
Care, Inc., dated June 28, 1996.*
10.18 Executive Severance Agreement between Cathy Bellehumeur and
Option Care, Inc., dated June 28, 1996.*
43
11 Statement re: Computation of Per Share Earnings. *
21 Subsidiaries of the Registrant. *
23 Consent of KPMG Peat Marwick LLP. *
* Filed as an Exhibit herewith.
The following management contracts and compensatory plans and arrangements are
filed as Exhibit 10 in this Annual Report on Form 10-K, or are incorporated by
reference herein.
EXHIBIT
NUMBER
- -------
10.2 1991 Stock Incentive Plan of the Registrant and related forms of
Incentive and Nonqualified Stock Option Agreements. Filed as
Exhibit 10(a) to the Company's Registration Statement (No. 33-
45836) dated April 15, 1992 and incorporated by reference herein.
10.2(a) Amendment to the 1991 Stock Incentive Plan of the Registrant and
related forms of Incentive and Nonqualified Stock Option
Agreements, dated February 21, 1995. Filed as Exhibit 10.6(a) to
the Company's Annual Report on Form 10-K for the year ending
December 31, 1994 and incorporated by reference herein.
10.3 Option Care, Inc. 401(k) Profit Sharing Plan. Filed as Exhibit
10(b) to the Company's Registration Statement (No. 33-45836)
dated April 15, 1992 and incorporated by reference herein.
10.4 Consulting Agreement dated as of September 27, 1990 between EJ
Financial Enterprises and Michael Prime. Filed as Exhibit 10(h)
to the Company's Registration Statement (No. 33-45836) dated
April 15, 1992 and incorporated by reference herein.
10.7 Consulting Agreement between the Registrant and EJ Financial
Enterprises, Inc. Filed as Exhibit 10(o) to the Company's
Registration Statement (No. 33-45836) dated April 15, 1992 and
incorporated by reference herein.
10.15 Amended Option Care, Inc. 1996 Employee Stock Purchase Plan,
dated January 1, 1996. Filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ending December 31, 1995
and incorporated by reference herein.
10.16 Executive Severance Agreement between Erick E. Hanson and Option
Care, Inc., dated June 28, 1996.
10.17 Executive Severance Agreement between Jeffery Fox and Option
Care, Inc., dated June 28, 1996.
10.18 Executive Severance Agreement between Cathy Bellehumeur and
Option Care, Inc., dated June 28, 1996.
44
OPTION CARE, INC.
EXHIBIT INDEX
(FOR EXHIBITS FILED WITH THIS ANNUAL REPORT ON FORM 10-K)
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ----------- ----
10.5 Form of Franchise Agreement.
10.6 Lease, dated October 23, 1996.
10.8 Credit Agreement, dated December 23, 1996.
10.9 Stock Sale Agreement, Franchise Agreement and Addendum
to Franchise Agreement, dated December 31, 1996.
10.10 Promissory Note, dated November 15, 1996
10.11 Security Agreement, dated November 15, 1996
10.16 Executive Severance Agreement, dated June 28, 1996.
10.17 Executive Severance Agreement, dated June 28, 1996.
10.18 Executive Severance Agreement, dated June 28, 1996.
11 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
(D) REPORTS ON FORM 8-K.
The Company has not filed any Reports on Form 8-K during the last quarter
of the fiscal year ended December 31, 1996.
45
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Option Care, Inc.:
Under date of March 5, 1997, we reported on the consolidated balance sheets
of Option Care, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996, as
contained in this annual report on Form 10-K for the year 1996. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.
In our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
March 5, 1997
46
OPTION CARE, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
BALANCE BALANCE
YEAR BEGINNING (A) CHARGED (B) END
ENDED OF PERIOD ACQUISITIONS TO EXPENSE DEDUCTIONS OF PERIOD
- ------ --------- ------------ ---------- ---------- ---------
December 31, 1994 1,836 --- 1,899 (1,393) 2,342
======== ======== ======== ========= =========
December 31, 1995 2,342 --- 1,653 (2,722) 1,273
======== ======== ======== ========= =========
December 31, 1996 1,273 306 1,861 (1,702) 1,738
======== ======== ======== ========= =========
ALLOWANCE FOR UNCOLLECTIBLE NOTES RECEIVABLE:
BALANCE BALANCE
YEAR BEGINNING (A) CHARGED (B) END
ENDED OF PERIOD ACQUISITIONS TO EXPENSE DEDUCTIONS OF PERIOD
- ------ --------- ------------ ---------- ---------- ---------
December 31, 1994 79 --- 671 (79) 671
======== ======== ======== ========= =========
December 31, 1995 671 --- --- (329) 342
======== ======== ======== ========= =========
December 31, 1996 342 --- 30 (256) 116
======== ======== ======== ========= =========
(A) Represents balances related to companies acquired during the year.
(B) Represents accounts written off.
47
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/ Erick E. Hanson
-------------------------------------
Erick E. Hanson
President, Chief Executive Officer
and Director
Date: March 20, 1997
-------------------------------------
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Erick E. Hanson President, Chief Executive March 20, 1997
- ---------------------------- Officer and Director --------------
Erick E. Hanson (Principal Executive Officer)
/s/ Paul S. Jurewicz Senior Vice President and March 20, 1997
- ---------------------------- Chief Financial Officer --------------
Paul Jurewicz (Principal Accounting Officer
and Principal Financial Officer)
/s/ James G. Andress Director March 20, 1997
- ---------------------------- --------------
James G. Andress
/s/ John N. Kapoor Chairman and Director March 20, 1997
- ---------------------------- --------------
Dr. John N. Kapoor
/s/ Jerome F. Sheldon Director March 20, 1997
- ---------------------------- --------------
Jerome F. Sheldon
/s/ Roger W. Stone Director March 20, 1997
- ---------------------------- --------------
Roger W. Stone
48