UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 

FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2006

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 number 0-19878

OPTION CARE, INC.
(Exact name of registrant as specified in its charter)

Delaware

36-3791193

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

 

485 Half Day Road, Suite 300
Buffalo Grove, Illinois


60089

(Address of principal executive offices)

(zip code)

 

 

(847) 465-2100

(Registrant’s telephone number, including area code)

 

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o  Accelerated filer x  Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Issued and Outstanding
as of November 1, 2006

 

 

 

Common Stock - $0.01 par value

 

34,361,439

 

 




INDEX

OPTION CARE, INC. AND SUBSIDIARIES

DESCRIPTION

 

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed consolidated balance sheets—September 30, 2006 and December 31, 2005

 

 

 

 

 

Condensed consolidated statements of income—Three and nine months ended September 30, 2006 and 2005

 

 

 

 

 

Condensed consolidated statements of cash flows—Nine months ended September 30, 2006 and 2005

 

 

 

 

 

Notes to condensed consolidated financial statements—September 30, 2006

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

 

 

 

SIGNATURES

 

 

2




PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Option Care, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)

 

 

September 30, 2006 

 

December 31, 2005 

 

 

 

(Unaudited)

 

(Restated-Note 1)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

12,456

 

$

7,816

 

Short-term investments

 

9,200

 

41,042

 

Accounts receivable, net

 

101,981

 

95,297

 

Inventory

 

18,954

 

15,490

 

Deferred income tax benefit

 

4,236

 

2,856

 

Other current assets

 

8,553

 

9,942

 

 

 

 

 

 

 

Total current assets

 

155,380

 

172,443

 

Equipment and other fixed assets, net

 

22,648

 

18,905

 

Goodwill, net

 

164,232

 

112,220

 

Other assets

 

12,269

 

12,996

 

 

 

 

 

 

 

Total assets

 

$

354,529

 

$

316,564

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

29,325

 

$

29,958

 

Current portion of long-term debt

 

32

 

48

 

Other current liabilities

 

14,433

 

9,743

 

 

 

 

 

 

 

Total current liabilities

 

43,790

 

39,749

 

Long-term debt, less current portion

 

86,284

 

86,306

 

Deferred income tax liability

 

11,537

 

9,084

 

Other liabilities

 

1,140

 

665

 

Minority interest

 

771

 

593

 

 

 

 

 

 

 

Total liabilities

 

143,522

 

136,397

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value per share, 60,000 shares authorized, 34,330 and 32,838 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively

 

343

 

328

 

Common stock to be issued, 108 and 134 shares at September 30, 2006 and December 31, 2005, respectively

 

1,179

 

1,311

 

Additional paid-in capital

 

146,193

 

128,158

 

Retained earnings

 

63,292

 

50,370

 

 

 

 

 

 

 

Total stockholders’ equity

 

211,007

 

180,167

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

354,529

 

$

316,564

 

 

See notes to condensed consolidated financial statements

3




 

Option Care, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)

 

 

Three months ended
 September 30,

 

Nine months ended
 September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

(Restated-Note 1)

 

 

 

(Restated-Note 1)

 

Revenue:

 

 

 

 

 

 

 

 

 

Specialty pharmacy services

 

$

84,640

 

$

67,239

 

$

269,873

 

$

209,736

 

Infusion and related healthcare services

 

66,657

 

51,178

 

188,292

 

141,716

 

Other

 

1,592

 

3,476

 

7,023

 

10,687

 

Total revenue

 

152,889

 

121,893

 

465,188

 

362,139

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

90,709

 

71,680

 

282,721

 

219,122

 

Cost of services provided

 

17,720

 

13,718

 

51,306

 

38,383

 

Total cost of revenue

 

108,429

 

85,398

 

334,027

 

257,505

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

44,460

 

36,495

 

131,161

 

104,634

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

30,627

 

25,318

 

90,846

 

72,165

 

Provision for doubtful accounts

 

3,542

 

2,248

 

10,461

 

6,727

 

Depreciation and amortization

 

1,227

 

915

 

3,597

 

2,668

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

35,396

 

28,481

 

104,904

 

81,560

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

9,064

 

8,014

 

26,257

 

23,074

 

Interest income (expense), net

 

(261

)

108

 

(470

)

258

 

Other expense, net

 

(260

)

(73

)

(688

)

(20

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

8,543

 

8,049

 

25,099

 

23,312

 

Income tax provision

 

3,337

 

3,137

 

9,265

 

8,925

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

5,206

 

$

4,912

 

$

15,834

 

$

14,387

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss on discontinued operations, net of income taxes

 

(256

)

 

(893

)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,950

 

$

4,912

 

$

14,941

 

$

14,387

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.15

 

$

0.15

 

$

0.47

 

$

0.44

 

Discontinued operations

 

$

(0.01

)

$

 

$

(0.03

)

$

 

Total

 

$

0.14

 

$

0.15

 

$

0.44

 

$

0.44

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.15

 

$

0.14

 

$

0.45

 

$

0.42

 

Discontinued operations

 

$

(0.01

)

$

 

$

(0.03

)

$

 

Total

 

$

0.14

 

$

0.14

 

$

0.42

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

34,324

 

32,771

 

33,822

 

32,496

 

Diluted

 

35,460

 

34,679

 

35,310

 

34,231

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

$

0.0200

 

$

0.0200

 

$

0.0600

 

$

0.0533

 

 

See notes to condensed consolidated financial statements

4




Option Care, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

 

 

 

 

(Restated-Note 1)

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

14,941

 

$

14,387

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,082

 

4,607

 

Provision for doubtful accounts

 

10,682

 

6,727

 

Income from equity investees

 

396

 

 

Loss on disposals

 

49

 

 

Non-cash stock compensation expense

 

1,047

 

2,540

 

Deferred income taxes

 

511

 

371

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

Accounts and notes receivable

 

(3,048

)

(8,450

)

Inventory

 

(984

)

2,974

 

Accounts payable

 

(11,513

)

(4,971

)

Income taxes receivable/payable

 

317

 

(273

)

Change in other assets and liabilities

 

2,853

 

(1,995

)

 

 

 

 

 

 

Net cash provided by operating activities

 

21,333

 

15,917

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of short-term investments

 

(13,200

)

(170,840

)

Sales of short-term investments

 

45,042

 

192,566

 

Purchases of equipment and other, net

 

(7,874

)

(7,094

)

Payments for acquisitions, net of cash acquired

 

(43,817

)

(46,367

)

Proceeds from disposals

 

462

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(19,387

)

(31,735

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Increase in deferred financing costs

 

(55

)

(166

)

Income tax benefit from exercise of stock options

 

994

 

1,973

 

Payments on capital leases and other debt

 

(38

)

(30

)

Proceeds from issuance of stock

 

3,812

 

6,060

 

Payments of cash dividends to common shareholders

 

(2,019

)

(1,728

)

 

 

 

 

 

 

Net cash provided by financing activities

 

2,694

 

6,109

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

4,640

 

(9,709

)

Cash and cash equivalents, beginning of period

 

7,816

 

19,816

 

Cash and cash equivalents, end of period

 

$

12,456

 

$

10,107

 

 

See notes to condensed consolidated financial statements

5




Option Care, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)

1.      Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes thereto included in Option Care’s Annual Report on Form 10-K for the year ended December 31, 2005.

In addition, the balance sheet at December 31, 2005 and statements of income and cash flows for the three and nine months ended September 30, 2005 have been restated to reflect the impact of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, as of January 1, 2006 utilizing the modified retrospective method (see also Note 9, Stock-based Compensation) and to reflect the correction of errors in previously reported pro-forma disclosures of stock-based compensation as then required by SFAS No. 123, Accounting for Stock-Based Compensation.  The errors in previously reported pro-forma disclosures of stock-based compensation were due to improper tax treatment of compensation expense from our employee stock purchase plan and improper accelerated expensing of certain prior years’ grants.

The following table sets forth the impact of the adoption of SFAS No. 123(R) utilizing the modified retrospective method and the correction of errors in previously reported pro-forma disclosures of stock-based compensation on the Condensed Consolidated Balance Sheet as of December 31, 2005 (in thousands):

 

As Reported

 

Effect of FAS
123(R) Adoption

 

As Restated

 

 

 

 

 

 

 

 

 

Total current assets

 

$

172,443

 

$

 

$

172,443

 

Equipment and other fixed assets, net

 

18,905

 

 

18,905

 

Goodwill, net

 

112,220

 

 

112,220

 

Other intangible assets, net(1)

 

3,450

 

 

3,450

 

Investment in affiliates(1)

 

4,911

 

 

4,911

 

Non-current portion of deferred income tax benefit(1)

 

230

 

2,886

 

3,116

 

Other long-term assets(1)

 

1,519

 

 

1,519

 

 

 

 

 

 

 

 

 

Total assets

 

$

313,678

 

$

2,886

 

$

316,564

 

 

 

 

 

 

 

 

 

Total liabilities

 

136,397

 

 

136,397

 

 

 

 

 

 

 

 

 

Common stock and common stock to be issued

 

1,639

 

 

1,639

 

Additional paid-in capital

 

113,686

 

14,472

 

128,158

 

Retained earnings

 

61,956

 

(11,586

)

50,370

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

177,281

 

2,886

 

180,167

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

313,678

 

$

2,886

 

$

316,564

 

 


(1) Included in the accompanying restated Condensed Consolidated Balance as of December 31, 2005 within “Other assets”.

6




The following table sets forth the impact of the adoption of SFAS No. 123(R) utilizing the modified retrospective method and the correction of errors in previously reported pro-forma disclosures of stock-based compensation on the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2005 (in thousands, except per share amounts):

 

 

Three months ended September 30, 2005

 

Nine months ended September 30, 2005

 

 

 

As
Reported

 

Effect of
FAS 123(R)
Adoption

 

As
Restated

 

As
Reported

 

Effect of
FAS 123(R)
Adoption

 

As
Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

121,893

 

$

 

$

121,893

 

$

362,139

 

$

 

$

362,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

71,680

 

 

71,680

 

219,122

 

 

219,122

 

Cost of services provided

 

13,688

 

30

 

13,718

 

38,269

 

114

 

38,383

 

Total cost of revenue

 

85,368

 

30

 

85,398

 

257,391

 

114

 

257,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

36,525

 

(30

)

36,495

 

104,748

 

(114

)

104,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

24,689

 

629

 

25,318

 

69,739

 

2,426

 

72,165

 

Other operating expenses

 

3,163

 

 

3,163

 

9,395

 

 

9,395

 

Total operating expenses

 

27,852

 

629

 

28,481

 

79,134

 

2,426

 

81,560

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

8,673

 

(659

)

8,014

 

25,614

 

(2,540

)

23,074

 

Interest income

 

108

 

 

108

 

258

 

 

258

 

Other expense, net

 

(73

)

 

(73

)

(20

)

 

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

8,708

 

(659

)

8,049

 

25,852

 

(2,540

)

23,312

 

Income tax provision

 

3,348

 

(211

)

3,137

 

9,798

 

(873

)

8,925

 

Net income

 

$

5,360

 

$

(448

)

$

4,912

 

$

16,054

 

$

(1,667

)

$

14,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

$

(0.01

)

$

0.15

 

$

0.49

 

$

(0.05

)

$

0.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.16

 

$

(0.02

)

$

0.14

 

$

0.47

 

$

(0.05

)

$

0.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

32,771

 

 

32,771

 

32,496

 

 

32,496

 

Diluted

 

34,566

 

113

 

34,679

 

34,163

 

68

 

34,231

 

 

7




The following table sets forth the impact of the adoption of SFAS No. 123(R) utilizing the modified retrospective method and the correction of errors in previously reported pro-forma disclosures of stock-based compensation on the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2005 (in thousands):

 

As Reported

 

Effect of FAS
123(R)
Adoption

 

As Restated

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

16,054

 

$

(1,667

)

$

14,387

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

Non-cash stock compensation expense

 

 

2,540

 

2,540

 

Deferred income taxes

 

1,244

 

(873

)

371

 

Income tax benefit from exercise of stock options

 

1,973

 

(1,973

)

 

Other adjustments

 

(1,381

)

 

(1,381

)

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

17,890

 

(1,973

)

15,917

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(31,735

)

 

(31,735

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Income tax benefit from exercise of stock options

 

 

1,973

 

1,973

 

Other cash flows from financing activities

 

4,136

 

 

4,136

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

4,136

 

1,973

 

6,109

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(9,709

)

 

(9,709

)

Cash and cash equivalents, beginning of period

 

19,816

 

 

19,816

 

Cash and cash equivalents, end of period

 

$

10,107

 

$

 

$

10,107

 

 

2.      Long-Term Debt

In November 2004, we completed an offering of $86.3 million of 2.25% convertible senior notes due 2024 in a private placement to qualified institutional buyers.  We filed a Registration Statement on Form S-3 on January 24, 2005, as subsequently amended, to register the notes under the Securities Act of 1933.  The notes are convertible into cash and, if applicable, shares of our common stock based on an initial conversion rate, subject to adjustment, of 55.5278 shares per $1,000 principal amount of notes (which represents an initial conversion price of $18.01 per share), in certain circumstances.  The conversion rate and conversion price were subsequently adjusted to 83.5519 and $11.97 per share, respectively, pursuant to the terms of the notes as a result of our 3-for-2 common stock split on March 31, 2005 and the $0.02 per share dividends paid each quarter thereafter.  Holders may convert their notes into cash and, if applicable, shares of our common stock prior to the stated maturity only under the following circumstances: (1) during any calendar quarter after the calendar quarter ended December 31, 2004, if the closing sale price of our common stock for each of 20 or more consecutive trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the five business day period after any five consecutive trading day period (the “note measurement period”) in which the average trading price per $1,000 principal amount of notes was equal to or less than 97% of the average conversion value of the notes during the note measurement period; (3) upon the occurrence of specified corporate transactions; or (4) if we have called the notes for redemption.  In general, upon conversion, the holder of each note will receive the conversion value of the note payable in cash, up to the principal amount of the note, and common stock for the note’s conversion value in excess of such principal amount (plus an additional cash payout in lieu of fractional shares).  If the notes are surrendered for conversion in connection with certain fundamental changes that occur before November 1, 2009, holders will in certain circumstances also receive a make-whole premium in addition to the cash and shares to which holders are otherwise entitled to receive upon conversion.  The convertible senior notes will mature on November 1, 2024 and will not be redeemable by us prior to November 1, 2009.  Holders of the convertible notes may require us to repurchase all or a portion of the convertible notes for cash on November 1, 2009, November 1, 2014 and November 1, 2019.  Interest will be paid at 2.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year to the holders of record at the close of business on the preceding April 15 and October 15, respectively.  The notes are senior unsecured obligations and rank equally with all of our existing and future senior unsecured indebtedness.  None of the required conditions for potential conversion of the notes by the holders occurred during the nine months ended September 30, 2006.  The holders of the notes possess no stockholder rights, such as dividend or voting rights, unless and until they convert their notes into cash and shares of our common stock.

On May 5, 2006, we entered into a five-year revolving Credit Agreement with LaSalle Bank National Association (the “Agreement”).  The initial revolving loan commitment under the Agreement is $35 million.  Provided there is no event of default, we have the option to increase the revolving loan commitment to a maximum of $100 million during the first two years of the

8




Agreement.  We will pay interest on borrowings at rates ranging from prime plus zero or LIBOR plus 1.00% to a maximum of prime plus 0.25% or LIBOR plus 1.75% based on our debt to EBITDA ratio for the applicable period.  We will also pay a non-use fee ranging from 0.15% to 0.225% of the unused portion of the revolving loan commitment. The interest rates and non-use fee rates payable are based on our Total Debt to EBITDA Ratio, as defined in the agreement, for the applicable period. We must maintain compliance with various financial and other covenants during the life of the Agreement. We incurred fees of approximately $150,000 related to negotiating this Agreement. We have had no borrowings under the Agreement from inception through September 30, 2006.

3.      Earnings Per Share Data

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated. (in thousands, except per share amounts):

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Basic:

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

5,206

 

$

4,912

 

$

15,834

 

$

14,387

 

Net loss from discontinued operations

 

(256

)

 

(893

)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,950

 

$

4,912

 

$

14,941

 

$

14,387

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

34,324

 

32,771

 

33,822

 

32,496

 

 

 

 

 

 

 

 

 

 

 

Basic earnings from continuing operations per share

 

$

0.15

 

$

0.15

 

$

0.47

 

$

0.44

 

Basic loss from discontinued operations per share

 

(0.01

)

 

(0.03

)

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.14

 

$

0.15

 

$

0.44

 

$

0.44

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

5,206

 

$

4,912

 

$

15,834

 

$

14,387

 

Net loss from discontinued operations

 

(256

)

 

(893

)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,950

 

$

4,912

 

$

14,941

 

$

14,387

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

34,324

 

32,771

 

33,822

 

32,496

 

Net effect of dilutive stock options – Based on the treasury stock method

 

873

 

1,073

 

985

 

1,070

 

Net effect of dilutive contingently convertible debt (1)

 

263

 

835

 

503

 

665

 

 

 

 

 

 

 

 

 

 

 

Total diluted shares

 

35,460

 

34,679

 

35,310

 

34,231

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings from continuing operations per share

 

$

0.15

 

$

0.14

 

$

0.45

 

$

0.42

 

Diluted loss from discontinued operations per share

 

(0.01

)

 

(0.03

)

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.14

 

$

0.14

 

$

0.42

 

$

0.42

 


(1) Weighted average shares issuable upon conversion of all $86.3 million of our 2.25% convertible senior notes due 2024.

4.      Operating Segments

We report our results of operations from one identifiable segment, with three service lines: specialty pharmacy services, infusion and related healthcare services, and other.

Specialty pharmacy services involve the distribution of injectable and infused pharmaceuticals to treat a wide range of chronic health conditions.  We purchase specialty pharmaceuticals from manufacturers and wholesale distributors, fill prescriptions provided by physicians, and label, package and deliver the pharmaceuticals to patients’ homes or physicians’ offices, either ourselves or through contract couriers. These pharmaceuticals may require refrigeration during shipping as well as special handling to prevent potency degradation. Depending on therapy, we may also administer the specialty pharmaceuticals to the patient at one of our ambulatory infusion centers. Patients receiving treatment are often provided special counseling and education regarding their condition and treatment program.

Infusion and related healthcare services typically involve the intravenous administration of medications at the patient’s home or other non-hospital sites such as one of our ambulatory infusion suites.  Infusion pharmacy services treat a wide range of acute and

9




chronic health conditions, including infections, dehydration, cancer, pain and nutritional deficiencies.  All of our company-owned pharmacies provide infusion pharmacy services.  Several of our company-owned pharmacies also provide home health nursing services, respiratory therapy services and home medical equipment sales and rentals.  We also have one location that provides home hospice services.

Other revenue consists of royalties and other fees generated from our franchised pharmacy network and, for the three and nine months ended September 30, 2005, software licensing and support revenue generated by our subsidiary, Management by Information, Inc. (“MBI”).  The MBI business was sold during the fourth quarter of 2005 and therefore generated no revenue during the three and nine months ended September 30, 2006.

5.      Significant Customers and Concentration of Credit Risk

We generate the majority of our revenue from managed care contracts and other agreements with commercial third party payors by providing health care services to their members.  Our principal managed care contract is with Blue Cross and Blue Shield of Florida, to whose members we provide infusion pharmacy services and specialty pharmacy services.  The contract may be terminated by either party on 90 days’ notice and, unless terminated, renews annually each September for an additional one-year term.  We also generate revenue from government healthcare programs such as Medicare and Medicaid.

The following table sets forth information regarding revenue and accounts receivable related to our most significant payors as of the dates and for the periods presented:

 

 

Revenue

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

Accounts Receivable

 

 

 

September 30,

 

September 30,

 

September 30,

 

December 31,

 

 

 

    2006    

 

    2005    

 

    2006    

 

    2005    

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Blue Cross and Blue Shield of Florida

 

14

%

14

%

13

%

14

%

8

%

9

%

Medicare & Medicaid

 

21

%

15

%

20

%

17

%

20

%

22

%

All other payors (1)

 

65

%

71

%

67

%

69

%

72

%

69

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100

%

100

%

100

%

100

%

100

%

100

%

 


(1) No other payor represents 10% or more of our revenue or accounts receivable as of the dates and for the periods presented.

6.      Seasonal Revenue Trends

Synagis®, one of the specialty pharmaceuticals that we provide to patients, is seasonal.  Synagis® is a drug used for the prevention of respiratory syncytial virus (RSV) in high-risk pediatric patients. RSV infection is a seasonal condition, with the season generally lasting from October through April.

Option Care’s quarterly Synagis® revenue for the year 2005 and the first three quarters of 2006 was as follows (in thousands):

 

Synagis®
revenue

 


% of Total
Revenue (1)

 

Quarter ended March 31, 2005

 

$

15,536

 

12.9

%

Quarter ended June 30, 2005

 

4,492

 

3.8

%

Quarter ended September 30, 2005

 

862

 

0.7

%

Quarter ended December 31, 2005

 

15,905

 

11.2

%

Fiscal year 2005

 

$

36,795

 

7.3

%

 

 

 

 

 

 

Quarter ended March 31, 2006

 

$

27,102

 

17.5

%

Quarter ended June 30, 2006

 

$

8,372

 

5.3

%

Quarter ended September 30, 2006

 

$

1,780

 

1.2

%

 


(1) Percent of total revenue is calculated based on total revenue from continuing operations.

10




7.                 Acquisitions

We completed two acquisitions and entered into a binding agreement for a third acquisition during the nine months ended September 30, 2006. The results of operations for each business were consolidated as of the effective date of the acquisition. The purpose of each acquisition was to increase our revenue and net income by accomplishing one or both of the following goals: (1) expanding our geographic coverage, and (2) consolidating our position in the markets we serve.

Effective May 15, 2006, we acquired all of the outstanding stock of our Eatontown, New Jersey franchise.  The initial purchase price was $18.2 million, paid $14.0 million in cash and $4.2 million in shares of our common stock. We may owe additional consideration of up to $7.4 million, payable in 2007, 2008 and/or 2009 based on achievement of certain financial performance targets. Concurrent with the acquisition of this franchise, we recorded a gain of $1.2 million related to settlement of their pre-existing franchise relationship. This gain is included within Other Revenue on our Condensed Consolidated Statements of Income for the nine months ended September 30, 2006. Related to this acquisition, we have recorded goodwill of $16.4 million, all of which is expected to be deductible for income tax purposes.

Effective March 13, 2006 (the “Effective Date”), we entered into a binding purchase agreement to acquire a home infusion business with operations in New York. The purchase price was $25.0 million, of which $16.5 million was paid in cash on the Effective Date, $7.5 million was paid in unregistered shares of our common stock and $1.0 million is payable pursuant to the terms of a note. Pursuant to terms contained in the binding purchase agreement, the unregistered shares will be repurchased by us during the quarter ending December 31, 2006 in exchange for a cash payment of $7.5 million. Under the terms of the purchase agreement, we will receive the acquired interest in the business at the closing date, which is the earlier of two days following the receipt of approval from the New York Department of Health or 270 days subsequent to the Effective Date. The total cost of the acquisition is subject to working capital and earn-out adjustments. The total purchase price has been allocated $22.2 million to goodwill and the remainder to accounts receivable and other working capital items. We anticipate that all of the goodwill will be deductible for tax purposes. Financial Accounting Standards Board Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, addresses the consolidation of business enterprises to which customary conditions of consolidation, such as a majority voting interest, do not apply. As a result of the purchase agreement and related joint coordination agreement, the acquired business is deemed to be a variable interest entity (“VIE”) and we are the primary beneficiary of this VIE as of the Effective Date. Accordingly, we have included the business in our consolidated financial reporting as of the Effective Date. Prior to the closing date, and subsequent to the Effective Date, creditors of the VIE will not have recourse to the assets of our company. Subsequent to the closing date, the acquired business will cease to be a VIE and will become a wholly-owned subsidiary of our company. As of September 30, 2006, the closing date had not yet been reached for this acquisition.

Effective March 1, 2006, we acquired a home infusion and RT/DME business with operations in Connecticut, Illinois, New Jersey and Ohio. Through this acquisition we acquired full equity ownership of one “C” corporation and one limited liability company for $5.0 million in cash, subject to certain adjustments. In connection with this acquisition, we recorded goodwill of $5.5 million, subject to adjustment related to contingencies involving the value of acquired assets. We anticipate that substantially all of the goodwill will be deductible for income tax purposes.

During the nine months ended September 30, 2006, we recorded additional goodwill of $7.9 million related to additional consideration paid and payable to the former owners of businesses we acquired in 2005 and 2004. We paid the additional consideration $7.5 million in cash and $1.0 million in 70,000 shares of our common stock.

For our current year acquisitions, the allocation of purchase price is tentative and subject to adjustment. The following table sets forth the allocation of purchase price for the nine months ended September 30, 2006 for our current year acquisition and additional consideration for our prior year acquisitions (in thousands):

 

Nine months ended
September 30, 2006

 

Purchase Price:

 

 

 

Paid in cash

 

$

43,817

 

Paid/payable in shares of Option Care common stock

 

12,636

 

Earn-out payable

 

1,559

 

Liabilities assumed

 

12,533

 

 

 

$

70,545

 

 

 

 

 

Allocation of Purchase Price:

 

 

 

Goodwill

 

$

52,400

 

Accounts receivable, net

 

14,044

 

Other tangible assets

 

3,627

 

Other intangible assets

 

475

 

 

 

$

70,545

 

 

11




The following table sets forth information regarding the changes in our gross and net goodwill during the nine months ended September 30, 2006 (in thousands):

 

Goodwill

 

Accumulated
Amortization

 

Goodwill, net

 

 

 

 

 

 

 

 

 

December 31, 2005

 

$

116,160

 

$

(3,940

)

$

112,220

 

Current year acquisitions

 

44,486

 

 

44,486

 

Prior year acquisitions

 

7,914

 

 

7,914

 

Current year disposals

 

(388

)

 

(388

)

 

 

 

 

 

 

 

 

September 30, 2006

 

$

168,172

 

$

(3,940

)

$

164,232

 

 

8.              Discontinued Operations

On August 1, 2006, we completed the sale of our home health agency in Portland, Oregon for $500,000. We recorded a pre-tax gain of $242,000 on this sale. In addition, during the quarter ended September 30, 2006 we ceased operations of our home health agency in Phoenix, Arizona and recorded a pre-tax loss of $291,000 on this disposal. The operations and cash flows of these home health agencies have been eliminated from our ongoing operations as a result of these transactions, and we will not have any significant continuing involvement in their operations. Accordingly, the results of operations of these home health agencies, including any gains or losses on sale or disposal, are now reported as discontinued operations, net of tax, in our condensed consolidated statements of income. There was no impact to the reported results for the three or nine months ended September 30, 2005 as we acquired both home health agencies on or after October 1, 2005.

Selected financial information related to our discontinued operations is summarized as follows (in thousands):

 

Three months ended
September 30, 2006

 

Nine months ended
September 30, 2006

 

 

 

 

 

 

 

Total revenue

 

$

498

 

$

4,436

 

 

 

 

 

 

 

Pre-tax loss on disposal of discontinued operations

 

(49

)

(49

)

Loss from discontinued operations before income taxes

 

(367

)

(1,350

)

Income tax benefit

 

160

 

506

 

Loss on discontinued operations, net of income taxes

 

$

(256

)

$

(893

)

 

9.                 Franchise-related Revenue

We maintain a national franchise network through which we generate a portion of our revenue.  Our franchise-related revenues include: (1) royalties; (2) vendor rebates and administration fees; and (3) franchise settlement and related fees. Each of these types of revenue can fluctuate over time, with the largest potential fluctuations relating to franchise settlements. Franchise-related revenue is included within our “Other revenue” service line. The following table sets forth our franchise-related revenue for the periods indicated (in thousands):

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Franchise-related revenue:

 

 

 

 

 

 

 

 

 

Royalties

 

$

1,270

 

$

1,775

 

$

4,064

 

$

5,690

 

Vendor rebates and administration fees

 

99

 

113

 

525

 

302

 

Franchise settlements and related fees

 

 

506

 

1,427

 

2,997

 

 

 

 

 

 

 

 

 

 

 

Total franchise-related revenue

 

$

1,369

 

$

2,393

 

$

6,016

 

$

8,989

 

 

During the nine months ended September 30, 2006, we recorded franchise settlement revenue of $1.4 million. Of this total, $1.2 million was related to settlement of our pre-existing franchise relationship with a business we acquired and $200,000 was related to the negotiated early termination of one of our franchises.

12




During the nine months ended September 30, 2005, we recorded franchise settlement revenue of $3.0 million.  Of this total, $1.9 million was related to early release of a franchise from our network and $800,000 was related to our acquisition of a franchise. We also recorded $300,000 in additional royalty revenue related to settlement of under-reported prior period royalties by the franchise that was early released from our network.

 

10.          Stock-based Compensation

Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, utilizing the modified retrospective method. Prior to January 1, 2006, we accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and shares purchased under our employee stock purchase plan, to be recognized in the income statement based on their fair values. We have restated the results for all prior periods to include compensation cost for all share-based payments based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123.

The following table sets forth the impact to our income before taxes, net income and basic and diluted earnings per common share for the three and nine months ended September 30, 2006 and 2005 of the adoption of SFAS No. 123(R) utilizing the modified retrospective method (in thousands, except per share amounts):

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Impact on net income for all stock-based compensation:

 

 

 

 

 

 

 

 

 

Stock option grants

 

$

(454

)

$

(315

)

$

(1,173

)

$

(1,075

)

Employee stock purchase plan withholdings

 

(141

)

(77

)

(357

)

(286

)

Cumulative effect of a change in estimate

 

 

 

483

 

 

Correction of pro-forma disclosure compensation expense

 

 

(267

)

 

(1,179

)

 

 

 

 

 

 

 

 

 

 

Total impact on income before income taxes

 

(595

)

(659

)

(1047

)

(2,540

)

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

177

 

153

 

269

 

534

 

Correction of pro-forma disclosure income tax benefit

 

 

58

 

 

339

 

Total impact on net income

 

$

(418

)

$

(448

)

$

(778

)

$

(1,667

)

 

 

 

 

 

 

 

 

 

 

Impact on net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

$

(0.01

)

$

(0.02

)

$

(0.05

)

Diluted

 

$

(0.01

)

$

(0.01

)

$

(0.02

)

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

 

Prior to the adoption of SFAS No. 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. Accordingly, we have reclassified the $2.0 million excess tax benefit as a financing cash inflow on the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2005.

We amortize the calculated fair value of our outstanding stock options straight-line over the vesting period of the options. The fair value of options granted under our stock option plan during the three and nine months ended September 30, 2006 and 2005 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Annual dividend yield per share

 

$

0.08

 

$

0.08

 

$

0.08

 

$

0.08

 

Expected volatility

 

30

%

30

%

28

%

32

%

Weighted average risk-free interest rate

 

4.92

%

4.08

%

5.14

%

3.77

%

Expected grant life (years)

 

4.6

 

4.0

 

4.6

 

4.0

 

Weighted average per share fair value of options granted

 

$

3.58

 

$

3.77

 

$

3.58

 

$

3.93

 

13




During the three and nine months ended September 30, 2006, we issued 135,207 and 410,025 shares of our common stock from the exercise of options granted through our stock incentive plan. In the quarter ended March 31, 2006, we issued 133,044 shares of our common stock to employees who participated in our employee stock purchase plan during 2005.

 

11.          Recently Issued Accounting Pronouncement

In June 2006, the Financial Accounting Standards Board published Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which is an interpretation of Statement 109, Accounting for Income Taxes. FIN 48 provides guidance on how entities should evaluate and report on uncertain tax positions. This interpretation requires that realization of an uncertain income tax position must be “more likely than not” (i.e. greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. Further, this interpretation prescribes the benefit to be recorded in the financial statements at the amount most likely to be realized assuming a review by tax authorities having all relevant information and applying current conventions. This interpretation also clarifies the financial statement classification of tax-related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. This interpretation is effective for fiscal years beginning after December 15, 2006, and we will be required to adopt this interpretation in the first quarter of 2007. We are currently evaluating the requirements of FIN 48 to determine the effects it will have, if any, on our accounting for income taxes.

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning after November 5, 2007. We will adopt the guidance contained in SFAS No. 157 at the beginning of our fiscal year ending December 31, 2008. We do not believe that adoption of the guidance contained in SFAS No. 157 will have a material affect on our results of operations or financial condition.

12.          Quarterly Dividends

In May 2004, our Board of Directors authorized the adoption of a quarterly dividend policy. Each quarter, our Board of Directors will determine the dividend amount per share, if any. During each of the fiscal quarters beginning with the quarter ended June 30, 2004 through the quarter ended March 31, 2005, our board declared a dividend of $0.0133 per share. During each of the fiscal quarters beginning with the quarter ended June 30, 2005 our Board declared a $0.02 per share dividend. The $0.02 per share dividend in the quarter ended September 30, 2006 was paid August 28, 2006 to stockholders of record as of August 14, 2006.

13.          Comprehensive Income

Net income was our only component of comprehensive income for the three and nine months ended September 30, 2006 and 2005.

14




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2005. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Quarterly Report on Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us) contain statements that are or will be forward-looking, such as statements relating to acquisitions and other business development activities, future capital expenditures and the anticipated or potential 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 us, or on our behalf. These risks and uncertainties include, but are not limited to, uncertainties affecting our businesses and our 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), changes in average wholesale price (“AWP”) and other benchmarks used to establish pricing for prescription drugs, 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 we operate. For a more comprehensive description of risks applicable to our business, see Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report or to reflect the occurrence of unanticipated events.

OVERVIEW

We provide specialty pharmacy services and infusion pharmacy and other related healthcare services to patients at home or at alternate sites such as infusion suites and physician’s offices. We contract with managed care organizations and other third party payors who reimburse us for the services we provide to their subscriber members. Our services are provided through our national network of 57 company-owned and managed locations, our 54 franchise-owned pharmacies and our two company-owned, high-volume distribution facilities.

We have three service lines: specialty pharmacy services, infusion and related healthcare services, and other. Specialty pharmacy services involve the distribution of injectable and infused pharmaceuticals to treat a wide range of chronic health conditions. We purchase specialty pharmaceuticals from manufacturers and wholesale distributors, fill prescriptions provided by physicians, and label, package and deliver the pharmaceuticals to patients’ homes or physicians’ offices, either ourselves or through contract couriers. These pharmaceuticals may require refrigeration during shipping as well as special handling to prevent potency degradation. Depending on therapy, we may also administer the specialty pharmaceuticals to the patient at one of our ambulatory infusion centers. Patients receiving treatment are often provided special counseling and education regarding their condition and treatment program. Infusion and related healthcare services typically involve the intravenous administration of medications at the patient’s home or other non-hospital sites such as one of our ambulatory infusion suites. Infusion pharmacy services treat a wide range of acute and chronic health conditions, including infections, dehydration, cancer, pain and nutritional deficiencies. All of our company-owned pharmacies provide infusion pharmacy services. Several of our company-owned pharmacies also provide home health nursing services, respiratory therapy services and home medical equipment sales and rentals. We also have one location that provides home hospice services. Other revenue consists of royalties, franchise settlements and other fees generated from our franchised pharmacy network and, for the quarter and nine months ended September 30, 2005, software licensing and support revenue generated by our subsidiary, Management by Information, Inc. (“MBI”). MBI was sold during the fourth quarter of 2005 and no software license and support revenue was recorded during the three and nine months ended September 30, 2006.

RECENT DEVELOPMENTS

Specialty Pharmacy Agreement with Blue Cross and Blue Shield of Michigan

 

On June 15, 2006, we signed a Specialty Pharmacy Agreement (the “Agreement”) with Blue Cross and Blue Shield of Michigan (“BCBSM”) and Blue Care Network of Michigan (“BCN”) to be their exclusive provider of specialty pharmacy mail order services. We expect this contract to materially increase our revenue in future periods. Under the Agreement, we will provide specialty pharmacy medications, ancillary products and focused therapy management to BCBSM and BCN members. The Agreement shall remain in force for an initial term ending September 30, 2009, with an automatic one year renewal beyond that date unless written notice of termination is given by BCBSM, BCN, or us. The Agreement may be terminated by BCBSM or BCN, without cause, on ninety (90) days written notice. We began delivering services under this contract in October 2006. We have incurred certain incremental implementation expenses of approximately $350,000 during the quarter ended September 30, 2006 and anticipate incurring additional expenses in the quarter ending December 31, 2006.

Proposed Reductions to Average Wholesale Prices Published by First DataBank

 

The proposed settlement of a legal case involving First DataBank, the main publisher of “average wholesale prices” (“AWP”s), could potentially have a material adverse effect on our financial performance, results of operations and financial condition in future

15




periods. The case New England Carpenters Health Benefits Fund, et al. v. First DataBank, et al., Civil Action No. 1:05-CV-11148-PBS (D. Mass.), is a civil class action case brought against First DataBank, alleging that the company colluded with a prescription drug wholesaler to artificially raise the average wholesale prices of various prescription drugs to increase pharmacy profits. As part of a proposed settlement in the case, First DataBank has agreed to reduce the reported AWP of over 8,000 specific pharmaceutical products by four percent. At this time the proposed settlement has received neither preliminary nor final court approval. We cannot predict the outcome of this case, or, if the settlement is approved, the precise timing of any of the proposed AWP changes.

Our contracts with managed care organizations and other commercial payers generally use AWP as a benchmark for establishing pricing for the drugs we provide to patients. In the absence of any mitigating action on our part, the proposed reduction in First DataBank’s AWP could have a material adverse effect on the margin we earn on the home infusion and specialty drugs we sell, particularly those contracts that identify AWP published by First DataBank as the sole resource for pricing under that contract. However, most of our contracts with health insurers, third party administrators, self-insured companies and other third party payors contain terms that we believe will enable us to mitigate the adverse effect of this proposed reduction in First DataBank’s reported AWP.  Further, we are party to a number of contracts under which drug reimbursement is based on proprietary fee schedules which may or may not be referenced to AWP, limiting the impact of reductions to the AWPs published by First DataBank. If the proposed settlement should become final we would exercise our contractual rights so as to mitigate the adverse impact to us.

SUMMARIZED INFORMATION ABOUT REVENUE AND GROSS PROFIT

Summarized information about revenues and gross profit for each of our service lines is provided in the following table (amounts in thousands):

REVENUE

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

Revenue

 

% of
total

 

Revenue

 

% of
total

 

Revenue

 

% of
total

 

Revenue

 

% of
total

 

Specialty pharmacy services

 

$

84,640

 

55.4

%

$

67,239

 

55.2

%

$

269,873

 

58.0

%

$

209,736

 

57.9

%

Infusion and related healthcare services

 

66,657

 

43.6

%

51,178

 

42.0

%

188,292

 

40.5

%

141,716

 

39.1

%

Other

 

1,592

 

1.0

%

3,476

 

2.8

%

7,023

 

1.5

%

10,687

 

3.0

%

Total revenue

 

$

152,889

 

100.0

%

$

121,893

 

100.0

%

$

465,188

 

100.0

%

$

362,139

 

100.0

%

 

GROSS PROFIT

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

Gross
Profit

 

Gross
profit
margin

 

Gross
Profit

 

Gross
profit
margin

 

Gross
Profit

 

Gross
profit
margin

 

Gross
Profit

 

Gross
profit
margin

 

Specialty pharmacy services

 

$

13,507

 

16.0

%

$

11,507

 

17.1

%

$

40,823

 

15.1

%

$

33,367

 

15.9

%

Infusion and related healthcare services

 

29,361

 

44.0

%

21,623

 

42.3

%

83,315

 

44.2

%

60,892

 

43.0

%

Total gross profit, excluding other revenue

 

42,868

 

28.3

%

33,130

 

28.0

%

124,138

 

27.1

%

94,259

 

26.8

%

Other

 

1,592

 

100.0

%

3,365

 

96.8

%

7,023

 

100.0

%

10,375

 

97.1

%

Total gross profit

 

$

44,460

 

29.1

%

$

36,495

 

29.9

%

$

131,161

 

28.2

%

$

104,634

 

28.9

%

 

We derive most of our revenue from contracts with third party payors, such as managed care organizations, insurance companies, self-insured employers and Medicare and Medicaid programs. Our principal managed care contract is with Blue Cross and Blue Shield of Florida for the provision of specialty pharmacy services and infusion pharmacy services to their members. Approximately 14% of our revenue from continuing operations for the quarter ended September 30, 2006 and 13% for the nine months ended September 30, 2006 was generated from this contract compared to 14% for the corresponding prior year periods. As of September 30, 2006 and December 31, 2005, respectively, 8% and 9% of our accounts receivable was due from Blue Cross and Blue

16




Shield of Florida. The contract may be terminated by either party on 90 days’ notice and, unless terminated, renews each September for an additional one-year term. Currently, no other single managed care payor represents more than 10% of our revenue.

We also provide services that are reimbursable through government healthcare programs such as Medicare and state Medicaid programs. For the three and nine months ended September 30, 2006, approximately 21% and 20% of our revenue, respectively, was generated from government healthcare programs compared to 15% and 17% in the corresponding prior year periods. The increase in percentage in the current year periods was primarily due to the impact of our 2006 acquisitions. As of September 30, 2006 and December 31, 2005, respectively, 20% and 22% of our total accounts receivable was due from government healthcare programs.

RESULTS OF OPERATIONS

The following table shows the results of our operations for the three and nine months ended September 30, 2006 and 2005, expressed in amounts and percentages of revenue (amounts in thousands):

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

Amount

 

% of
Revenue

 

Amount

 

% of
Revenue

 

Amount

 

% of
Revenue

 

Amount

 

% of
Revenue

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty pharmacy services

 

$

84,640

 

55.4

%

$

67,239

 

55.2

%

$

269,873

 

58.0

%

$

209,736

 

57.9

%

Infusion and related healthcare services

 

66,657

 

43.6

%

51,178

 

42.0

%

188,292

 

40.5

%

141,716

 

39.1

%

Other

 

1,592

 

1.0

%

3,476

 

2.9

%

7,023

 

1.5

%

10,687

 

3.0

%

Total revenue

 

152,889

 

100.0

%

121,893

 

100.0

%

465,188

 

100.0

%

362,139

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

90,709

 

59.3

%

71,680

 

58.8

%

282,721

 

60.8

%

219,122

 

60.5

%

Cost of services provided

 

17,720

 

11.6

%

13,718

 

11.3

%

51,306

 

11.0

%

38,383

 

10.6

%

Total cost of revenue

 

108,429

 

70.9

%

85,398

 

70.1

%

334,027

 

71.8

%

257,505

 

71.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

44,460

 

29.1

%

36,495

 

29.9

%

131,161

 

28.2

%

104,634

 

28.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

30,627

 

20.1

%

25,318

 

20.8

%

90,846

 

19.5

%

72,165

 

19.9

%

Provision for doubtful accounts

 

3,542

 

2.3

%

2,248

 

1.8

%

10,461

 

2.3

%

6,727

 

1.9

%

Depreciation and amortization

 

1,227

 

0.8

%

915

 

0.8

%

3,597

 

0.8

%

2,668

 

0.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

35,396

 

23.2

%

28,481

 

23.4

%

104,904

 

22.6

%

81,560

 

22.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

9,064

 

5.9

%

8,014

 

6.6

%

26,257

 

5.6

%

23,074

 

6.4

%

Interest income (expense), net

 

(261

)

(0.2

)%

108

 

0.1

%

(470

)

(0.1

)%

258

 

%

Other expense, net

 

(260

)

(0.1

)%

(73

)

(0.1

)%

(688

)

(0.1

)%

(20

)

%