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 June 30, 2006
Or
o 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
(Registrants 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 issuers classes of common stock, as of the latest practicable date.
|
Issued and Outstanding |
|
Class |
|
as of August 1, 2006 |
|
|
|
Common Stock - $0.01 par value |
|
34,201,896 |
INDEX
OPTION CARE, INC. AND SUBSIDIARIES
2
Option Care, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
|
|
June 30, 2006 |
|
December 31, 2005 |
|
||
|
|
(Unaudited) |
|
(Restated-Note 1) |
|
||
|
|
|
|
|
|
||
Assets |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
15,444 |
|
$ |
7,816 |
|
Short-term investments |
|
4,000 |
|
41,042 |
|
||
Accounts receivable, net |
|
102,531 |
|
95,297 |
|
||
Inventory |
|
19,275 |
|
15,490 |
|
||
Deferred income tax benefit |
|
3,921 |
|
2,856 |
|
||
Other current assets |
|
8,974 |
|
9,942 |
|
||
|
|
|
|
|
|
||
Total current assets |
|
154,145 |
|
172,443 |
|
||
Equipment and other fixed assets, net |
|
22,024 |
|
18,905 |
|
||
Goodwill, net |
|
164,836 |
|
112,220 |
|
||
Other assets |
|
12,593 |
|
12,996 |
|
||
|
|
|
|
|
|
||
Total assets |
|
$ |
353,598 |
|
$ |
316,564 |
|
|
|
|
|
|
|
||
Liabilities and stockholders equity |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Trade accounts payable |
|
$ |
29,959 |
|
$ |
29,958 |
|
Accrued wages and benefits |
|
7,207 |
|
5,666 |
|
||
Current portion of long-term debt |
|
44 |
|
48 |
|
||
Other current liabilities |
|
12,899 |
|
4,077 |
|
||
|
|
|
|
|
|
||
Total current liabilities |
|
50,109 |
|
39,749 |
|
||
Long-term debt, less current portion |
|
86,301 |
|
86,306 |
|
||
Deferred income tax liability |
|
10,638 |
|
9,084 |
|
||
Other liabilities |
|
1,079 |
|
665 |
|
||
Minority interest |
|
705 |
|
593 |
|
||
|
|
|
|
|
|
||
Total liabilities |
|
148,832 |
|
136,397 |
|
||
|
|
|
|
|
|
||
Stockholders equity: |
|
|
|
|
|
||
Common stock, $.01 par value per share, 60,000 shares authorized, 34,125 and 33,081 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively |
|
341 |
|
328 |
|
||
Common stock to be issued, 145 and 134 shares at June 30, 2006 and December 31, 2005, respectively |
|
1,747 |
|
1,311 |
|
||
Additional paid-in capital |
|
143,652 |
|
128,158 |
|
||
Retained earnings |
|
59,026 |
|
50,370 |
|
||
|
|
|
|
|
|
||
Total stockholders equity |
|
204,766 |
|
180,167 |
|
||
|
|
|
|
|
|
||
Total liabilities and stockholders equity |
|
$ |
353,598 |
|
$ |
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 |
|
Six months ended |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
(Restated-Note 1) |
|
|
|
(Restated-Note 1) |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
||||
Specialty pharmacy services |
|
$ |
89,434 |
|
$ |
67,600 |
|
$ |
185,233 |
|
$ |
142,497 |
|
Infusion and related healthcare services |
|
64,870 |
|
47,690 |
|
122,248 |
|
90,538 |
|
||||
Other |
|
3,356 |
|
4,201 |
|
5,432 |
|
7,211 |
|
||||
Total revenue |
|
157,660 |
|
119,491 |
|
312,913 |
|
240,246 |
|
||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
||||
Cost of goods sold |
|
93,850 |
|
71,750 |
|
192,029 |
|
147,442 |
|
||||
Cost of services provided |
|
17,826 |
|
12,823 |
|
34,029 |
|
24,666 |
|
||||
Total cost of revenue |
|
111,676 |
|
84,573 |
|
226,058 |
|
172,108 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
45,984 |
|
34,918 |
|
86,855 |
|
68,138 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative expenses |
|
32,022 |
|
24,403 |
|
60,598 |
|
46,846 |
|
||||
Provision for doubtful accounts |
|
3,463 |
|
2,153 |
|
6,931 |
|
4,479 |
|
||||
Depreciation and amortization |
|
1,226 |
|
849 |
|
2,370 |
|
1,753 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
36,711 |
|
27,405 |
|
69,899 |
|
53,078 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
9,273 |
|
7,513 |
|
16,956 |
|
15,060 |
|
||||
Interest income (expense), net |
|
(217 |
) |
194 |
|
(209 |
) |
150 |
|
||||
Other income (expense), net |
|
(365 |
) |
100 |
|
(427 |
) |
53 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income before income taxes |
|
8,691 |
|
7,807 |
|
16,320 |
|
15,263 |
|
||||
Income tax provision |
|
3,330 |
|
3,004 |
|
5,842 |
|
5,788 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income from continuing operations |
|
$ |
5,361 |
|
$ |
4,803 |
|
$ |
10,478 |
|
$ |
9,475 |
|
|
|
|
|
|
|
|
|
|
|
||||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
||||
Loss on discontinued operations, net of income taxes |
|
(160 |
) |
|
|
(487 |
) |
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
5,201 |
|
$ |
4,803 |
|
$ |
9,991 |
|
$ |
9,475 |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
0.16 |
|
$ |
0.15 |
|
$ |
0.31 |
|
$ |
0.29 |
|
Discontinued operations |
|
$ |
(0.01 |
) |
$ |
|
|
$ |
(0.01 |
) |
$ |
|
|
Total |
|
$ |
0.15 |
|
$ |
0.15 |
|
$ |
0.30 |
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
0.15 |
|
$ |
0.14 |
|
$ |
0.30 |
|
$ |
0.28 |
|
Discontinued operations |
|
$ |
|
|
$ |
|
|
$ |
(0.02 |
) |
$ |
|
|
Total |
|
$ |
0.15 |
|
$ |
0.14 |
|
$ |
0.28 |
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
||||
Shares used in computing net income per share: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
33,991 |
|
32,559 |
|
33,572 |
|
32,332 |
|
||||
Diluted |
|
35,198 |
|
34,593 |
|
35,161 |
|
33,971 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash dividends per share |
|
$ |
0.0200 |
|
$ |
0.0200 |
|
$ |
0.0400 |
|
$ |
0.0333 |
|
See notes to condensed consolidated financial statements
4
Option Care, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
|
Six Months Ended |
|
||||
|
|
2006 |
|
2005 |
|
||
|
|
|
|
(Restated-Note 1) |
|
||
|
|
|
|
|
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net income |
|
$ |
9,991 |
|
$ |
9,475 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
3,975 |
|
3,022 |
|
||
Provision for doubtful accounts |
|
7,079 |
|
4,479 |
|
||
Deferred income taxes |
|
209 |
|
1 |
|
||
Income from equity investees |
|
243 |
|
|
|
||
Non-cash stock compensation expense |
|
452 |
|
1,881 |
|
||
Changes in assets and liabilities: |
|
|
|
|
|
||
Accounts and notes receivable |
|
(125 |
) |
(3,066 |
) |
||
Inventory |
|
(1,248 |
) |
1,546 |
|
||
Accounts payable |
|
(10,853 |
) |
(5,693 |
) |
||
Income taxes receivable/payable |
|
(114 |
) |
1,639 |
|
||
Change in other assets and liabilities |
|
3,748 |
|
(2,715 |
) |
||
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
13,357 |
|
10,569 |
|
||
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Purchases of short-term investments |
|
(4,000 |
) |
(135,288 |
) |
||
Sales of short-term investments |
|
41,042 |
|
139,060 |
|
||
Purchases of equipment and other, net |
|
(5,823 |
) |
(4,158 |
) |
||
Payments for acquisitions, net of cash acquired |
|
(38,778 |
) |
(25,742 |
) |
||
|
|
|
|
|
|
||
Net cash used in investing activities |
|
(7,559 |
) |
(26,128 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
||
Increase in financing costs |
|
(70 |
) |
(161 |
) |
||
Income tax benefit from exercise of stock options |
|
618 |
|
1,388 |
|
||
Payments on capital leases and other debt |
|
(10 |
) |
(13 |
) |
||
Proceeds from issuance of stock |
|
2,627 |
|
4,466 |
|
||
Payments of cash dividends to common shareholders |
|
(1,335 |
) |
(1,077 |
) |
||
|
|
|
|
|
|
||
Net cash provided by financing activities |
|
1,830 |
|
4,603 |
|
||
|
|
|
|
|
|
||
Net increase (decrease) in cash and cash equivalents |
|
7,628 |
|
(10,956 |
) |
||
Cash and cash equivalents, beginning of period |
|
7,816 |
|
19,816 |
|
||
Cash and cash equivalents, end of period |
|
$ |
15,444 |
|
$ |
8,860 |
|
See notes to condensed consolidated financial statements
5
Option Care, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 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 six months ended June 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 Cares 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 six months ended June 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 incorrect tax treatment of compensation expense from our employee stock purchase plan and incorrectly 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 |
|
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.
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 six months ended June 30, 2005 (in thousands, except per share amounts):
6
|
Three months ended June 30, 2005 |
|
Six months ended June 30, 2005 |
|
|||||||||||||||
|
|
As |
|
Effect of |
|
As |
|
As |
|
Effect of |
|
As |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total revenue |
|
$ |
119,491 |
|
$ |
|
|
$ |
119,491 |
|
$ |
240,246 |
|
$ |
|
|
$ |
240,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cost of goods sold |
|
71,750 |
|
|
|
71,750 |
|
147,442 |
|
|
|
147,442 |
|
||||||
Cost of services provided |
|
12,781 |
|
42 |
|
12,823 |
|
24,581 |
|
85 |
|
24,666 |
|
||||||
Total cost of revenue |
|
84,531 |
|
42 |
|
84,573 |
|
172,023 |
|
85 |
|
172,108 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gross profit |
|
34,960 |
|
(42 |
) |
34,918 |
|
68,223 |
|
(85 |
) |
68,138 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Selling, general and administrative expenses |
|
23,509 |
|
894 |
|
24,403 |
|
45,050 |
|
1,796 |
|
46,846 |
|
||||||
Other operating expenses |
|
3,002 |
|
|
|
3,002 |
|
6,232 |
|
|
|
6,232 |
|
||||||
Total operating expenses |
|
26,511 |
|
894 |
|
27,405 |
|
51,282 |
|
1,796 |
|
53,078 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Operating income |
|
8,449 |
|
(936 |
) |
7,513 |
|
16,941 |
|
(1,881 |
) |
15,060 |
|
||||||
Interest income |
|
194 |
|
|
|
194 |
|
150 |
|
|
|
150 |
|
||||||
Other expense, net |
|
100 |
|
|
|
100 |
|
53 |
|
|
|
53 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income before income taxes |
|
8,743 |
|
(936 |
) |
7,807 |
|
17,144 |
|
(1,881 |
) |
15,263 |
|
||||||
Income tax provision |
|
3,334 |
|
(330 |
) |
3,004 |
|
6,450 |
|
(662 |
) |
5,788 |
|
||||||
Net income |
|
$ |
5,409 |
|
$ |
(606 |
) |
$ |
4,803 |
|
$ |
10,694 |
|
$ |
(1,219 |
) |
$ |
9,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Basic |
|
$ |
0.17 |
|
$ |
(0.02 |
) |
$ |
0.15 |
|
$ |
0.33 |
|
$ |
(0.04 |
) |
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Diluted |
|
$ |
0.16 |
|
$ |
(0.02 |
) |
$ |
0.14 |
|
$ |
0.32 |
|
$ |
(0.04 |
) |
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Shares used in computing net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Basic |
|
32,559 |
|
|
|
32,559 |
|
32,332 |
|
|
|
32,332 |
|
||||||
Diluted |
|
34,519 |
|
74 |
|
34,593 |
|
33,930 |
|
41 |
|
33,971 |
|
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 six months ended June 30, 2005 (in thousands):
|
As Reported |
|
Effect of FAS |
|
As Restated |
|
||||
|
|
|
|
|
|
|
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|||
Net income |
|
$ |
10,694 |
|
$ |
(1,219 |
) |
$ |
9,475 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|||
Non-cash stock compensation expense |
|
|
|
1,881 |
|
1,881 |
|
|||
Deferred income taxes |
|
663 |
|
(662 |
) |
1 |
|
|||
Income tax benefit from exercise of stock options |
|
1,388 |
|
(1,388 |
) |
|
|
|||
Other adjustments |
|
(788 |
) |
|
|
(788 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net cash provided by operating activities |
|
11,957 |
|
(1,388 |
) |
10,569 |
|
|||
|
|
|
|
|
|
|
|
|||
Net cash used in investing activities |
|
(26,128 |
) |
|
|
(26,128 |
) |
|||
|
|
|
|
|
|
|
|
|||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|||
Income tax benefit from exercise of stock options |
|
|
|
1,388 |
|
1,388 |
|
|||
Other cash flows from financing activities |
|
3,215 |
|
|
|
3,215 |
|
|||
|
|
|
|
|
|
|
|
|||
Net cash provided by financing activities |
|
3,215 |
|
1,388 |
|
4,603 |
|
|||
|
|
|
|
|
|
|
|
|||
Net decrease in cash and cash equivalents |
|
(10,956 |
) |
|
|
(10,956 |
) |
|||
Cash and cash equivalents, beginning of period |
|
19,816 |
|
|
|
19,816 |
|
|||
Cash and cash equivalents, end of period |
|
$ |
8,860 |
|
$ |
|
|
$ |
8,860 |
|
7
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 83.5052 and $11.98 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 $0.02 per share dividends paid on June 10, September 2, and December 2, 2005, March 24, 2006 and June 5, 2006. 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 notes 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 six months ended June 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 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. We must maintain compliance with various financial and other covenants during the life of the Agreement. We incurred fees of approximately $100,000 related to negotiating this Agreement. We had no borrowings under the Agreement during the quarter ended June 30, 2006.
8
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 |
|
Six months ended |
|
|||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Basic: |
|
|
|
|
|
|
|
|
|
||||
Net income from continuing operations |
|
$ |
5,361 |
|
$ |
4,803 |
|
$ |
10,478 |
|
$ |
9,475 |
|
Net loss from discontinued operations |
|
(160 |
) |
|
|
(487 |
) |
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
5,201 |
|
$ |
4,803 |
|
$ |
9,991 |
|
$ |
9,475 |
|
|
|
|
|
|
|
|
|
|
|
||||
Average shares outstanding |
|
33,991 |
|
32,559 |
|
33,572 |
|
31,782 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings from continuing operations per share |
|
$ |
0.16 |
|
$ |
0.15 |
|
$ |
0.31 |
|
$ |
0.29 |
|
Basic loss from discontinued operations per share |
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per share |
|
$ |
0.15 |
|
$ |
0.15 |
|
$ |
0.30 |
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted: |
|
|
|
|
|
|
|
|
|
||||
Net income from continuing operations |
|
$ |
5,361 |
|
$ |
4,803 |
|
$ |
10,478 |
|
$ |
9,475 |
|
Net loss from discontinued operations |
|
(160 |
) |
|
|
(487 |
) |
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
5,201 |
|
$ |
4,803 |
|
$ |
9,991 |
|
$ |
9,475 |
|
|
|
|
|
|
|
|
|
|
|
||||
Average shares outstanding |
|
33,991 |
|
32,559 |
|
33,572 |
|
32,332 |
|
||||
Net effect of dilutive stock options Based on the treasury stock method |
|
906 |
|
1,099 |
|
979 |
|
1,064 |
|
||||
Net effect of dilutive contingently convertible debt (1) |
|
301 |
|
935 |
|
610 |
|
575 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total diluted shares |
|
35,198 |
|
34,593 |
|
35,161 |
|
33,971 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings from continuing operations per share |
|
$ |
0.15 |
|
$ |
0.14 |
|
$ |
0.30 |
|
$ |
0.28 |
|
Diluted loss from discontinued operations per share |
|
$ |
|
|
$ |
|
|
$ |
(0.02 |
) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings per share |
|
$ |
0.15 |
|
$ |
0.14 |
|
$ |
0.28 |
|
$ |
0.28 |
|
(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 patients 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.
9
Other revenue consists of royalties and other fees generated from our franchised pharmacy network and, for the three and six months ended June 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 six months ended June 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 |
|
Six months ended |
|
Accounts Receivable |
|
||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
December 31, |
|
||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blue Cross and Blue Shield of Florida |
|
13 |
% |
14 |
% |
13 |
% |
14 |
% |
10 |
% |
9 |
% |
Medicare & Medicaid |
|
21 |
% |
17 |
% |
20 |
% |
17 |
% |
18 |
% |
22 |
% |
All other payors (1) |
|
66 |
% |
69 |
% |
67 |
% |
69 |
% |
72 |
% |
69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
100 |
% |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
(1) No other payor represented 10% or more of 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 Cares quarterly Synagis® revenue for the year 2005 and the first two quarters of 2006 was as follows (in thousands):
|
Synagis® |
|
% of Total |
|
||
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 |
|
$ |
8,327 |
|
5.3 |
% |
(1) Percent of total revenue is calculated based on total revenue from continuing operations.
7. Acquisitions
We completed two acquisitions and entered into a binding agreement for a third acquisition during the six months ended June 30, 2006. The results of operations for each business were consolidated as of the effective date of their 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.
10
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 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 three and six months ended June 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 City. 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 shares of our common stock and $1.0 million is payable pursuant to the terms of a note. 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 six months subsequent to the Effective Date. The total cost of the acquisition is subject to working capital and earn-out adjustments. The total purchase price was allocated $21.9 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 June 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 six months ended June 30, 2006, we recorded additional goodwill of $8.8 million related to additional consideration paid and payable to the former owners of businesses we acquired in 2005. We also recorded $200,000 in additional consideration payable to the formers owners of a business we acquired during 2004.
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 three and six months ended June 30, 2006 for our current year acquisition and adjustments and additional consideration for our prior year acquisitions (in thousands):
|
Three months ended |
|
Six months ended |
|
|||
Purchase Price: |
|
|
|
|
|
||
Paid in cash |
|
$ |
17,533 |
|
$ |
38,778 |
|
Paid/payable in shares of Option Care common stock |
|
5,136 |
|
12,636 |
|
||
Liabilities assumed |
|
6,344 |
|
19,286 |
|
||
|
|
$ |
29,013 |
|
$ |
70,700 |
|
|
|
|
|
|
|
||
Allocation of Purchase Price: |
|
|
|
|
|
||
Goodwill |
|
$ |
23,787 |
|
$ |
52,712 |
|
Accounts receivable, net |
|
3,520 |
|
13,924 |
|
||
Other tangible assets |
|
1,273 |
|
3,589 |
|
||
Other intangible assets |
|
433 |
|
475 |
|
||
|
|
$ |
29,013 |
|
$ |
70,700 |
|
The following table sets forth information regarding the changes in our gross and net goodwill during the six months ended June 30, 2006 (in thousands):
11
|
Goodwill |
|
Accumulated |
|
Goodwill, net |
|
||||
|
|
|
|
|
|
|
|
|||
December 31, 2005 |
|
$ |
116,160 |
|
$ |
(3,940 |
) |
$ |
112,220 |
|
Current year acquisitions |
|
44,246 |
|
|
|
44,246 |
|
|||
Prior year acquisitions |
|
8,466 |
|
|
|
8,466 |
|
|||
Held for sale reclassification |
|
(96 |
) |
|
|
(96 |
) |
|||
|
|
|
|
|
|
|
|
|||
June 30, 2006 |
|
$ |
168,776 |
|
$ |
(3,940 |
) |
$ |
164,836 |
|
8. Discontinued Operations
In January 2006, we began exploring strategic alternatives for our home health agency in Portland, Oregon (Portland HHA), including the possible sale or disposition of certain operating assets of the Portland HHA. The Portland HHA was acquired on October 1, 2005 and is not viewed as a strategic asset of the company. At the end of the first quarter of 2006, we decided to sell or cease operations of the Portland HHA. The net book value of the operating assets expected to be sold or disposed was $300,000 as of June 30, 2006. These assets are classified as held for sale in our Condensed Consolidated Balance Sheet as of June 30, 2006, in accordance with SFAS No. 144. The Portland HHA incurred losses, net of tax of $160,000 for the quarter and $487,000 for the six months ended June 30, 2006. These net losses are included in a separate caption in our Condensed Consolidated Statement of Income for the three and six months ended June 30, 2006. We completed the sale of this business on August 1, 2006. The sale price was $500,000 paid in cash at closing, plus the assumption of certain liabilities by the purchaser.
The following table sets forth operating results from discontinued operations for the three and six months ended June 31, 2006 (in thousands):
|
Three months ended |
|
Six months ended |
|
|||
|
|
|
|
|
|
||
Total revenue |
|
$ |
1,483 |
|
$ |
3,325 |
|
|
|
|
|
|
|
||
Loss from discontinued operations before income taxes |
|
(259 |
) |
(746 |
) |
||
Income tax provision |
|
(99 |
) |
(259 |
) |
||
Net loss from discontinued operations |
|
$ |
(160 |
) |
$ |
(487 |
) |
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 |
|
Six months ended |
|
|||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Franchise-related revenue: |
|
|
|
|
|
|
|
|
|
||||
Royalties |
|
$ |
1,344 |
|
$ |
2,105 |
|
$ |
2,794 |
|
$ |
3,915 |
|
Vendor rebates and administration fees |
|
179 |
|
95 |
|
429 |
|
189 |
|
||||
Franchise settlements and related fees |
|
1,427 |
|
1,700 |
|
1,427 |
|
2,491 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total franchise-related revenue |
|
$ |
2,950 |
|
$ |
3,900 |
|
$ |
4,650 |
|
$ |
6,595 |
|
During the six months ended June 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.
During the six months ended June 30, 2005, we recorded franchise settlement revenue of $2.5 million. Of this total, $1.7 million was
12
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 six months ended June 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 June 30, |
|
Six months ended June 30, |
|
|||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Impact on net income for all stock-based compensation: |
|
|
|
|
|
|
|
|
|
||||
Stock option grants |
|
$ |
(255 |
) |
$ |
(404 |
) |
$ |
(719 |
) |
$ |
(760 |
) |
Employee stock purchase plan withholdings |
|
(108 |
) |
(117 |
) |
(216 |
) |
(209 |
) |
||||
Cumulative effect of a change in estimate(1) |
|
|
|
|
|
483 |
|
|
|
||||
Correction of pro-forma disclosure compensation expense |
|
|
|
(415 |
) |
|
|
(912 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Total impact on income before income taxes |
|
(363 |
) |
(936 |
) |
(452 |
) |
(1,881 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Provision for income taxes |
|
(98 |
) |
(205 |
) |
(91 |
) |
(381 |
) |
||||
Correction of pro-forma disclosure income tax benefit |
|
|
|
(125 |
) |
|
|
(281 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Total impact on net income |
|
$ |
(265 |
) |
$ |
(606 |
) |
$ |
(361 |
) |
$ |
(1,219 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Impact on net income per common share: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
(0.01 |
) |
$ |
(0.02 |
) |
$ |
(0.01 |
) |
$ |
(0.04 |
) |
Diluted |
|
$ |
(0.01 |
) |
$ |
(0.02 |
) |
$ |
(0.01 |
) |
$ |
(0.04 |
) |
(1) The cumulative effect of a change in estimate in the six months ended June 30, 2006 was related to a change in the estimated pre-vesting forfeiture rate for stock options.
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 $1.4 million excess tax benefit as a financing cash inflow on the Condensed Consolidated Statement of Cash Flows for the six months ended June 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 six months ended June 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 |
|
Six months ended |
|
|||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Annual dividend yield per share |
|
$ |
0.08 |
|
$ |
0.08 |
|
$ |
0.08 |
|
$ |
0.08 |
|
Expected volatility |
|
28 |
% |
30 |
% |
28 |
% |
33 |
% |
||||
Weighted average risk-free interest rate |
|
5.22 |
% |
3.72 |
% |
5.14 |
% |
3.66 |
% |
||||
Expected grant life (years) |
|
4.6 |
|
4.0 |
|
4.6 |
|
4.0 |
|
||||
Weighted average per share fair value of options granted |
|
$ |
3.51 |
|
$ |
3.92 |
|
$ |
3.58 |
|
$ |
3.99 |
|
During the quarter and six months ended June 30, 2006, we issued 165,000 and 278,000 shares of our common stock, respectively, related to the exercise of options granted from our stock incentive plan. During the quarter ended March 31, 2006, we issued 133,000
13
shares of common stock to participants in our employee stock purchase plan. No shares were issued from our employee stock purchase plan in the quarter ended June 30, 2006.
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. In accordance with FIN 48, the evaluation of a tax position is a two-step process. The first step is recognition: the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit recognized in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in:
(a) an increase in a liability for income taxes payable or a reduction of an income tax refund,
(b) a reduction in a deferred tax asset or an increase in a deferred tax liability, or
(c) both (a) and (b).
Unrecognized tax benefits should be classified on an enterprises balance sheet as current to the extent that enterprise anticipates making a payment within one year. An income tax liability should not be classified as a deferred tax liability unless it results from a taxable temporary difference (that is, a difference between the tax basis of an asset or a liability as calculated using FIN 48 and its reported amount in the balance sheet).
Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Use of a valuation allowance as described in Statement 109 is not an appropriate substitute for de-recognition of a tax position. The requirement to assess the need for a valuation allowance for deferred tax assets based on the sufficiency of future taxable income is unchanged by FIN 48.
FIN 48 is effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of FIN 48 was encouraged if the enterprise had not yet issued financial statements, including interim financial statements, in the period FIN 48 is adopted. We will adopt the guidance contained in FIN 48 at the beginning of our fiscal year ending December 31, 2007. We do not believe that adoption of the guidance contained in FIN 48 will have a material affect on our results of operations or financial condition.
12. Quarterly Dividends
Each quarter, our Board of Directors determines the dividend amount per share, if any, to be distributed in cash to our common stockholders. During each of the fiscal quarters ending March 31 and June 30, 2006, our board declared and we paid a $0.02 per share cash dividend. During the corresponding periods in 2005, our board declared and we paid cash dividends of $0.133 per share and $0.02 per share during the quarters ended March 31, 2005 and June 30, 2005, respectively.
13. Comprehensive Income
Net income was our only component of comprehensive income for the three and six months ended June 30, 2006 and 2005.
14
Item 2. Managements 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), 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 physicians 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 58 company-owned and managed locations, our 59 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 patients 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 six months ended June 30, 2005, software licensing and support revenue generated by our subsidiary, MBI. The MBI business was sold during the fourth quarter of 2005 and no software license and support revenue was recorded during the three and six months ended June 30, 2006.
Summarized information about revenue and gross profit for each of our service lines is provided in the following table (amounts in thousands):
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||||||||||
REVENUE |
|
Revenue |
|
% of |
|
Revenue |
|
% of |
|
Revenue |
|
% of |
|
Revenue |
|
% of |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Specialty pharmacy services |
|
$ |
89,434 |
|
56.7 |
% |
$ |
67,600 |
|
56.6 |
% |
$ |
185,233 |
|
59.2 |
% |
$ |
142,497 |
|
59.3 |
% |
Infusion and related healthcare services |
|
64,870 |
|
41.2 |
% |
47,690 |
|
39.9 |
% |
122,248 |
|
39.1 |
% |
90,538 |
|
37.7 |
% |
||||
Other |
|
3,356 |
|
2.1 |
% |
4,201 |
|
3.5 |
% |
5,432 |
|
1.7 |
% |
7,211 |
|
3.0 |
% |
||||
Total revenue |
|
$ |
157,660 |
|
100.0 |
% |
$ |
119,491 |
|
100.0 |
% |
$ |
312,913 |
|
100.0 |
% |
$ |
240,246 |
|
100.0 |
% |
15
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||||||||||
GROSS PROFIT |
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Specialty pharmacy services |
|
$ |
14,135 |
|
15.8 |
% |
$ |
10,307 |
|
15.2 |
% |
$ |
27,315 |
|
14.7 |
% |
$ |
21,860 |
|
15.3 |
% |
Infusion and related healthcare services |
|
28,494 |
|
43.9 |
% |
20,513 |
|
43.0 |
% |
54,108 |
|
44.3 |
% |
39,268 |
|
43.4 |
% |
||||
Total gross profit, excluding other revenue |
|
$ |
42,629 |
|
27.6 |
% |
$ |
30,820 |
|
26.7 |
% |
$ |
81,423 |
|
26.5 |
% |
$ |
61,128 |
|
26.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
3,355 |
|
100.0 |
% |
4,098 |
|
97.6 |
% |
5,432 |
|
100.0 |
% |
7,010 |
|
97.2 |
% |
||||
Total gross profit |
|
$ |
45,984 |
|
29.2 |
% |
$ |
34,918 |
|
29.2 |
% |
$ |
86,855 |
|
27.8 |
% |
$ |
68,138 |
|
28.4 |
% |
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. For the three and six months ended June 30, 2006, approximately 13% of our revenue was generated from this contract compared to 14% for the corresponding periods in the prior year. As of June 30, 2006 and December 31, 2005, respectively, 10% and 9% of our accounts receivable was due from Blue Cross and Blue Shield of Florida. 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. Currently, no other single managed care payor represents more than 10% of our revenue.
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 are currently making operational changes that will enable us to fully deliver services under this contract and anticipate implementing this program in our fiscal fourth quarter ending December 31, 2006. We expect to incur certain incremental implementation expenses during our third and fourth fiscal quarters related to these efforts.
We also provide services that are reimbursable through government healthcare programs such as Medicare and state Medicaid programs. For the three and six months ended June 30, 2006, approximately 21% and 20% of our revenue was generated from government healthcare programs compared to 17% for the corresponding three and six month periods in the prior year. As of June 30, 2006 and December 31, 2005, respectively, 18% and 22% of our total accounts receivable was due from government healthcare programs.
16
RESULTS OF OPERATIONS
The following table shows the results of our operations for the three and six months ended June 30, 2006 and 2005, expressed in amounts and percentages of revenue (amounts in thousands):
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||||||||||
|
|
Amount |
|
% of |
|
Amount |
|
% of |
|
Amount |
|
% of |
|
Amount |
|
% of |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Specialty pharmacy services |
|
$ |
89,434 |
|
56.7 |
% |
$ |
67,600 |
|
56.6 |
% |
$ |
185,233 |
|
59.2 |
% |
$ |
142,497 |
|
59.3 |
% |
Infusion and related healthcare services |
|
64,870 |
|
41.2 |
% |
47,690 |
|
39.9 |
% |
122,248 |
|
39.1 |
% |
90,538 |
|
37.7 |
% |
||||
Other |
|
3,356 |
|
2.1 |
% |
4,201 |
|
3.5 |
% |
5,432 |
|
1.7 |
% |
7,211 |
|
3.0 |
% |
||||
Total revenue |
|
157,660 |
|
100.0 |
% |
119,491 |
|
100.0 |
% |
312,913 |
|
100.0 |
% |
240,246 |
|
100.0 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of goods sold |
|
93,850 |
|
59.5 |
% |
71,750 |
|
60.0 |
% |
192,029 |
|
61.3 |
% |
147,442 |
|
61.4 |
% |
||||
Cost of services provided |
|
17,826 |
|
11.3 |
% |
12,823 |
|
10.8 |
% |
34,029 |
|
10.9 |
% |
24,666 |
|
10.2 |
% |
||||
Total cost of revenue |
|
111,676 |
|
70.8 |
% |
84,573 |
|
70.8 |
% |
226,058 |
|
72.2 |
% |
172,108 |
|
71.6 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
45,984 |
|
29.2 |
% |
34,918 |
|
29.2 |
% |
86,855 |
|
27.8 |
% |
68,138 |
|
28.4 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative expenses |
|
32,022 |
|
20.3 |
% |
24,403 |
|
20.4 |
% |
60,598 |
|
19.4 |
% |
46,846 |
|
19.5 |
% |
||||
Provision for doubtful accounts |
|
3,463 |
|
2.2 |
% |
2,153 |
|
1.8 |
% |
6,931 |
|
2.2 |
% |
4,479 |
|
1.9 |
% |
||||
Depreciation and amortization |
|
1,226 |
|
0.8 |
% |
849 |
|
0.7 |
% |
2,370 |
|
0.8 |
% |
1,753 |
|
0.7 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|