**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**For the quarterly period ended**

 

**June 30, 2002**

 

**Commission file number 0-19878**

 

----

 

**OPTION CARE, INC.**

(Exact name of registrant asspecified 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  office)                        |   | (zip code)                         |
|                                                            |   |                               |
| **(847) 465-2100**                                         |
| (Registrant’s telephone number,  including area code)      |

 

----

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý  No o

 

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

 

| **Class**                    |   | **Issued and Outstanding  as of August 1, 2002** |
|------------------------------|--------|--------------------------------------------------|
|                         |   |                                             |
| Common Stock - .01 par value |   | 20,546,681                                       |
|                         |   |                                             |

 

 

----

 

**INDEX**

 

**OPTIONCARE, INC. AND SUBSIDIARIES**

 
| **DESCRIPTION** |
|-----------------|
|            |   |   |
| **PART I**      |   | **FINANCIAL INFORMATION** |
|            |   |   |
| Item 1.         |   | Financial Statements  (Unaudited) |
|            |   |   |
|            |   | Condensed  consolidated balance sheets—June 30, 2002 and December 31, 2001 |
|            |   |   |
|            |   | Condensed  consolidated statements of income—Three and six months ended June 30,  2002 and 2001 |
|            |   |   |
|            |   | Condensed  consolidated statements of cash flows—Six months ended June 30, 2002 and  2001 |
|            |   |   |
|            |   | Notes  to condensed consolidated financial statements—June 30, 2002 |
|            |   |   |
| Item  2.        |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|            |   |   |
| Item  3.        |   | Quantitative  and Qualitative Disclosures about Market Risk |
|            |   |   |
|            |   |   |
| **PART II**     |   | **OTHER INFORMATION** |
|            |   |   |
| Item 1.         |   | Legal Proceedings |
|            |   |   |
| Item  2.        |   | Changes  in 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(a).      |   | Exhibits |
|            |   |   |
| Item 6(b).      | Reports on Form 8-K |
|            |   |   |
| **SIGNATURES**  |
|                 |  |  |  |

 

2

----

 

**PART I.  FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**Option Care, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

(in thousands, except share and per share amounts)

 
|                                                                                                                                                                   |   | **June 30, 2002  (Unaudited)** |    | **December 31, 2001  (Note 1)** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|---------------------------------|--------|
|                                                                                                                                                                   |   |                           |    |                            |   |
| Assets                                                                                                                                                                 |   |                           |    |                            |   |
| Current  assets:                                                                                                                                                       |   |                           |    |                            |   |
| Cash  and cash equivalents                                                                                                                                             |   | $                              | —  |                            | $      | 8,511 |   |
| Accounts  receivable, net                                                                                                                                              |   | 62,440                         |    | 56,341                          |   |
| Inventory                                                                                                                                                              |   | 7,141                          |    | 6,388                           |   |
| Deferred  tax asset                                                                                                                                                    |   | 3,038                          |    | 3,038                           |   |
| Other  current assets                                                                                                                                                  |   | 3,312                          |    | 3,421                           |   |
|                                                                                                                                                                   |   |                           |    |                            |   |
| Total  current assets                                                                                                                                                  |   | 75,931                         |    | 77,699                          |   |
| Investments                                                                                                                                                            |   | 178                            |    | —                          |   |
| Equipment  and other fixed assets, net                                                                                                                                 |   | 8,536                          |    | 7,330                           |   |
| Goodwill,  net                                                                                                                                                         |   | 45,646                         |    | 38,384                          |   |
| Intangible assets, net                                                                                                                                                 |   | 2,135                          |    | 1,555                           |   |
| Other  assets                                                                                                                                                          |   | 371                            |    | 294                             |   |
|                                                                                                                                                                   |   |                           |    |                            |   |
| Total  assets                                                                                                                                                          |   | $                              | 132,797 |                            | $      | 125,262 |   |
|                                                                                                                                                                   |   |                           |    |                            |   |
| Liabilities  and stockholders’ equity                                                                                                                             |   |                           |    |                            |   |
| Current  liabilities:                                                                                                                                                  |   |                           |    |                            |   |
| Cash  overdraft                                                                                                                                                        |   | $                              | 350     |                            | $      | — |   |
| Current  portion of long-term debt                                                                                                                                     |   | 229                            |    | 265                             |   |
| Trade  accounts payable                                                                                                                                                |   | 9,943                          |    | 11,117                          |   |
| Other  current liabilities                                                                                                                                             |   | 7,327                          |    | 9,960                           |   |
|                                                                                                                                                                   |   |                           |    |                            |   |
| Total  current liabilities                                                                                                                                             |   | 17,849                         |    | 21,342                          |   |
| Long-term  debt, less current portion                                                                                                                                  |   | 388                            |    | 353                             |   |
| Other  liabilities                                                                                                                                                     |   | 2,206                          |    | 2,333                           |   |
| Minority  interest                                                                                                                                                     |   | 1,014                          |    | 468                             |   |
|                                                                                                                                                                   |   |                           |    |                            |   |
| Total  liabilities                                                                                                                                                     |   | 21,457                         |    | 24,496                          |   |
|                                                                                                                                                                   |   |                           |    |                            |   |
| Stockholders’  equity:                                                                                                                                            |   |                           |    |                            |   |
| Common stock, $.01 par  value per share, 60,000,000 shares authorized, 20,544,481 and 20,046,480  shares issued and outstanding at June 30, 2002 and December 31, 2001 |   | 205                            |    | 200                             |   |
| Common  stock to be issued, 110,944 and 191,296 shares at June 30, 2002 and December  31, 2001                                                                         |   | 1,128                          |    | 1,270                           |   |
| Other  stockholders’ equity                                                                                                                                       |   | 110,007                        |    | 99,296                          |   |
|                                                                                                                                                                   |   |                           |    |                            |   |
| Total  stockholders’ equity                                                                                                                                       |   | 111,340                        |    | 100,766                         |   |
|                                                                                                                                                                   |   |                           |    |                            |   |
| Total  liabilities and stockholders’ equity                                                                                                                       |   | $                              | 132,797 |                            | $      | 125,262 |   |

* *

*See notes tocondensed consolidated financial statements*

 

3

----

 

**Option Care, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Income**

(Unaudited)

(in thousands, except per share amounts)

 
|                                            |   | **Three Months EndedJune 30,** |   | **Six Months EndedJune 30,** |   |
|-------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|
|                                            |   | **2002**                            |   | **2001**                          |   | **2002** |   | **2001** | ** ** |
|                                            |   |                                |   |                              |   |   |   |   |   |   |   |   |   |
| Revenue                                         |   | $                                   | 75,525 |                              | $      | 49,903 |   | $ | 148,232 |   | $ | 95,808 |   |
| Cost  of revenue                                |   | 51,952                              |   | 32,556                            |   | 101,996 |   | 62,845 |   |
|                                            |   |                                |   |                              |   |   |   |   |   |
| Gross  profit                                   |   | 23,573                              |   | 17,347                            |   | 46,236 |   | 32,963 |   |
|                                            |   |                                |   |                              |   |   |   |   |   |
| Selling,  general and administrative expenses   |   | 15,981                              |   | 11,921                            |   | 31,428 |   | 23,004 |   |
| Provision  for doubtful accounts                |   | 1,426                               |   | 847                               |   | 2,925 |   | 1,411 |   |
| Amortization  of goodwill                       |   | —                              |   | 237                               |   | — |   | 462 |   |
|                                            |   |                                |   |                              |   |   |   |   |   |
| Total  operating expenses                       |   | 17,407                              |   | 13,005                            |   | 34,353 |   | 24,877 |   |
|                                            |   |                                |   |                              |   |   |   |   |   |
| Operating  income                               |   | 6,166                               |   | 4,342                             |   | 11,883 |   | 8,086 |   |
| Interest  expense                               |   | (33                                 | )      | (413                              | )      | (16 | ) | (754 | ) |
| Other  expense, net                             |   | 43                                  |   | (73                               | )      | 11 |   | — |   |
|                                            |   |                                |   |                              |   |   |   |   |   |
| Income  before income taxes                     |   | 6,176                               |   | 3,856                             |   | 11,878 |   | 7,332 |   |
| Income  tax provision                           |   | 2,425                               |   | 1,515                             |   | 4,665 |   | 2,860 |   |
|                                            |   |                                |   |                              |   |   |   |   |   |
| Net  income                                     |   | $                                   | 3,751  |                              | $      | 2,341 |   | $ | 7,213 |   | $ | 4,472 |   |
|                                            |   |                                |   |                              |   |   |   |   |   |
| Net  income per common share:                   |   |                                |   |                              |   |   |   |   |   |
| Basic                                           |   | $                                   | 0.18   |                              | $      | 0.15 |   | $ | 0.35 |   | $ | 0.29 |   |
|                                            |   |                                |   |                              |   |   |   |   |   |
| Diluted                                         |   | $                                   | 0.18   |                              | $      | 0.14 |   | $ | 0.34 |   | $ | 0.28 |   |
|                                            |   |                                |   |                              |   |   |   |   |   |
| Shares  used in computing net income per share: |   |                                |   |                              |   |   |   |   |   |
| Basic                                           |   | 20,627                              |   | 15,504                            |   | 20,528 |   | 15,405 |   |
| Diluted                                         |   | 21,243                              |   | 16,209                            |   | 21,110 |   | 15,990 |   |

* *

*See notes to condensed consolidatedfinancial statements*

 

4

----

 

**Option Care, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)

(in thousands)

 
|                                                                                          |   | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                                          |   | **2002**                            |       | **2001** | ** ** |
|                                                                                          |   |                                |       |   |   |
| Cash  flows from operating activities:                                                        |   |                                |       |   |   |
| Net  income                                                                                   |   | $                                   | 7,213      |   | $ | 4,472 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |   |                                |       |   |   |
| Depreciation  and amortization                                                                |   | 1,853                               |       | 1,794 |   |
| Provision  for doubtful accounts                                                              |   | 2,925                               |       | 1,411 |   |
| Other                                                                                         |   | 1,596                               |       | 514 |   |
| Changes  in assets and liabilities:                                                           |   |                                |       |   |   |
| Accounts  receivable                                                                          |   | (7,006                              | )          | (9,585 | ) |
| Inventory                                                                                     |   | 172                                 |       | (457 | ) |
| Accounts  payable                                                                             |   | (2,867                              | )          | (706 | ) |
| Change  in other assets and liabilities                                                       |   | (1,622                              | )          | (1,674 | ) |
|                                                                                          |   |                                |       |   |   |
| Net  cash provided by (used in) operating activities                                          |   | 2,264                               |       | (4,231 | ) |
|                                                                                          |   |                                |       |   |   |
| Cash  flows from investing activities:                                                        |   |                                |       |   |   |
| Purchases  of equipment and other, net                                                        |   | (2,265                              | )          | (1,329 | ) |
| Additions  to other assets, net                                                               |   | (70                                 | )          | 112 |   |
| Payments for  acquisitions, net of cash acquired                                              |   | (9,834                              | )          | (10,320 | ) |
|                                                                                          |   |                                |       |   |   |
| Net  cash used in investing activities                                                        |   | (12,169                             | )          | (11,537 | ) |
|                                                                                          |   |                                |       |   |   |
| Cash  flows from financing activities:                                                        |   |                                |       |   |   |
| Increase  in cash overdraft                                                                   |   | 350                                 |       | 582 |   |
| Increase  in financing costs                                                                  |   | (530                                | )          | — |   |
| Net  borrowing on credit agreements                                                           |   | —                              |       | 14,741 |   |
| Payments  on capital leases and other debt                                                    |   | (191                                | )          | (34 | ) |
| Proceeds  from issuance of stock                                                              |   | 1,765                               |       | 479 |   |
|                                                                                          |   |                                |       |   |   |
| Net  cash provided by financing activities                                                    |   | 1,394                               |       | 15,768 |   |
|                                                                                          |   |                                |       |   |   |
| Net  decrease in cash and cash equivalents                                                    |   | (8,511                              | )          | — |   |
| Cash and cash  equivalents, beginning of period                                               |   | 8,511                               |       | — |   |
| Cash  and cash equivalents, end of period                                                     |   | $                                   | —     |   | $ | — |   |

* *

*See notes tocondensed consolidated financial statements*

 

5

----

 

**Option Care, Inc. and Subsidiaries**

**Notesto Condensed Consolidated Financial Statements**

**June 30, 2002**

(Unaudited)

 

**1.   Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements. Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.Operating results for the three and six months ended June 30, 2002 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2002.

 

The balance sheet at December 31, 2001 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

For further information, refer to theconsolidated financial statements and footnotes thereto included in OptionCare’s Report on Form 10-K for the year ended December 31, 2001.

 

Effective January1, 2002, Option Care is operating in and reporting one segment.  Since there is no longer a clear distinctionbetween the operations of our local pharmacies and our regional specialtypharmacies, the chief decision-maker no longer uses separate financialinformation for those two portions of our business to make decisions. Ouroperations are reflected as one segment and all prior period informationcontained in this Form 10-Q has been reclassified accordingly.

 

**2.  Reclassifications**

 

Certain amounts in the condensed consolidatedfinancial statements have been reclassified to conform to the current yearpresentation.

 

**3.  Long-Term Debt**

 

On March 29, 2002,we entered into a $60 million revolving Credit and Security Agreement with J.P.Morgan Business Credit Corporation, J.P. Morgan Chase Bank and LaSalle Bank,N.A.  The facility requires us to meet certainfinancial covenants.  Option Care paid afacility fee of approximately $400,000 upon signing the agreement.  The agreement provides for a commitment fee,calculated and paid quarterly on a sliding scale from 0.45% to 0.25%, based onthe average daily unused portion of the facility.  For a fee, Option Care may secure up to $5 million in letters ofcredit.  Depending on our level ofborrowing under the agreement, Option Care may select interest rates rangingfrom the Eurodollar Rate plus 2% to 2.75%, or the bank’s reference rate plus 0%to 0.75%.  The agreement expires onMarch 29, 2005.

 

Availability under the Credit and Security Agreement is relatedto various percentages of Option Care’s outstanding accounts receivable andinventory balances, less certain capped and ineligible amounts, as defined inthe agreement.  Overall borrowings underthe agreement will be limited to the lesser of the remaining availability underthe agreement and the total allowable collateral borrowing base.  The facility is secured by substantially allcompany assets.  In addition tocustomary events of default, the facility provides that a change in controlwould give rise to an event of default.

 

As of June 30,2002, no amounts were outstanding under this facility and our availability was$34.2 million, based on the accounts receivable and inventory balances.

 

6

----

 

**4.   Earnings Per Share Data**

 

The following table sets forth the computation of basic and dilutedearnings per share for the periods indicated. Share and per share amounts for all periods presented reflect theeffects of the 5-for-4 stock split completed on May 1, 2002 for stockholders ofrecord as of April 10, 2002.

 
|                                                                            |   | **Three months ended  June 30,**             |   | **Six months ended  June 30,** |   |
|---------------------------------------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------|--------|
|                                                                            |   | **2002**                                     |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                                                            |   | **(in thousands, except per share amounts)** |   |
|                                                                            |   |                                         |   |
| Basic:                                                                          |   |                                         |   |                           |   |   |   |   |   |
| Net  income                                                                     |   | $                                            | 3,751  |                           | $      | 2,341 |   | $ | 7,213 |   | $ | 4,472 |   |
|                                                                            |   |                                         |   |                           |   |   |   |   |   |
| Average  shares outstanding                                                     |   | 20,627                                       |   | 15,504                         |   | 20,528 |   | 15,405 |   |
|                                                                            |   |                                         |   |                           |   |   |   |   |   |
| Basic  earnings per share                                                       |   | $                                            | 0.18   |                           | $      | 0.15 |   | $ | 0.35 |   | $ | 0.29 |   |
|                                                                            |   |                                         |   |                           |   |   |   |   |   |
| Diluted:                                                                        |   |                                         |   |                           |   |   |   |   |   |
| Net  income                                                                     |   | $                                            | 3,751  |                           | $      | 2,341 |   | $ | 7,213 |   | $ | 4,472 |   |
|                                                                            |   |                                         |   |                           |   |   |   |   |   |
| Average  shares outstanding                                                     |   | 20,627                                       |   | 15,504                         |   | 20,528 |   | 15,405 |   |
| Net  effect of dilutive stock options – Based on the treasury stock method |   | 616                                          |   | 705                            |   | 582 |   | 585 |   |
|                                                                            |   |                                         |   |                           |   |   |   |   |   |
| Total  diluted shares                                                           |   | 21,243                                       |   | 16,209                         |   | 21,110 |   | 15,990 |   |
|                                                                            |   |                                         |   |                           |   |   |   |   |   |
| Diluted  earnings per share                                                     |   | $                                            | 0.18   |                           | $      | 0.14 |   | $ | 0.34 |   | $ | 0.28 |   |

 

**5.   Operating Segments**

 

Effective January 1, 2002, Option Care is operating in and reporting onesegment. Previously, Option Care had identified two distinct operatingsegments: the local pharmacy division and the regional specialty pharmacydivision.  Over the past year, OptionCare has expanded the distribution of specialty drugs through its company-ownedlocal pharmacies.  Since there is nolonger a clear distinction between the operations of our local pharmacies andour regional specialty pharmacies, Option Care’s chief decision-makersno longer use separate financial information for those two portions of ourbusiness to make decisions. Our operations are now reflected as one reportingsegment and all prior period informationcontained in this Form 10-Q has been reclassified accordingly.

 

**6.   Significant Customer**

 

We generate revenue from managed care contracts and other agreementswith commercial third party payors.  Ourprincipal managed care contract is with Blue Cross and Blue Shield of Floridawhich contracts with us through our company-owned pharmacy located in Miami,Florida.  Approximately 21% and 20% ofour revenue, respectively, for the three and six months ended June 30, 2002 wasrelated to this contract.  For the threeand six months ended June 30, 2001, approximately 21% of our revenue wasrelated to this contract.  As of June30, 2002 and December 31, 2001, approximately 10% and 11% of our accountsreceivable, respectively, was due from Blue Cross and Blue Shield of Florida.  In September 2001, we signed a new agreementthat expands our relationship by increasing the patient lives covered by theagreement. The contract is terminable by either party on 90 days’ notice and,unless terminated, renews annually each September for an additional one-yearterm.

 

Option Care also generates revenue from government programs such asMedicare and Medicaid.  Approximately15% and 16% of our revenue for the three and six months ended June 30, 2002 wasrelated to this contract.  For thecorresponding periods of the prior year, approximately 16% of our revenue wasrelated to these government programs. Approximately 19% and 17% of our accounts receivable as of June 30, 2002and December 31, 2001, respectively, was due from these government programs.

 

7

----

 

**7.****              Acquisitions**

 

On April 16, 2002, Option Care acquired certain assets and the relatedhome infusion operations of The Mount Sinai Hospital, which is located in NewYork, New York.  This acquisitionprovides us with entrance into the New York City market, and establishes anassociation with a well-established and respected healthcare institution.  This acquisition also furthers our goal ofexpanding our overall presence in the Northeast.

 

On May 6, 2002, Option Care acquired 60% of the issued and outstandingcapital stock of Infusion Specialties, Inc., a Houston, Texas based independentprovider of specialty pharmaceuticals, primarily focused on treating chronicconditions such as hemophilia and cystic fibrosis. This acquisition expandsOption Care’s market share in Texas and expands our menu of services to includethe treatment of hemophilia.  OnApril 1, 2003, the Company has the right to purchase and the seller hasthe right to sell the remaining 40% interest at a price based on theoperation’s earnings.

 

On May 15, 2002, Option Care acquired 100% of the issued and outstandingshares of capital stock of Springville Pharmacy Infusion Therapy, Inc., anindependent provider of home infusion therapies in Springville, New York, whichis a suburb of Buffalo.  Thisacquisition expands Option Care’s coverage within the state of New York andimproves our opportunity to secure statewide contracts.

 

Each acquisition was accounted for as a purchase. The results ofoperations of these acquisitions are included in the condensed consolidatedstatements of income as of the effective date of each acquisition.  In aggregate, Option Care paid $5.6 millionin cash at closing for these acquisitions, and an additional $600,000 will bepayable as additional consideration in a future period, subject to potentialoffsets and adjustments.  During thethree-month period ended June 30, 2002, Option Care also paid additionalconsideration of $1.1 million in cash related to acquisitions completed in 2001,2000 and 1996.

 

The aggregate cost of these three new acquisitions was as follows:

 

|                              |   | **(in thousands)** |   |
|-----------------------------------|--------|--------------------|--------|
|                              |   |               |   |   |
| Cash                              |   | $                  | 5,647  |   |
| Deferred  acquisition obligations |   | 600                |   |
| Assumption  of liabilities        |   | 1,497              |   |
|                              |   | $                  | 7,744  |   |

 

The aggregatepurchase price was allocated as follows:

 

|                    |   | **(in thousands)** |   |
|-------------------------|--------|--------------------|--------|
|                    |   |               |   |   |
| Accounts  receivable    |   | $                  | 2,000  |   |
| Inventory               |   | 589                |   |
| Property  and equipment |   | 333                |   |
| Other  tangible assets  |   | 85                 |   |
| Intangible  assets      |   | 311                |   |
| Goodwill                |   | 4,933              |   |
| Minority  interest      |   | (507               | )      |
|                    |   | $                  | 7,744  |   |

 

8

----

 

Our unaudited pro formaresults of operations, presented as if the acquisitions Option Care completedfrom January 1, 2001 through June 30, 2002 had occurred as of January 1, 2001,were as follows:

 

|                                                   |   | **Six Months Ended June 30,**                |       |
|--------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                   |   | **2002**                                     |       | **2001** | ** ** |
|                                                   |   | **(in thousands, except per share amounts)** | ** ** |
|                                                   |   |                                         |       |   |   |   |   |
| Revenue                                                |   | $                                            | 154,332    |   | $ | 134,417 |   |
|                                                   |   |                                         |       |   |   |
| Net  income                                            |   | 7,733                                        |       | 6,571 |   |
|                                                   |   |                                         |       |   |   |
| Net income per diluted  share                          |   | $                                            | 0.37       |   | $ | 0.41 |   |
|                                                   |   |                                         |       |   |   |
| Shares used in  computing net income per diluted share |   | 21,110                                       |       | 15,990 |   |

 

**8.   New Accounting Pronouncements**

 

Option Care adopted the non-amortization provisions of Statement ofFinancial Accounting Standards (SFAS) No. 142, *Goodwill and Other Intangible Assets*,effective January 1, 2002.  Thisresulted in an increase to net income of approximately $500,000 for the sixmonths ended June 30, 2002, and is expected to increase full-year net income byapproximately  $1.2 million. Inaccordance with the requirements of SFAS No. 142, Option Care has testedgoodwill for impairment as of January 1, 2002. No impairment of goodwill was identified.

 

The following table provides comparative netincome and net income per share had the non-amortization provisions of SFAS No.142 been adopted for all periods presented:

 
|                               |   | **Three Months Ended June 30,**         |   | **Six Months Ended June 30,** |   |
|------------------------------------|--------|----------------------------------------------|--------|------------------------------------|--------|
|                               |   | **2002**                                     |   | **2001**                           |   | **2002** |   | **2001** | ** ** |
|                               |   | **(in thousands, except per share amounts)** |   |
|                               |   |                                         |   |                               |   |   |   |   |   |   |   |   |   |
| Reported  net income               |   | $                                            | 3,751  |                               | $      | 2,341 |   | $ | 7,213 |   | $ | 4,472 |   |
| Goodwill  amortization, net of tax |   | —                                       |   | 162                                |   | — |   | 316 |   |
| Adjusted  net income               |   | $                                            | 3,751  |                               | $      | 2,503 |   | $ | 7,213 |   | $ | 4,788 |   |
|                               |   |                                         |   |                               |   |   |   |   |   |
| Basic  income per share:           |   |                                         |   |                               |   |   |   |   |   |
| Reported  basic income per share   |   | $                                            | 0.18   |                               | $      | 0.15 |   | $ | 0.35 |   | $ | 0.29 |   |
| Goodwill  amortization, net of tax |   | —                                       |   | 0.01                               |   | — |   | 0.02 |   |
| Adjusted  basic income per share   |   | $                                            | 0.18   |                               | $      | 0.16 |   | $ | 0.35 |   | $ | 0.31 |   |
|                               |   |                                         |   |                               |   |   |   |   |   |
| Diluted  income per share:         |   |                                         |   |                               |   |   |   |   |   |
| Reported  diluted income per share |   | $                                            | 0.18   |                               | $      | 0.14 |   | $ | 0.34 |   | $ | 0.28 |   |
| Goodwill  amortization, net of tax |   | —                                       |   | 0.01                               |   | — |   | 0.02 |   |
| Adjusted diluted income  per share |   | $                                            | 0.18   |                               | $      | 0.15 |   | $ | 0.34 |   | $ | 0.30 |   |

 

9

----

 

**9.   Subsequent Event**

 

On July 29, 2002, Option Care acquired certain assets of the homeinfusion business operated by Allina Heath Systems in Roseville, Minnesota, asuburb of St. Paul.  The purchase pricewas $15.1 million, of which $10.0 million was paid in cash at closing and $5.1million will be payable in cash in future periods.

 

10

----

 

**Item 2.**             **Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**FORWARD LOOKING STATEMENTS**

 

The following discussionshould be read in conjunction with our Annual Report on Form 10-K for theyear ended December 31, 2001. The Private Securities Litigation Reform Actof 1995 provides a “safe harbor” for forward-looking statements. Certaininformation included in this Quarterly Report on Form 10-Q and othermaterials filed or to be filed by us with the Securities and ExchangeCommission (as well as information included in oral statements or other writtenstatements made or to be made by us) contain statements that are or will beforward-looking, such as statements relating to acquisitions and other businessdevelopment activities, future capital expenditures and the effects of futureregulation and competition. Such forward-looking information involves importantrisks and uncertainties that could significantly affect anticipated results inthe future and, accordingly, such results may differ from those expressed inany forward-looking statements made by us, or on our behalf. These risks anduncertainties include, but are not limited to, uncertainties affecting ourbusinesses 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 (includingfederal, state and local efforts to reform the delivery of and payment forhealthcare services), general economic conditions (including economicconditions affecting the healthcare industry in particular), the pricing andavailability of equipment and services, technological developments and changesin the competitive environment in which we operate.

 

**OVERVIEW**

 

We provide alternate siteinfusion and specialty pharmacy services to patients on behalf of managed careorganizations and other third party payors. We contract with payors to provide infusion therapy, specialtypharmaceuticals and other related healthcare services to patients at home or atother alternate-site settings, such as physicians’ offices.  As of June 30, 2002, our pharmacy andrelated services are provided locally through our nationwide network of 129owned and franchised pharmacy locations, operating under the name OptionCare®.  Three of these pharmacies alsofunction as regional distribution hubs for specialty pharmaceuticals, andoperate under the name OptionMed®.

 

Effective January 1,2002, Option Care is operating in and reporting one segment with three servicelines: infusion pharmacy and related services; specialty pharmacy services; andother.  All prior period informationcontained in this Form 10-Q has been reclassified accordingly.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

Management’s discussion and analysis of our financial condition andresults of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these statements requires usto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses and their related disclosures.  On an ongoing basis, Option Care evaluatesits estimates and judgments based on historical experience and various otherfactors that are believed to be reasonable. Actual results may vary from these estimates under different assumptionsor conditions.  We annually review ourfinancial reporting and disclosure practices and accounting policies to ensurethat our financial reporting and disclosures provide accurate and transparentinformation relative to our financial condition and results of operations, aswell as our current business environment. Option Care management believes that of our significant accountingpolicies, the following policies involve a higher degree of judgment and/orcomplexity.

 

**Revenuerecognition**

 

Our revenue is primarilyderived from the sale of infusible and injectible pharmaceuticals and provisionof related nursing services to patients at alternate-site settings.  Most of this revenue is billed under managedcare or other contracts, while virtually all of the remainder is billed togovernment programs, such as Medicare and Medicaid. Billed and unbilled revenueis recorded net of contractual adjustments based on our interpretation of theterms of each managed care contract or government contract/pricing schedule.The accuracy of our recorded net revenue is subject to the accuracy of payorinformation on file for each patient, and is also subject to our correctinterpretation of each underlying contract with respect to reimbursement ratesfor the drugs and services we provided. If we subsequently discover errors ineither payor information or interpretation of the reimbursement rates of ourcontracts,

 

11

----

 

we adjust revenue in theperiod that such errors are discovered. Such adjustments may have a positive ornegative impact on the revenues and results of operations reported for thosesubsequent periods.

** **

**Accountsreceivables**

 

Option Care records allof our accounts receivables net of allowance for bad debts.  These allowances are estimated based onseveral factors, such as our past accounts receivable collection history, evaluationof the age of the accounts receivable at the end of each period, and detailedanalysis of the expected collectibility of amounts receivable from eachsignificant payor based on a number of factors. In certain circumstances, ouraccounts receivable may also be subject to retroactive adjustments by payors.Although we believe that our estimation of the net value of our accountsreceivable is reasonable, actual collections may differ from our estimates ofcollectibility, affecting our future financial condition and results ofoperations.

** **

**Goodwill and otherintangible assets**

 

Werecord goodwill from our acquisitions equal to the excess of the total cost ofthe acquisitions over the net book value of all identified tangible andintangible assets acquired. Beginning in 2002, in accordance with Statements ofFinancial Accounting Standards No. 141, *Business Combinations* and No. 142, *Goodwill andOther Intangible Assets (SFAS No. 141 and SFAS No. 142)*, goodwill isnot to be amortized but is to be evaluated periodically for impairment. OptionCare has performed an initial impairment test of our goodwill as of January 1,2002.  No impairment was identified. Ifmarket conditions and/or the performance of our acquired businesses change infuture periods, we may be required to record impairment charges in thoseperiods.

 

12

----

 

**RESULTS OF OPERATIONS**

 

The following table showsthe results of our operations for the three and six months ended June 30, 2002and 2001, expressed as percentages of revenue:

 
|                                          |   | **Three Months EndedJune 30,** |   | **Six Months EndedJune 30,** |   |
|-----------------------------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|
|                                          |   | **2002**                            |   | **2001**                          |   | **2002** |   | **2001** |   |
|                                          |   |                                |   |                              |   |   |   |   |   |
| Revenue                                       |   | 100.0                               | %      | 100.0                             | %      | 100.0 | % | 100.0 | % |
| Cost  of revenue                              |   | 68.8                                | %      | 65.2                              | %      | 68.8 | % | 65.6 | % |
|                                          |   |                                |   |                              |   |   |   |   |   |
| Gross  profit                                 |   | 31.2                                | %      | 34.8                              | %      | 31.2 | % | 34.4 | % |
|                                          |   |                                |   |                              |   |   |   |   |   |
| Selling,  general and administrative expenses |   | 21.1                                | %      | 23.9                              | %      | 21.2 | % | 24.0 | % |
| Provision  for doubtful accounts              |   | 1.9                                 | %      | 1.7                               | %      | 2.0 | % | 1.5 | % |
| Amortization  of goodwill                     |   | —                              | %      | 0.5                               | %      | — | % | 0.5 | % |
|                                          |   |                                |   |                              |   |   |   |   |   |
| Total  operating expenses                     |   | 23.0                                | %      | 26.1                              | %      | 23.2 | % | 26.0 | % |
|                                          |   |                                |   |                              |   |   |   |   |   |
| Operating  income                             |   | 8.2                                 | %      | 8.7                               | %      | 8.0 | % | 8.4 | % |
| Interest  expense                             |   | (0.1                                | )%     | (0.8                              | )%     | — | % | (0.7 | )% |
| Other  expense, net                           |   | 0.1                                 | %      | (0.2                              | )%     | — | % | — | % |
|                                          |   |                                |   |                              |   |   |   |   |   |
| Income  before income taxes                   |   | 8.2                                 | %      | 7.7                               | %      | 8.0 | % | 7.7 | % |
| Income  tax provision                         |   | 3.2                                 | %      | 3.0                               | %      | 3.1 | % | 3.0 | % |
|                                          |   |                                |   |                              |   |   |   |   |   |
| Net  income                                   |   | 5.0                                 | %      | 4.7                               | %      | 4.9 | % | 4.7 | % |

 

13

----

 

**Three and Six Months Ended June 30,2002 and 2001**

 

Revenue for the threemonths ended June 30, 2002 was $75.5 million, which represents an increase of$25.6 million, or 51.3%, over the revenues of $49.9 million for thecorresponding period of the prior year. Revenue for the six months ended June 30, 2002 was $148.2 million,representing an increase of $52.4 million, or 54.7%, over the $95.8 million inrevenue recognized in the first six months of 2001.  The revenue increases can be attributed to the acquisitionscompleted in 2002 and 2001, and also to an increase in sales of specialtypharmaceuticals.

 

For the three monthsended June 30, 2002, revenue from infusion and related healthcare services was$30.4 million, representing an increase of $4.3 million, or 16.5%, from $26.1million in the three months ended June 30, 2001.  For the six months ended June 30, 2002, revenue from infusion andrelated healthcare services was $59.9 million, an increase of $12.2 million, or25.4%, from the $47.7 million in the corresponding period of the prior year.These increases can be primarily attributed to acquisitions completed in 2002 and2001.

 

For the three monthsended June 30, 2002, specialty pharmacy revenue increased to $42.5 million,representing a $21.4 million, or 101.6% increase, over the $21.1 million inspecialty pharmacy revenue for the three months ended June 30, 2001.  For the six month period ended June 30,2002, specialty pharmacy revenue increased by $40.7 million, or 95.9%, to $83.1million compared to $42.4 million for the corresponding period of the prioryear.  The increase in specialtypharmacy revenue can be attributed in near equal proportion to three factors:increased sales under our contract with Blue Cross and Blue Shield of Florida,increased same store sales, and sales generated by 2002 and 2001acquisitions.  The increase in samestore sales and the sales generated from acquisitions was driven by increasedmarketing of specialty drugs such as Synagis, a seasonal drug for the treatmentof Respiratory Synctial Virus (RSV).

 

Other revenue consistsprimarily of royalty revenues from our franchise network and software sales andrentals by our wholly-owned subsidiary, Management by Information, Inc. Otherrevenue was $2.6 million for the three months ended June 30, 2002, a decline of$200,000, or 4.3% compared to the $2.8 million in other revenue for the threemonths ended June 30, 2001.  For the sixmonths ended June 30, 2002, other revenue was $5.3 million.  This represents a decline of $400,000, or7.1%, compared to the $5.7 million in other income for the six months endedJune 30, 2002.

 

Cost of revenue for thethree months ended June 30, 2002 increased by $19.4 million, or 59.6%, over thecorresponding quarter of the prior year. For the six months ended June 30,2002, cost of revenue increased by $39.2 million, or 62.3%, compared to the sixmonths ended June 30, 2001. These increases are attributable to the respective$25.6 million and $52.4 million increases in revenue in the three and sixmonths ended June 30, 2002 as compared to the corresponding periods of theprior year.

 

The following table showsthe gross profit margin for each of our three service lines: infusion andrelated healthcare services; specialty pharmacy; and other revenue:

 
|                                      |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|-------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                      |   | **2002**                        |   | **2001**                      |   | **2002** |   | **2001** |   |
|                                      |   |                            |   |                          |   |   |   |   |   |
| Gross profit margin:                      |   |                            |   |                          |   |   |   |   |   |
| Infusion and related  healthcare services |   | 42.2                            | %      | 43.6                          | %      | 43.3 | % | 42.5 | % |
| Specialty pharmacy                        |   | 19.1                            | %      | 15.6                          | %      | 18.2 | % | 16.8 | % |
| Other                                     |   | 99.1                            | %      | 97.4                          | %      | 99.1 | % | 97.6 | % |
| Total gross profit  margin                |   | 31.2                            | %      | 34.8                          | %      | 31.2 | % | 34.4 | % |

 

The gross profit marginfor the three months and six months ended June 30, 2002 was 31.2%, whichrepresents a decline of 3.6% and 3.2%, respectively, compared to the grossprofit margins for the three months and six months ended June 30, 2001. Theprimary reason for these reductions in margin was the increase in sales ofsingle-source specialty pharmaceuticals, which have a higher cost and generatea lower gross profit margin than traditional generic drugs used for infusiontherapy.  The gross profit margin on ourinfusion and related healthcare services revenue has remained fairlystable.  For the three and six monthperiods ended June 30, 2002, our margins on these services were 42.2% and43.3%, respectively, compared to 43.6% and 42.5% for the three and six monthperiods ended June 30, 2001. The gross profit margin on specialtypharmaceuticals increased by 3.5% to 19.1% for the three months ended

 

14

----

 

June 30, 2002 compared to15.6% for the three months ended June 30, 2001.  For the six months ended June 30, 2002, the margin increased by1.4% to 18.2% compared to 16.8% for the corresponding period of the prior year.The primary cause of these margin improvements was the increase in specialtypharmaceutical sales by our company-owned local pharmacies.  Local pharmacy contracts generally coverboth traditional home infusion drugs and specialty drugs, and offer bettermargins on specialty drugs than contracts that cover only specialty drugs, suchas Option Care’s contract with Blue Cross and Blue Shield of Florida.  These margin increases, driven by increasedspecialty pharmaceutical sales at our local pharmacies, more than offset theeffect of pricing reductions that went into effect on April 1, 2001 under ourprimary managed care contract with Blue Cross and Blue Shield of Florida.Although the pricing changes under this contract negatively affected ourmargins, increases in sales volume more than offset the reduction in margin.

 

Selling, general andadministrative expenses were $16.0 million for the three months ended June 30,2002, representing an increase of $4.1 million, or 34.1%, over the $11.9million for the corresponding period of the prior year.  For the six months ended June 30, 2002,selling, general and administrative expenses were $31.4 million, an increase of$8.4 million, or 36.6%, over the six-month period ended June 30, 2001.  These increases are primarily attributableto the acquisitions made over these periods. However, selling, general and administrative expenses have declined as apercentage of revenue.  For the threeand six months ended June 30, 2002, selling, general and administrativeexpenses equaled 21.2% of revenue, compared to 23.9% and 24.0% of revenue forthe three and six months ended June 30, 2001, respectively.  By continuing to acquire new businesses,Option Care is able to spread our fixed selling, general and administrativeexpenses over a larger revenue base. This fact and the increases in sales of specialty pharmaceuticals werethe reasons for the decline in selling, general and administrative expenses asa percent of revenue.

 

The provision fordoubtful accounts was $1.4 million for the three months ended June 30,2002.  This represents an increase ofapproximately $600,000, or 68.4%, over the $800,000 provision for doubtfulaccounts for the three months ended June 30, 2001.  For the six months ended June 30, 2002, the provision fordoubtful accounts was $2.9 million, representing a $1.5 million, or 107.3%,increase over the $1.4 million provision for the six months ended June 30,2001. These increases are primarily due to the acquisitions completed over thepast five quarters and due to increases in same store sales.  As a percentage of revenue, the provisionfor doubtful accounts increased to 1.9% for the three months ended June 30,2002 from 1.7% for the three months ended June 30, 2001.  For the six months ended June 30, 2002, theprovision for doubtful accounts increased to 2.0% of net revenue compared to1.5% for the six months ended June 30, 2001. These increases are primarily dueto higher bad debt provisions needed by some of our acquired offices duringtheir integration period.

 

In compliance with thenew accounting standards presented in SFAS No.142, *Goodwill and Other Intangible Assets*,Option Care did not amortize goodwill during the six months ended June 30,2002.  Goodwill amortization expense forthe three and six months ended June 30, 2001 were $237,000 and $462,000.  Had we adopted the non-amortizationprovisions of SFAS No. 142 as of the beginning of 2001, our net income for thethree and six months ended June 30, 2001 would have increased by $162,000 and$316,000, respectively.

 

Interest expense for thethree months ended June 30, 2002 was $33,000, which is 92.0% lower than theinterest expense of $400,000 for the corresponding period of the prioryear.  For the six months ended June 30,2002, interest expense was $16,000, which is 97.9% lower than the $800,000interest expense for the six months ended June 30, 2001. The interest expenseincurred in 2001 was primarily related to borrowings on our previous creditfacility to fund acquisitions completed in 2000 and in the first six months of2001.  Upon completing an underwrittenpublic offering of stock in October 2001, which generated $50 million in cash,we were able to pay off this debt and had a positive cash balance.  The $33,000 of interest expense for thethree months ended June 30, 2002 was primarily due to borrowings on our newcredit facility to fund 2002 acquisitions.

 

Income tax expense forthe three months ended June 30, 2002 increased by $900,000, or 60.1%, comparedto the corresponding period in the prior year. Income tax expense for the sixmonths ended June 30, 2002 was higher by $1.8 million, or 63.1%, over theincome tax expense reported for the six months ended June 30, 2001. Theseincreases are directly attributable to our respective 60.2% and 62.0% increasesin pretax income over the periods.  Theeffective income tax rate has remained stable. For both the three months ended June 30, 2002 and the three months endedJune 30, 2001, the effective income tax rate was approximately 39.3%.  For the six months ended June 30, 2002,Option Care’s effective income tax rate was 39.3% compared to 39.0% for the sixmonths ended June 30, 2001.

 

Net income grew to $3.8million, or $0.18 per diluted share, for the three months ended June 30,2002.  This represents an increase ofapproximately $1.5 million, or 60.2%, over the net income of $2.3 million forthe three months ended June 30, 2001. For the six months ended June 30, 2002, net income was $7.2 million, or$0.34 per diluted share.  Thisrepresents a 61.3% increase over the net income of $4.5 million for the sixmonths ended June 30, 2002. These increases in net income were primarily due tothe incremental

 

15

----

 

revenue and net incomegenerated by offices acquired since January 1, 2001, and to increases in thesale of specialty pharmaceuticals by our company-owned local pharmacies.

 

Option Care completed a5-for-4 stock split effective May 1, 2002 for holders of record on April 10,2002.  All shares outstanding and pershare amounts in this Quarterly Report on Form 10-Q have been adjusted toreflect the effects of the split.

 

Total diluted shares forthe three and six months ended June 30, 2002 were 21.2 million and 21.1million, respectively, compared to 16.2 million and 16.0 million for thecorresponding three and six-month periods in 2001.  The respective 5.0 million and 5.1 million increases in dilutedshares are primarily due to the issuance of approximately 4.5 million newshares of stock through an underwritten public offering of stock, which wascompleted in October 2001. The remaining increases are related to the issuanceof new shares from employee stock option exercises, an increase in the numberof unexercised “in the money” stock options, and the issuance of shares toparticipants in Option Care’s Employee Stock Purchase Plan.****

 

16

----

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

For the six-month periodended June 30, 2002, we financed our operations and acquisitions throughoperating cash flows, the use of cash reserves and borrowings under our creditfacility.  In previous periods, we alsofinanced our operations and acquisitions through an underwritten publicoffering of common stock.

 

Netcash flow provided by operations equaled $2.3 million for the six months endedJune 30, 2002, compared to $4.2 million used by operations during the sixmonths ended June 30, 2001.  The year toyear change is primarily due to two factors: the $2.7 million increase in netincome in 2002 compared to 2001, and lower funding of the operating cash flowneeds of acquisitions in the current year compared to the prior year.  During the first six months of 2002, weacquired accounts receivable in two of our four acquisitions, allowing us toreceive immediate cash inflow from those offices by collecting their existingaccounts receivable.  By contrast, inthe first six months of 2001, we acquired accounts receivable in only one ofour seven acquisitions, causing initial negative operating cash flows from sixof the seven acquisitions, and causing our overall operating cash flow to benegative for the six months ended June 30, 2001.

 

Netcash flow used in investing activities during the six months ended June 30,2002 was $12.2 million, an increase of $700,000 from the $11.5 million usedduring the corresponding period in the prior year. In both periods, the use ofcash was primarily due to the completion of several acquisitions. During thesix months ended June 30, 2002, Option Care invested $9.8 million inacquisitions, consisting of $6.9 million paid at closing for acquisitionscompleted in 2002 and $2.9 million paid as additional consideration on prioryears’ acquisitions.  Payments forpurchase of equipment equaled $2.3 million for the six months ended June 30,2002, compared to $1.3 million in the prior year. Of the $2.3 million spent on equipmentpurchases in the six months ended June 30, 2002, approximately $1.3 million wasspent on infrastructure improvements such as office furniture and equipment andleasehold improvements, $400,000 on revenue-producing medical equipment, and$600,000 on new software development projects. Of the $1.3 million spent on infrastructure improvements, approximately$600,000 was related to relocation of our corporate offices and various localpharmacies.

 

Net cash flow provided byfinancing activities equaled $1.4 million for the six months ended June 30,2002, compared to $15.8 million provided by financing activities in thecorresponding period of the prior year. Of the $1.4 million provided in the current year, $1.8 million wasprovided from the exercise of stock options, while $500,000 was used to payloan origination costs and fees related to Option Care’s Credit and SecurityAgreement with J.P. Morgan Commercial Finance Corp.  In the prior year, the majority of the $15.8 million provided wasfrom borrowings on our credit facility to fund acquisitions and their workingcapital needs.  Acquisitions in thecurrent year have been primarily funded through cash reserves.

 

As of March 29, 2002,Option Care signed a new senior secured credit facility with JP MorganCommercial Finance Corp. Availability under this revolving credit facility isrelated to percentages of our outstanding accounts receivable and inventorybalances, less certain ineligible amounts, as defined in the facility. Overallborrowings allowable under the revolving credit facility are limited to thelesser of $60 million or the total allowable collateral base. The agreementrequires us to comply with various financial covenants.  As of June 30, 2002, no amounts wereoutstanding under this facility and availability was $34.2 million based onoutstanding accounts receivable and inventory balances on that date.  The JP Morgan credit facility expires onMarch 29, 2005.

 

As of June 30, 2002, wehad no cash and cash equivalents, compared to $8.5 million as of December 31,2001. This reduction in cash during the six months ended June 30, 2002 wasprimarily due to payments for acquisitions and operational cash flow fundingrelated to those acquisitions. Should we need to borrow to fund futureacquisitions or our operating cash flow needs, we are able to borrow or paydown on our existing debt facility with JP Morgan on a daily basis.  We have instituted a policy of using excesscash balances, if any, to retire outstanding debt under our loan facility.

 

We believe that cash flowfrom operations and amounts available under our revolving credit facility willbe sufficient to meet our operating cash needs for the immediate future,including any interest due on our credit facility or other debts.  In the event that additional capital isrequired, management cannot assure that such capital can be obtained from othersources on terms acceptable to us, if at all.

 

Our business strategyincludes the selective acquisition of additional local pharmacy facilities andspecialty pharmacy operations. Accordingly, we may require additional capital in order to completethese acquisitions.  It is impossible topredict the amount of capital that may be required for acquisitions, and thereis no assurance that sufficient financing for these activities will beavailable on terms acceptable to us, if at all.

 

17

----

 

**Goodwill and Other Intangible Assets**

 

Asof June 30, 2002, net goodwill and other intangible assets equaled $47.8million, consisting of $45.7 million of goodwill and $2.1 million of otherintangible assets such as non-compete agreements, patient records, and managedcare contracts.  This total representsan increase of approximately $7.9 million over the $39.9 million of netgoodwill and other intangible assets at December 31, 2001. The increasesof $7.3 million in goodwill and $600,000 of other intangible assets wasprimarily due to the acquisition we made during the six months ended June 30,2002, plus additional consideration on various acquisitions completed in prioryears.

 

Totalnet goodwill and other intangible assets represent 36.0% of total assets as ofJune 30, 2002 compared to 31.9% of total assets as of December 31, 2001.  This increase is due to the acquisitions wecompleted in the first six months of 2002, which increased goodwill and otherintangibles and reduced cash.

 

Perthe requirements of Statements of Financial Accounting Standards No. 142, *Goodwill andOther Intangible Assets (SFAS No. 142)*, Option Care has testedgoodwill for impairment as of January 1, 2002. No impairment of goodwill was identified.

 

**Regulatory andOther Developments**

 

Many governmental payorsreimburse us for some pharmaceuticals based on the pharmaceutical’s averagewholesale price (AWP). In many cases, we purchase pharmaceuticals at less thanAWP. AWP for most pharmaceuticals is compiled and published by privatecompanies, including First DataBank, Inc. It has been reported that there arecurrently several lawsuits pending against manufacturers of certainpharmaceuticals. These government investigations and lawsuits involveallegations that manufacturers have misrepresented to First DataBank the actualselling price of certain pharmaceuticals. First DataBank has announced that itwill now base AWP on market prices certified by the manufacturer. As a resultof this change, First DataBank has published a Market Price Survey that reducesthe AWP significantly for a number of the products we currently supply topatients. We cannot predict the eventual results of these investigations, northe changes made in AWP by First DataBank. If AWP’s on the products we purchasewere reduced, or if the AWP system was replaced with a different reimbursementsystem, our gross profit margins could be narrowed.

 

**ITEM 3.  Quantitative andQualitative Disclosures About Market Risk**

 

We are subject to marketrisk from exposure to changes in interest rates based on our financing and cashmanagement activities. We utilize a mix of debt maturities along with bothfixed-rate and variable-rate debt to manage our exposure to changes in interestrates. Although there can be no assurances that interest rates will not changesignificantly, we do not expect changes in interest rates to have a materialeffect on income or cash flows in 2002. As of June 30, 2002, our fixed-ratedebt was $600,000 and our corresponding variable-rate debt was zero. Since wehad no variable-rate debt, our market rate risk as of June 30, 2002 was zero.

 

18

----

 

**PARTII.  OTHER INFORMATION**

 

**ITEM 1.  LegalProceedings**

 

Option Care is not a party to any material legal proceedings.  Option Care may become a party to variousclaims and legal actions arising in the ordinary course of business.

 

**ITEM 2.  Changes inSecurities and Use of Proceeds**

 

None.

 

**ITEM 3. Defaults Upon Senior Securities**

 

None.

 

**ITEM 4. Submission of Matters to a Vote of Securities Holders**

 

Our annual meeting of stockholders was held on June 4, 2002. Thefollowing matters were voted upon at the meeting:

 

1.                               Election of two members to the Board of Directors,each being elected to hold office for a three-year term or until his respectivesuccessor is duly elected and qualified. Each of management’s nominees forelection to our Board of Directors as listed in our proxy statement was electedfor three-year terms, with the results of the voting as follows:

 

|             |   | **VOTES FOR** |   | **VOTES  AGAINST** |   | **ABSTAIN** | ** ** |
|------------------|--------|---------------|--------|--------------------|--------|-------------|------------|
| James G. Andress |   | 11,071,965    |   | —             |   | 437,483     |       |
| Leo Henikoff     |   | 11,071,965    |   | —             |   | 437,483     |       |

 

The term of office of each of thefollowing directors continued after the meeting: John N. Kapoor, Rajat Rai,Jerome F. Sheldon and James M. Hussey.

 

2.                               Amendment to the Company’s Amended and RestatedStock Incentive Plan to increase the number of shares of Option Care commonstock reserved for issuance upon the exercise of options granted thereunderfrom 4,375,000 shares to 5,625,000 shares. The proxy voting results were as follows:

 

| **VOTES FOR** |   | **VOTES   AGAINST** |   | **ABSTAIN** |   |
|---------------|--------|---------------------|--------|-------------|--------|
| 10,650,893    |   | 813,337             |   | 45,217      |   |

 

3.                               Amendment to the Company’s Certificate ofIncorporation to (a) increase the number of shares of common stock which theCompany is authorized to issue from 30,000,000 to 60,000,000 and (b) increasethe number of shares of undesignated preferred stock which the Company isauthorized to issue from 5,000,000 to 30,000,000. The proxy voting results wereas follows:

 

| **VOTES FOR** |   | **VOTES  AGAINST** |   | **ABSTAIN** |   |
|---------------|--------|--------------------|--------|-------------|--------|
| 10,537,580    |   | 971,756            |   | 112         |   |

 

19

----

 

4.                               Ratification of the appointment of Ernst &Young, LLP as independent auditors of the Company for the fiscal year 2002. Theproxy voting results were as follows:

 

| **VOTES FOR** |   | **VOTES  AGAINST** |   | **ABSTAIN** |   |
|---------------|--------|--------------------|--------|-------------|--------|
| 11,361,418    |   | 135,283            |   | 233         |   |

 

At the annual meeting, Option Care’s stockholdersvoted to elect the two nominees for director as identified in MatterNumber 1 above, and to approve each of the matters described in MatterNumbers 2 through 4 above.

 

**ITEM 5.  OtherInformation**

 

None.

 

**ITEM 6(a). Exhibits**

 

See Exhibit Index.

 

**ITEM6(b).  Reports on Form 8-K**

 

On May 15, 2002, Option Care filed a current report on Form 8-Kto announce that effective March 29, 2002, the Company has entered into a $60million revolving Credit and Security Agreement with J.P. Morgan BusinessCredit Corp., J.P. Morgan Chase Bank and LaSalle Bank National Association.

 

20

----

 

**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                        |   | OPTION CARE, INC. |
|-----------------------------|--------|------------------------|
| Date:  August 14, 2002 |   | By:                    | /s/  Paul Mastrapa |   |
|                        |   |                   | *Chief  Financial Officer* |
|                        |   |                   | *(Principal  Accounting Officer and**Principal  Financial Officer)* |

 

 

**CERTIFICATION PURSUANT TO 16 U.S.C.**

**SECTION 1350, AS ADOPTEDPURSUANT TO**

**SECTION 906 OF THE SARBANES-OXLEYACT OF 2002**

 

 

Pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, the undersigned certifies that:

 

(1)           This Quarterly Report onForm 10-Q for the period ended June 30, 2002, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), fullycomplies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange act of 1934; and

 

(2)           The information contained in theReport fairly presents, in all material respects, the financial condition andresults of operations of Option Care, Inc.

 

 

 

 
| Date: August 14,  2002 | By:    | /s/ Rajat Rai                          |   |
|-----------------------------|--------|----------------------------------------|--------|
|                        |   | Rajat Rai                              |   |
|                        |   | President and Chief  Executive Officer |   |

 

 

 

 

Pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, the undersigned certifies that:

 

(1)           This Quarterly Report onForm 10-Q for the period ended June 30, 2002, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), fullycomplies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange act of 1934; and

 

(2)           The information contained in theReport fairly presents, in all material respects, the financial condition andresults of operations of Option Care, Inc.

 

 

 

 
| Date: August 14,  2002 | By:    | /s/ Paul Mastrapa                                   |   |
|-----------------------------|--------|-----------------------------------------------------|--------|
|                        |   | Paul Mastrapa                                       |   |
|                        |   | Senior Vice President

and Chief Financial  Officer |   |

 

21

----

 

**EXHIBIT INDEX**

 
| **Exhibit Number** |   |                                                                                                                                                                                                                                                                                         |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                         |
| 3.1                |   | Certificate  of Incorporation of the Registrant, together with Certificate of Amendment  thereto filed February 18, 1992. Filed as Exhibit 3(a) to Option  Care’s Registration Statement (No. 33-45836) dated April 15, 1992  and incorporated by reference herein. |
|               |   |                                                                                                                                                                                                                                                                                         |
| 3.2                |   | Certificate  of Amendment to Certificate of Incorporation of the Registrant filed  March 25, 1992. Filed as Exhibit 3(c) to Option Care’s Registration  Statement (No. 33-45836) dated April 15, 1992 and incorporated by  reference herein.                        |
|               |   |                                                                                                                                                                                                                                                                                         |
| 3.3                |   | Certificate  of Amendment to Certificate of Incorporation of the Registrant filed with the  Delaware Secretary of State on June 18, 2002.  Filed herewith.                                                                                                                         |
|               |   |                                                                                                                                                                                                                                                                                         |
| 3.4                |   | Restated  By-laws of the Registrant dated June 1, 1994. Filed as Exhibit 10.5  to Option Care’s Annual Report on Form 10-K for the year ending  December 31, 1994 and incorporated by reference herein.                                                             |
|               |   |                                                                                                                                                                                                                                                                                         |
| 10.1               |   | Intentionally  omitted.                                                                                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                         |
| 10.2               |   | Intentionally  omitted.                                                                                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                         |
| 10.3               |   | Intentionally  omitted.                                                                                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                         |
| 10.4               |   | Intentionally  omitted.                                                                                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                         |
| 10.5               |   | Option  Care, Inc. 401(k) Profit Sharing Plan. Filed as Exhibit 10(b) to  Option Care’s Registration Statement (No. 33-45836) dated April 15, 1992  and incorporated by reference herein.                                                                                |
|               |   |                                                                                                                                                                                                                                                                                         |
| 10.6               |   | Amendment  to the 1992 401(k) Profit Sharing Plan of the Registrant dated  January 1, 1996. Filed as Exhibit 10.3(a) to Option Care’s Annual  Report on Form 10-K for the year ending December 31, 1997 and  incorporated by reference herein.                      |
|               |   |                                                                                                                                                                                                                                                                                         |
| 10.7               |   | Intentionally  omitted.                                                                                                                                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                         |
| 10.8               |   | Form  of Franchise Agreement. Filed as Exhibit 10.5 to Option Care’s Annual  Report on Form 10-K for the year ending December 31, 1996 and  incorporated by reference herein.                                                                                            |
|               |   |                                                                                                                                                                                                                                                                                         |
| 10.9               |   | Intentionally  omitted.                                                                                                                                                                                                                                                                      |

 

22

----

 
| 10.10  |   | Consulting  Agreement between the Registrant and EJ Financial Enterprises, Inc. Filed as  Exhibit 10(o) to Option Care’s Registration Statement  (No. 33-45836) dated April 15, 1992 and incorporated by reference  herein.                                                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.11  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.12  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.13  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.14  |   | Executive  Severance Agreement between Cathy Bellehumeur and Option Care, Inc.,  dated November 12, 1997. Filed as Exhibit 10.18 to Option Care’s  Annual Report for the year ending December 31, 1997 and incorporated by  reference herein.                                               |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.15  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.16  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.17  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.18  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.19  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.20  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.21  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.22  |   | Amendment  No. 1 to the Consulting Agreement By and Between EJ Financial  Enterprises, Inc. and Option Care, Inc., dated October 1,  1999. Filed as Exhibit 10.30 to Option Care’s Annual Report for the year  ended December 31, 1999 and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.23  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.24  |   | 2001  Employee Stock Purchase Plan. Filed as Exhibit A to the registrants  definitive proxy statement for the 2000 Annual Shareholders Meeting and  incorporated by reference herein.                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.25  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                              |

 

23

----

 
| 10.26  |   | Participation  Agreement between Health Options, Inc. and Option Care, Inc. effective  as of June 1, 1997. 2001. Filed as Exhibit 10.26 to Option Care’s  Amendment No. 1 to its Annual Report on Form 10-K/A filed September 10,  2001 and incorporated by reference herein.                                            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 10.27  |   | Prescription  Drug Agreement among Blue Cross and Blue Shield of Florida, Inc., Health  Options, Inc. and Option Care, Inc. dated March 8, 2000. Filed  as Exhibit 10.27 to Option Care’s Amendment No. 1 to its Annual  Report on Form 10-K/A filed September 10, 2001 and incorporated by  reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 10.28  |   | Amendment  to Participation Agreement between Health Options, Inc. and Option Care, Inc.  dates as of April 1, 2001.                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 10.29  |   | Deferred  Compensation Plan for certain Executives, effective as of January 1, 2001.                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 10.30  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 10.31  |   | Intentionally  omitted.                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 10.32  |   | Injectable  Drugs Agreement effective as of September 5, 2001 between Health Option, Inc.  and OptionMed, Inc.  Filed on October  10, 2001 as Exhibit 10.1 to Form 8-K/A and incorporated herein by reference.                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| 23     |   | Consent  of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                           |

 

24

----